Why Is the Insurance Industry Important for Nature-Based Infrastructure?

Climate change is increasing the intensity and frequency of both extreme weather conditions and natural disasters around the world. Nature-based infrastructure can help protect communities from hazards such as floods and storms while also providing other valuable ecosystem services. Research shows that the implementation and maintenance of nature-based infrastructure are often more cost efficient than alternative grey (i.e., engineered) infrastructure solutions.

Nature-based infrastructure includes:

• Natural ecosystems that can be conserved, rehabilitated, and maintained in a productive state to deliver a range of ecosystem services and improve resilience against extreme weather. 
   
• Hybrid infrastructure, also referred to as grey-green infrastructure, combines engineered and nature-based solutions. These include constructed wetlands, porous pavements, bioswales for stormwater runoff, sustainable urban drainage systems (SUDS), rain gardens, green roofs, etc.

However, governments often lack the funds to invest in the maintenance of natural infrastructure and to restore it after damages from storms or floods, leading to degradation and decreased protection from future events. After natural catastrophes, government often need to act as “insurers of last resort,” which causes serious pressure on public budgets.

Innovative insurance solutions can help create or strengthen the investment case for the development and restoration of nature-based infrastructure. The insurance industry can play a crucial role in this field for two reasons: 

1. First, insurance schemes can improve the financial resilience of communities: Insurance policies can protect asset owners and governments from the potentially devastating financial impacts of natural catastrophes.
    
2. Second, insurance schemes can also improve the natural protection of communities against extreme weather events: Insurance companies can offer reduced premiums to customers who invest in risk-reducing nature-based solutions. For example, savings from the reduced premiums for flood insurance could be invested in wetland restoration, which lowers flood risks and creates additional benefits such as new natural habitats and recreation areas.

There are two types of insurance that can be applied to enhance resilience and support nature-based infrastructure: indemnity insurance products and parametric insurance products.

Indemnity insurance compensates the insured party for the loss or damage of a physical asset such as infrastructure or real estate. The insured value is calculated based on the market and reconstruction value of the asset, while the insurance premiums are based on the cost of repairing the asset and the likelihood of damages. Indemnity insurance products are usually used for events with low severity but high frequency, and the payout of claims can involve a lengthy due diligence process. 

Parametric insurance products offer coverage to respond to extreme weather events and natural catastrophes. The insurance payments are triggered by a set of parameters or disasters of a specific type and severity predetermined in the contract. For example, in the case of a hurricane, the parameters would be the wind speed and rainfall volume over defined timeframes and in specific locations. Parametric insurances disburse funds immediately after the triggering events, enabling rapid emergency responses as well as longer-term reconstruction.

How Can Insurance Instruments Support Nature-Based Infrastructure?

The insurance industry is becoming increasingly active in the field of resilience and nature-based infrastructure. Here are three examples showing the successful use of insurance instruments in this domain.

Mexican Coral Reefs

Coral reefs reduce wave energy and significantly protect people and properties during storms. In 2019, regional governments in Mexico, The Nature Conservancy, and Swiss Re launched a first-of-its-kind insurance solution for natural infrastructure, aiming to protect the barrier reef in the Mexican state Quintana Roo. The parametric insurance that was created for this purpose covers coral reefs and beaches along a coastline of 160 km of the Yucatán peninsula. 

The insurance is triggered if wind speeds exceeding 100 knots are recorded, allowing for rapid disbursement of funds after severe storms. This enables trained community members to quickly begin restoration actions and minimize coral damage, protecting livelihoods and tourism assets related to the reef. The insurance payouts are multi-tiered according to wind speeds, with the maximum payout to be disbursed after events with wind speeds exceeding 160 knots. These calculations are based on wind speed data from previous storms, and payouts are automatically triggered after the predefined storm events, even if no damages occurred.

The insurance of the coral reef is managed through a trust fund: The trust fund purchases the insurance, receives insurance payouts in the case of a severe storm, and is responsible for organizing the reef repair work after such events. The fund also invests in the resilience and maintenance of the coral reef. The communities and asset owners on the coast benefit from the longer-term protection of the reef as a tourism asset, as well as from the insurance payouts that allow for the rapid restoration of the reef and the beaches after storms. The trust fund receives funds from public, private, and philanthropic sources as well as a federal fee collected from beachfront property owners who use the beach for commercial purposes.

