For every participant in the value chain, there are tangible consequences of a failed carbon credit. Unpreparedness against potential credit invalidation can translate into significant legal, reputational, and financial repercussions.
In this article we outline where risk sits at each stage of the carbon credit lifecycle, and how insurance can help manage potential credit failure.
What does failure look like?
Carbon credit failure can take several forms. Each creates a different pattern of loss, but in every case, determining who ultimately bears that loss can be difficult. Key examples include:
Reversals, where sequestered carbon is later released back into the atmosphere
Over-crediting, where flawed baselines or monitoring result in more credits being issued than a project justifies
Double counting, where the same reduction is claimed by multiple parties
Outright fraud, where the quality or quantity of credits is duplicitous.
Developers: carrying the most direct exposure
Project developers sit at the start of the credit lifecycle and carry the most concentrated risk. They are responsible for project design, baseline setting, monitoring, and the accuracy of the data supporting every issued credit. If a project underperforms, is damaged, or generates credits against an inflated baseline, the financial consequences often fall first on the developer.
The practical risks developers face are numerous, and key examples include:
Delivery risk
Forward-sold credits may fail to materialise if a project underperforms, creating liabilities for offtakersPermanence risk
Projects in catastrophe-exposed regions, such as areas vulnerable to wildfire, flooding, or pest outbreaks, can rapidly lose sequestered carbon and trigger credit reversalsMethodology risk
As scientific baselines evolve, previously approved methodologies may be revised or invalidated, affecting credits already issuedPolitical and regulatory risk
Host governments may alter land rights, withdraw approvals, or impose restrictions that render projects unviable
Offtakers: the risk you didn’t know you were carrying
For offtakers, the risk profile isn’t as obvious, but equally significant. A buyer that retires a credit later deemed invalid may not face a direct financial claim. However, the corporate sustainability claims built on those credits can create substantial exposure, and regulators are increasingly scrutinising them.
For example, a large airline is currently facing a regulatory complaint to a competition authority, alleging that its carbon neutral programme and net-zero claims misled consumers about the sustainability of flying, and its alignment with the Paris Agreement. Companies that have made net-zero claims based on credits later found not to represent genuine emissions reductions face growing scrutiny under consumer protection and corporate disclosure frameworks in both the UK and EU. The reputational and financial cost of a greenwashing allegation – even where successfully defended – can far exceed the original value of the purchased credits.
The practical implication is clear: credit quality is not someone else’s problem. Buyers who treat registry issuance as sufficient due diligence may be assuming risks they have not properly priced. Insurance solutions, such as Cancellation Cover, can help protect both the financial value of carbon positions and the integrity of the claims built upon them.
Developers can also expose offtakers to risk through their own conduct. In 2024, US federal prosecutors charged executives at a major forestry credit developer with fraud for allegedly manipulating satellite data to inflate credit issuance. Beyond the immediate reputational fallout, the case highlighted the significant financial exposure facing offtakers holding those credits. With no clear recovery mechanism available, it served as a reminder that developer fraud risk is not theoretical, and that the resulting financial exposure extends beyond the developer.
The Verra registry’s experience with rice cultivation projects in China illustrates this challenge. In August 2024, Verra rejected 37 Chinese rice cultivation projects and revoked issued credits, due to evidence suggesting there were significant “phantom” projects that may never have existed. Buyers, who had already retired the original credits, had no straightforward route to compensation.
Insurance solutions, such as offtaker-purchased Carbon Delivery Insurance (CDI), are designed specifically to address this exposure – protecting offtakers against the financial consequences of non-delivery, including fraud, negligence, and project cessation.
Lenders: capital at risk across the chain
Banks, private equity firms, and infrastructure funds provide the capital developers need to build projects, often years before credits are generated. That capital is exposed to many of the same risks affecting the underlying projects, including underperformance, reversals, methodology revisions, and political interference.
Carbon Lender Non-Payment Insurance (CLNPI) addresses this directly by protecting lenders against developer default. For lenders seeking greater exposure to the carbon market, insurance provides a framework for growth without transferring unquantified project risk onto their own balance sheets.
Managing carbon credit risk
Across the value chain, the financial consequences of credit failure are real, often underappreciated, and – in many cases – insurable.
Whether purchasing credits for the first time or managing a large and complex carbon portfolio, understanding your risk profile is the essential first step. Increasingly, insurability is being used as a signal of credit quality in procurement decisions, and for good reason.
Lockton’s Carbon Credit Insurance Team works with developers, offtakers, lenders, and intermediaries to identify where exposures sit and structure appropriate cover.
For further discussion, reach out to a member of the Carbon Credit Insurance Team here (opens a new window).
