July 2008
ASK THE EXPERT SUBMISSION – FORENSIC INSIGHT
Forensic Insight – July 2008
Question
What are “carbon credits” as they relate to levels of greenhouse gas emissions, and how can they potentially be involved in the measurement of a business interruption/extra expense loss?
Answer
Carbon credits were designed to reduce the output of various “greenhouse” gases most commonly associated with carbon dioxide (CO2) and help mitigate the overall effects of releasing greenhouse gases into the earth’s atmosphere. For participating entities in certain regulatory protocols, one carbon credit essentially gives the owner the right to emit one ton of carbon dioxide.
Those that produce less than their allocated allowance of carbon emissions are allowed to sell or trade unused carbon credits to other participants that emit more than their allowance of carbon dioxide.
Assume that an insured participating entity is carbon neutral (one that emits its exact carbon allocation), and it suffers a production interruption from a covered peril. The following business interruption/extra expense scenarios may take place:
- The company may experience a partial or total interruption of operations which results in reduced/below normal levels of emissions. In that instance, they can sell those allocated but unused credits at the current market value to reduce the business interruption loss otherwise payable.
- Through its partial or temporary operations, the company is able to mitigate its production loss but does so inefficiently. To the extent the company generates excess emissions on the actual production accomplished, it may be entitled to claim an extra expense on the cost to purchase additional carbon credits, net of savings on its reduced level of operations.
- While an insurer cannot force the insured to sell their unused carbon credits, this can be factored into the overall loss measurement regardless of the path chosen by the insured.
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