Mangrove Restoration and Protection

Mangroves are highly valuable nature-based infrastructure for climate adaptation and mitigation; around the world, mangroves protect more than 18 million people and reduce the flood damage to coastal assets by more than USD 82 billion a year. In addition, mangroves help mitigate climate change by storing large amounts of carbon.

The Global Innovation Lab for Climate Finance developed an innovative instrument that recognizes revenue streams derived from mangrove conservation and restoration. The Lab developed a social enterprise model, the Restoration Insurance Service Company (RISCO), which integrates mangroves’ risk reduction value into insurance products and monetizes the climate mitigation potential of mangroves through blue carbon credits. 

In the Philippines, Conservation International is currently implementing the RISCO pilot phase for the Lab, aiming to conserve 3,400 hectares of mangrove forests and restoring an additional 600 hectares. Over 10 years, the pilot is expected to reduce flood risks for 7,000 people, provide a climate benefit of more than 600,000 tons of avoided and sequestered CO2 emissions, and generate more than USD 10 million in revenue from the insurance sector and blue carbon credits.

The RISCO model works as follows: RISCO identifies suitable sites for mangrove conservation and restoration, coordinates with local partners and the insurance industry, and helps the insurance sector evaluate the risk reduction benefits of the mangroves. The insurance companies pay a fee to RISCO for helping with the valuation of mangrove benefits, and for continued, verified mangrove conservation or restoration. RISCO receives funds not only from the insurance sector, but also from investors and blue carbon credit buyers. These revenues are invested in restoring and protecting mangroves, which improves coastal protection and stores significant amounts of carbon. Benefiting from reduced flood risks through the mangroves, the insurance sector offers insurance with reduced premiums to coastal asset owners.

Wetland Restoration on Agricultural Land

The Canadian city of Windsor is facing high flood risks and flood damage per capita. Nearly all wetlands upstream of the city have been drained for agricultural purposes, causing high water runoff in spring and during heavy rainfall. The Insurance Bureau of Canada (IBC) therefore proposes an insurance framework to encourage the proactive restoration and conservation of upstream wetlands. Such wetlands on private agricultural land would protect public infrastructure in the municipality of Windsor from spring flooding, while landowners would be compensated for the land-use change through the insurance. 

The IBC proposes that cities like Windsor take out a parametric or indemnity insurance contract for its public infrastructure and receive payouts in case of floods. Meanwhile, a trust fund would manage and fund flood-resilience activities across different jurisdictions, such as hydrology studies and the restoration and maintenance of the upstream wetlands. Upon policy renewal every few years, the new insurance premiums would take into account the flood risk reductions from the wetland restoration projects. The savings from the reduced insurance premiums (along with contributions from other public and private parties like the national government) would recapitalize the trust fund and allow for further wetland restoration and conservation.

The insurance scheme proposed by the IBC is similar to a resilience bond. A resilience bond links insurance premiums to the implementation of projects that increase resilience and reduce risks: Avoided damages in the future are monetized through a rebate on the insurance premiums. The insurance scheme functions similar to progressive life insurance, where reduced premiums are offered if measures are taken to reduce mortality risks. In the case of resilience bonds, the rebate on the insurance premiums forms a source of funding for risk-reducing resilience projects such as wetland restoration. 

Conclusion

Opportunity

As shown throughout these examples, the insurance industry can provide solutions that increase both the financial and the physical resilience of communities around the world by supporting nature-based infrastructure. Such innovative schemes are urgently needed to respond to the climate and biodiversity crisis and improve resilience toward catastrophic events.

Scaling up the use of insurance products for nature-based infrastructure offers a wide range of benefits to different stakeholders including local communities, governments of different levels, institutional investors, and the insurance industry itself. These parties could vastly benefit from increased financial and physical resilience through insurance schemes for nature-based infrastructure. Likewise, parties could realize varying benefits ranging from reduced insurance premiums, job creation, and new investment opportunities to the diverse environmental, social, and economic co-benefits of nature-based infrastructure. A crucial step is to identify, measure, and quantify these benefits or avoided costs. IISD is working with the Sustainable Asset Valuation (SAVi) methodology to provide these assessments for nature-based infrastructure, such as for example in the Saloum Delta in Senegal.

