In 2024, California experienced its hottest summer on record, with temperatures in June to August rising 5ºC above the 1895 – 2000 historical average, resulting in several large wildfires. One of the most notable was the Park Fire, which burned 430,000 acres (174,000 hectares) across Butte and Tehama counties in July. Ignited by arson, the fire spread rapidly due to the unusually hot and dry conditions. The Park Fire ranks among California’s largest, reflecting a trend in recent years where four of the state’s largest wildfires have occurred in the past seven years.
Although improved detection and suppression efforts have helped stabilize the total number of wildfires across California in recent years, rising temperatures and prolonged drought continue to drive a steady increase in the total area burned. With wildfires becoming more intense, the future of forestry projects designed to capture and store carbon dioxide is increasingly at risk.
In 2024, wildfires — including the Park Fire — burned over 52,300 acres of California forests designated for carbon removal projects. The burning of such forests poses a dual challenge: First, wildfires release vast amounts of carbon dioxide into the atmosphere as forests burn, reversing years of carbon storage. Second, they reduce the capacity of forests to absorb future carbon, weakening their role as natural carbon sinks. Compounding this issue, research suggests that land and ocean systems are currently absorbing far less carbon than before, highlighting the importance of understanding and protecting natural capitals.
Carbon removal projects such as those in California rely on buffer pools — reserves of unsold credits meant to replace those lost to such disasters as wildfires. However, these safety nets are under significant strain due to the increasing intensity of wildfires. Over the past decade, wildfires have consumed an estimated 11 million buffer pool credits, far exceeding the 6.6 million credits reserved for wildfire losses over the 100-year lifespan of current projects.
This growing pressure on buffer pools has prompted calls for a reassessment of their size and structure. Experts recommend updating buffer pool contributions and halting the approval of new projects in high-risk wildfire regions to ensure the resilience of carbon markets.
However, buffer pools alone are not sufficient to address the growing complexity of these risks nor to protect forests and their vital role as carbon sinks. A comprehensive risk management strategy, including tailored insurance solutions, is required to safeguard carbon removal projects against escalating risks.
As highlighted by the World Bank, robust risk management strategies are essential for maintaining market integrity and ensuring carbon markets remain effective in delivering both environmental and financial benefits. These markets are essential for accelerating climate action, providing mechanisms for organizations to meet sustainability goals.
The urgency of risk transfer solutions has been further underscored by the recent Los Angeles wildfires in early 2025, which have already caused insured losses of up to $45 billion [1] – accounting for more than a third of all global insured losses in 2024. As insurers adapt to the escalating financial toll of wildfires, carbon markets must follow suit.
Forestry and land-use carbon credits were valued at over $22.4 billion globally in 2023. This includes projects such as reforestation, afforestation and improved forest management, which directly relate to forestry carbon removal efforts. With a projected compound annual growth rate of over 15.1%, the U.S. is expected to be a significant contributor to this growth. As these markets grow, the demand for insurance products tailored to safeguard carbon removal projects is expected to rise, with research estimating that the market for risk transfer related to carbon markets could be worth $10 billion to $30 billion of annual gross written premium by 2050.
Carbon insurance solutions are vital to ensuring that forestry carbon removal projects remain viable and resilient against escalating risks such as wildfires. By offering protection to buyers and sellers of credits alike, as well as to financial institutions lending capital, these products drive confidence in the market, unlock lending capacity and facilitate the financing of new projects. Without such protections, organizations may hesitate to invest in forestry restoration initiatives, perceiving them as too vulnerable to future disasters.
However, safeguarding the future of carbon removal projects requires more than individual solutions. A collaborative approach — where insurers provide innovative risk transfer solutions, investors and policymakers prioritize resilience, governmental bodies establish supportive frameworks, brokers facilitate tailored coverage, researchers deliver actionable insights, and project developers implement best practices — is essential. By aligning risk strategies with the realities of escalating climate threats, these stakeholders can help protect forestry projects from the dual risks of wildfires: the immediate release of stored carbon and the long-term loss of sequestration capacity. With the carbon dioxide growth rate rising sharply in recent years, protecting forestry carbon removal projects is essential to achieving global climate goals.
Current carbon credit insurance products represent an emerging and growing market, addressing some of the challenges of buffer pools and offering protection against key risks faced by carbon removal projects. As this market evolves, broader adoption of these solutions will be essential to safeguarding these investments and ensuring the resilience of carbon markets.
Pre-issuance risk cover mitigates the risk of a project under-delivering the credits promised before they are issued, protecting buyers and investors of forward purchased credits. For example, when carbon credits are purchased on a forward basis, but the forestry project fails to reach maturity — due to events such as wildfires — insurance can indemnify the policyholder for the financial value of non-delivered credits or replace them with replacement credits.
Post-issuance risk cover offers additional protection, providing financial indemnification or replacement credits, in the event of adverse events impacting credits after issuance. Typically renewed annually, this type of cover safeguards against invalidation and non-permanence risks, providing reassurance to both buyers and sellers of carbon credits.
Credit non-payment risk cover for banks and financial institutions protects against non-repayment of loans from project developers.
Wildfires and natural catastrophes are not the only risks to carbon removal projects, prompting a rapid increase in product development in the carbon credit insurance market. Solutions are now available to protect against political risk relating to carbon credits as well as products specific to compliance regimes such CORSIA and the European Union’s Emissions Trading Scheme (EU ETS).
For more information on how to manage your carbon risks, please contact our team.
