Currently, emissions are at an all-time high and the gap between the proposed amount of carbon dioxide removal and the amount of carbon dioxide removal required to meet the Paris Agreement temperature targets is expected to be between 0.9-2.8bn tonnes of CO2/yr in 2030 and 1.8-6.9bn tonnes of CO2/yr in 2050. The carbon removal industry needs to grow by 1,300-fold in three decades to meet climate targets.

Engineered carbon removal credit deliveries as of March 2023
Source: Cdr. fyi

Engineered carbon removal credit deliveries as of March 2023 Source: Cdr. fyi

However, of the c.800,000 carbon removal credits sold to date, less than 10% have been delivered as ex-post credits, meaning that buyers are inherently taking a delivery risk by investing today in carbon removal credits projected to be delivered in the future, which hinders the expansion and development of carbon markets.

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Key risks in carbon credit lifecycle

Source: why carbon insurance

Insurance products, can address delivery risk by paying a claim if the purchaser’s carbon is not delivered. By reducing the financial risk associated with upfront investment, insurance makes purchasers feel more comfortable to invest greater capital in projects at an early stage, mobilising the necessary finances for project development and the scaling of supply within the market. Thus, insurance provides a solution to the problem of limited carbon removal supply.

HOWEVER, there are a series of problems with traditional insurance, such as non-transparency, slow claims settlement, and high insurance costs, which hinder the further development of the carbon insurance market.

Decentralized insurance represents a transformative innovation in the insurance industry. It offers a range of benefits that traditional centralized insurance models struggle to match. Decentralized Insurance uses blockchain technology to provide transparency, trustlessness, and community-driven decision-making in the insurance ecosystem. As DeFi gained traction, decentralized insurance emerged as a natural extension. It addresses flaws in traditional insurance models. However, the current decentralized insurance is more about providing protection for crypto assets, lacks other application scenarios, and certainly doesn't address risk management in carbon credit trading markets.