However, measuring and monetizing the benefits of nature-based infrastructure over time and harnessing approaches to capture such added value can be challenging, which hampers the broader application of innovative insurance solutions for nature-based infrastructure. The lack of a track record on the performance of nature-based infrastructure, in comparison with the track record of grey infrastructure, is one challenge for the insurance industry as well as for governments and investors. The projects above are nascent examples of building the track record for the investment case for nature-based solutions. To extend the use of insurance solutions for various nature-based infrastructure types, there is a need to create reliable modelling approaches that are not solely based on historical data but also estimate future benefits of nature-based infrastructure projects. With better (and spatially explicit) data, advances in climate projections, as well as site-specific and customized models, it will be possible to also develop and apply insurance solutions to the whole promising spectrum of nature-based infrastructure.

Solution

IISD has long recognized the challenges of quantifying and valuing the benefits of sustainable infrastructure. In cooperation with various partners, it has developed the SAVi methodology to help policy-makers and investors make informed decisions on sustainable infrastructure financing. SAVi allows the evaluation of the financial attractiveness of an infrastructure project across its life cycle, taking into account important environmental, social, economic, and governance factors that are overlooked in a traditional valuation.

IISD is using the SAVi methodology to assess the value of nature-based infrastructure around the world. For example, a recent project analyzed the economic value of the Saloum Delta in Senegal under different development scenarios. The assessment demonstrates (among other things) the positive impact of mangrove restoration on carbon sequestration and water filtering. The assessment of two wetlands in Sardinia, Italy, includes site-specific evaluation of the ecosystem services, the generated labour income, and a comparison with built infrastructure. A new collaboration between the Global Environment Facility (GEF), UNIDO, the MAVA Foundation and IISD will kick off in 2021 to further improve the track record of nature-based infrastructure as an alternative to grey infrastructure for climate adaptation and other infrastructure services. 

These projects show that, even though challenging, it is possible to model the multi-faceted value of diverse nature-based infrastructure under different climate and policy scenarios.  Stronger collaboration between stakeholders and the insurance sector could therefore be highly valuable for accelerating the use of innovative insurance products for nature-based infrastructure.

Oil, gas, and coal are multi-billion-dollar industries, yet every year fossil fuel companies get billions in tax breaks and handouts that increase their profits even further. In a world that’s shifting to clean energy, Canada could get left behind if these subsidies don’t change. Fossil fuel subsidies also work against other climate change actions, incentivizing the very pollution we’re trying to stop. Canada committed to phasing out inefficient fossil fuel subsidies 11 years ago—but even after over a decade, there are still large subsidies to fossil fuel production. With COVID-19 stimulus spending, fossil fuel subsidies went up in 2020 compared to previous years.

Taxes and subsidies are a complicated topic, so we created this web page to explain federal and provincial subsidies in Canada. We’ll cut through the jargon, so you can understand what’s really happening, debate it, and propose solutions for Canadians and Canada’s economy.

What are fossil fuel subsidies?

A subsidy is a financial benefit that the government gives, usually to a specific business, group, or industry. There are debates about the difference between “subsidy” and the broader term “support,” but that’s a pretty good plain English definition. (It’s also roughly how the World Trade Organization defines the term—and their definition is globally accepted.) This financial benefit most commonly comes as a direct handout of cash or a tax break. Either way, it’s more money in the pocket of whoever receives the subsidy. Fossil fuel subsidies go to fossil fuel producers or consumers—whether it’s for extracting oil, shipping gas through a pipeline, or burning fossil fuels for energy.

How much does Canada give out in fossil fuel subsidies?

It’s difficult to know, because federal and provincial governments haven’t transparently reported how much they really provide in fossil fuel subsidies. From what we do know, it’s at least CAD 4.8 billion per year. That includes measures like special tax deductions and direct cash transfers that governments provide to fossil fuel companies. You can find a list of some of the largest subsidies below. Examples of federal subsidies include research and development support programs and tax breaks like flow-through shares, which incentivize oil, gas, and mining exploration.

