While the environment and climate change have been a major issue for Sens. Barack Obama, D-Ill., and John McCain, R-Ariz., along the presidential campaign trail, the biggest impact of their proposed solutions on the environmental pollution market may be in creating customers for new, related products.

Both of the major party candidates have promised to address the issue of climate change through a "cap and trade" system that would limit the amount of carbon pollutants a company or facility is allowed to emit, with those that stay under their limit allowed to sell their remaining allotment of pollution "credits" on the open market.

The theory is that allowing businesses to sell excess pollution capacity will create an incentive to innovate to reduce pollutants in an effort to profit from greater credit sales.

The difference between the two campaigns lies in how far they promise to go in cutting emissions.

On his campaign Web site, Sen. McCain, the presumptive Republican nominee, calls for reducing pollution to 1990 levels by 2020, and to 60 percent below 1990 levels by 2050. Sen. Obama's campaign takes the reduction further, calling for a drop to 80 percent below 1990 levels by 2050.

Rod Taylor, managing director at Aon Environmental Services Group, said a proposed cap-and-trade system "probably will not have a great deal of direct impact" on the environmental pollution market.

"What would you be insuring?" he asked, suggesting that most problems posed by a cap-and-trade system would fall under a general liability or excess liability policy.

For the most part, he said, the carbon emissions that would be controlled under cap-and-trade are not considered as "pollutants" for an insurance policy.

Lindene Patton, climate product officer for Zurich Financial Group, said that, in general, a proposed cap-and-trade "really means a change in liability exposure for our customers." However, she noted that the "proposed" aspect of cap-and-trade makes it difficult to say much beyond that.

Without knowing how the parameters of a system would be set, "it's a bit hard for us to develop products" for an as yet undefined liability that such a system may or may not entail, she said.

Perhaps the most convincing evidence that a cap-and-trade system will not have a deep impact on the market, according to Mr. Taylor, is the experience that insurers are already having with a similar system in Europe.

Aon, he said, has "had no requests for insurance from virtually any of the people who are subject to the system" across the Atlantic, and he said he expected a similar experience in the United States.

While it may not directly impact companies, Mr. Taylor noted that a cap-and-trade system could provide some opportunity for insurers by creating a market to ensure that pollution controls work adequately.

When faced with a cap-and-trade system, he said, companies have two options: They can reduce their pollution, or purchase credits to allow them to continue at their current rate.

However, he added that the systems used by companies to monitor and control their pollution output and ensure compliance could fail, leading to accidental overages and the resulting penalties.

Given that the system is based on gauging the amount of pollution emitted, he said, "you might want to look at insuring against the failure of pollution control equipment."

Additionally, he suggested that a cap-and-trade system could lead to a need for a new kind of directors and officers coverage.

If the leadership of a company chose to wait before purchasing or selling credits, and as a result lost money due to rising or falling prices for those credits, that could lead to claims against a firm's officers--that "everyone else saw" the rising prices for credits but the officers failed to act, he explained.

Ms. Patton also pointed to the system existing in Europe as a possible blueprint for cap-and-trade based products, noting that Zurich offers expansions of property and D&O coverage to indemnify customers from pollution exposure due to other events.

As an example, she noted that a business that had suffered a fire may need to be powered by generators while it recovers, which produces pollution. The insurance would cover potential liabilities stemming from the emissions.

And what of the credits themselves? Given that these systems have been proposed, and would presumably be implemented by either a McCain or Obama administration, who's to say that they would be kept up under the succeeding president?

"Can you insure the validity of a carbon credit?" Mr. Taylor asked. In fact, he said, there are programs that exist to do just that, although he noted that "there isn't anything right now to cover the whole package."

Ms. Patton said Zurich provides political risk coverage against the failure of delivery of carbon credits for their customers.

In a broader context, Mr. Taylor said providing a complete coverage for a carbon credit would require the risk to be covered in "bits and pieces" from a number of different standpoints, including political risk, contract repudiation risk, and the risk of the technical side of the equipment and system itself.

However, Mr. Taylor expected there to be a "stronger interest" in developing a complete product should a cap-and-trade system be implemented and the trading of credits become established among the commodities firms.

The horizon may be closer than many think. Already, Ms. Patton said, Zurich has received requests for coverage based on regulations recently enacted at the state level in California. Additionally, she noted, "our approach can be extended into voluntary mechanisms" created under regional compacts between states.

Overall, Ms. Patton said that it will be difficult to gauge exactly what impact a cap-and-trade system would have for insurers, but the products will be ready for customers once the parameters of a system have been established.

"Our business awaits," she said.

Special Reports /

Candidates' Carbon Cap & Trade Stand Could Call For New Pollution Products

Related Stories

Recommended For You