November 27, 2008
Paying landowners to let forests grow is promoted by the United Nations as a viable way to fight global warming, but experts first have to puzzle out how to insure trees.
 | Trees for CreditsA protest against deforestation in the Amazon rainforest. The United Nations wants to pay landowners not to cut down trees (Photo: Reuters) |
Under U.N. plans, owners will get carbon credits to slow the destruction of tropical forests. But fires caused by lightning—along with other hazards such as storms, insects and illegal logging—are a big risk for insurers and investors.
Burning forests to clear land for farming releases about a fifth of all the greenhouse gases blamed for causing climate change. If trees die, the carbon stored as they grew would be released, rendering carbon credits worthless.
"From a formal point of view insurance shouldn't be a problem," said Wojciech Galinsky, who works on U.N. projects to promote green investment in developing countries. "If Tina Turner's legs can be insured, why not forests?"
But there is wide disagreement on how to assess the risks under a new U.N. treaty, due to be agreed by end-2009. Forest owners want full access to credits as fast as possible. But insurers suggest that half be retained in buffer funds in case forests vanish in a few decades. If a forest disappeared, the credits in the funds would go to them.
One difficulty is that protecting a forest in one area of the Amazon or the Congo can lead to more logging or burning of forests to clear farmland elsewhere.
Demand for insurance to cover such forestry projects is not currently very high, said Joachim Herbold, senior underwriter at Munich Re's department for agricultural insurance: "We expect a rising demand in future," he added.
 | Infographic (click on the image to enlarge)The financial industry is facing new challenges and opportunities due to global warming. |
The market could be huge. About 7.3 million hectares (18.04 million acres) of forest—an area the size of Panama—vanishes every year, according to U.N. data. A European Union report last month said it would cost 15-25 billion euros a year from now to halve deforestation rates by 2020, mainly by paying people to safeguard existing trees.
Risks that forests will not be standing in a few decades mean that forest carbon credits trade for just 2 to 3 dollars a ton on voluntary markets, said to Phil Cottle, head of London-based ForestRe which specialises in forestry insurance. That is a fraction of European Union market prices of about 16 euros (20.20 dollars) a ton for industrial emissions.
Investors will only be interested in forest carbon if it is interchangeable with industrial credits. If a factory or power plant owner in Europe needs to buy carbon credits to offset domestic emissions, forestry carbon has to represent real trees.
The U.N.'s focus so far is on protecting tropical forests. But owners of forests from Siberia to Scandinavia are interested in carbon credits.
Insurance companies have long offered forestry cover—more easily calculated than carbon insurance because it is based on the value of wood, for instance as a building material, rather than the value of trees left to grow.
The only reforestation project approved so far under an existing U.N. scheme is in the Pearl River basin of south China. Under the plan, plantations will soak up carbon and the forest's carbon store will be measured every five years to allocate temporary tradeable credits. If the forest burns down five years later, no future credits will be issued.
That project does not include insurance, because southern China is wet. "There are regions in which the probability of forest fire is negligible," said Galinsky, of the U.N. Climate Change Secretariat in Bonn, Germany. But global warming may affect forests and increase the likelihood of fires. A report by the U.N. Climate Panel last year projected forecast "gradual replacement of tropical forest by savannah in eastern Amazonia" by 2050.
editor: Alister Doyle (Reuters)
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