Examples of provincial subsidies include crown royalty reductions in Alberta valued at an average of CAD 1.16 billion and deep drilling and infrastructure credits in British Columbia valued at CAD 350 million in 2019.

In addition to the more narrowly defined subsidies, governments also provide public finance to fossil fuels through loans, guarantees, equity, and grants. Canada is one of the largest international fossil fuel financers in the world, averaging CAD 11 billion per year from 2018 to 2020. 

What do fossil fuel subsidies cost me?

Canada’s subsidies represent a lot of money. Let’s put it in perspective.

• They would pay for education for nearly 360,000 students (Canada’s average annual spending per K–12 student is CAD 13,315).
• It would offer job training for 480,000 workers (Canada Job Grants provide up to CAD 10,000 to help workers gain the right skills).
• It would pay for annual health care costs for 880,000 people (Canada spends CAD 5,418 per person on health care each year).

Wouldn’t you rather this money be spent on issues that matter to Canadians?

So subsidies are expensive, and they cost me money. Is that why they are a problem?

Yes, but it gets worse. Fossil fuel subsidies also undermine the other climate change actions that Canada is taking. For example, the federal government recently introduced carbon pricing across Canada. By making carbon pollution more expensive, carbon pricing encourages us to pollute less. Just like Canada’s past success in stopping acid rain, putting a price on carbon pollution is a key part of the global fight against climate change. But through money and tax breaks, fossil fuel subsidies increase the same pollution that we’re trying to lower. Rather than making pollution expensive, they make it cheaper. This is like raising taxes on cigarettes to discourage smoking while also giving tobacco companies tax breaks so they can make more cigarettes and profits.

To make matters worse, fossil fuel subsidies disadvantage clean energy because they make it cheaper to produce or burn fossil energy. When fossil fuels are artificially cheap, investing in renewable energy becomes less attractive. In the long run, subsidies distort the market, pushing investment toward sectors that might not otherwise be viable. If even a small portion of subsidy savings were swapped to support renewable energy or energy efficiency, we could make a faster shift to an economically stable, climate-safe future. That sounds like a pretty good alternative compared to getting locked into dangerous climate change and unhealthy pollution!

Is the government doing anything about this?

In short: despite commitments for reform, progress is slow. At the provincial level, there have been very few efforts to reform subsidies. At the federal level, Canada committed to phasing out “inefficient” fossil fuel subsidies way back in 2009, as part of the G20. In 2021, they moved up their deadline to complete this to 2023.

However, Canada still hasn’t taken all the necessary steps to live up to these promises and has added new subsidies in the wake of COVID-19. In a scorecard ranking G20 countries’ support to fossil fuels (including subsidies and other policies like public finance), Canada ranked last among 11 OECD countries on progress in ending support to fossil fuels. 

Canada is also lagging on public finance commitments. As one of the biggest financiers of fossil fuels internationally through Export Development Canada, the country is not yet on track to meet its Glasgow commitment to phase out this international financing by the end of 2022.

As part of its G20 commitment, the federal government is doing what’s called a “peer review” with Argentina. Through this process, Canada is evaluating “inefficient” federal fossil fuel subsidies. Overall, the process isn’t entirely clear and is well behind schedule. Where other reviews took 12–18 months, Canada and Argentina are now in their fourth year. We also don’t know which subsidies will or won’t be considered inefficient, or even which subsidies will be reviewed. IISD is following the peer review process and will keep our readers updated as it progresses.

The federal government has made moves to reform certain tax deductions that act as subsidies to fossil fuel companies. But with the 2023 commitment, the government still has a lot of work to do—and fast.

What should Canada do?

To start, the federal and provincial governments should stop introducing new subsidies for fossil fuel companies. At the same time, governments shouldn’t be extending the lifespan of any existing subsidies that are scheduled to expire. It’s also important that all government spending have clear conditions and standards to align spending with climate change goals.

As well, governments should be upfront with Canadians about how much money they spend on fossil fuel subsidies each year. This means increasing transparency and measuring subsidies using globally agreed-upon definitions and methodologies.

What are common misconceptions about subsidies?

There are a number of misconceptions about subsidies that seek to exclude certain types, argue for estimation methods that minimize their size, or mislead on the goals of fossil fuel subsidy reform. These efforts to push policy-makers away from international guidelines and best practices have delayed fossil fuel subsidy reform in Canada. Here, we clarify some common misconceptions about fossil fuel subsidies in Canada:

Misconception: Money to reduce greenhouse gas emissions is not a subsidy. Grants and direct spending that have environmental benefits are not subsidies.

Correction: Ultimately, these help fossil fuel industries compete and lower their cost of business, so they are correctly classified as subsidies. There can be a significant opportunity cost when government directs money to this type of subsidy rather than other clean energy or emission-reduction options. Grants and direct spending clearly fall within the World Trade Organization’s definition of subsidies.

Misconception: Tax expenditures and royalty relief are not subsidies. Allowing companies to undervalue their assets for tax purposes just levels the playing field for capital-intensive industries.

Correction: Tax expenditures and royalty relief have the same impact as grants. They reduce government revenue while lowering the cost of producing fossil fuels, giving them an unfair advantage when countries need to be rapidly transitioning to renewables. They also clearly fall within the World Trade Organization definition of subsidies as “government revenue forgone or not collected.” They are included in internationally recognized subsidy methodologies.

Misconception: Canada has already reformed all of its “inefficient” fossil fuel subsidies.

Correction: Canada has reformed only a handful of tax measures and argues that those that remain are either not subsidies (see above) or are not inefficient. But Canada hasn’t given a robust definition of “inefficient,” making it difficult to hold them to their own commitment. In 2019, the Office of the Auditor General found that Canada’s assessment of inefficient subsidies for fossil fuels was incomplete and didn’t take into account the environmental or social costs of subsidies.

IISD has proposed four criteria that the Canadian government should use to identify inefficient fossil fuel subsidies, ensuring that they adopt a strong definition that doesn’t leave any loopholes for problematic subsidies to continue. This includes ensuring public funds are spent in ways that are: (1) aligned with Canada’s climate commitments; (2) supportive of a low-carbon economy; (3) consistent with a just transition; and (4) the best way to achieve the policy’s goal. Through this lens, it becomes apparent that there is essentially no room for fossil fuel subsidies in the context of Canada’s commitment to phase out inefficient subsidies by 2023. 

Misconception: All subsidies are inherently bad.

Correction: When properly applied, subsidies can support the low-carbon transition and avoid bankruptcies and unemployment risks. For example, careful government spending can support worker transitions from fossil fuels to clean energy while encouraging a shift away from the production and consumption of fossil fuels.

Misconception: Removing fossil fuel subsidies means advocating for job losses and energy insecurity.

Correction: Fossil fuel subsidy reform can be done in a way that supports job creation and enhances energy security, setting Canada up to thrive in a low-carbon economy. For example, ensuring affordable energy access in remote and northern communities in Canada is an absolute necessity. Historically, some fossil fuel subsidies have enabled this. However, a subsidy should only remain in place if it verifiably meets robust criteria for inefficiency, with a plan for eventual phase-out. IISD supports developing alternative policies that encourage clean energy options while maintaining affordable access.

To learn more, you can check out our report on applying best practices for fossil fuel subsidy measurement in Canada.

Can you tell me more about these subsidies?

Here are some of the largest current subsidies in Canada.

* The exact amount changes from year to year, so unless otherwise listed, this is a yearly average based on OECD estimates from the period 2016–2019, with specific data used for all years available and averaged. During periods of higher oil prices, royalty payments will also tend to be higher. 
**From fiscal year 2019/20. For a full breakdown, see our most recent federal subsidy report.
†   From fiscal year 2018/19, as listed in British Columbia’s Public Accounts.
†† Data from Ontario’s Taxation Transparency Reports. 

The IISD Global Subsidies Initiative has produced a wealth of information on subsidies to fossil fuels globally and in Canada.

You can learn more from this detailed report, which gives a breakdown of fossil fuel subsidies by Canada’s federal government in 2020. 

If you’re curious about provincial and territorial subsidies, you can check out reports we’ve done on Alberta, British Columbia, Newfoundland and Labrador, Nunavut, Ontario, Quebec, and Saskatchewan.

This article was last updated in August 2022.