Carbon Portfolio Valuation
Carbon Portfolio Valuation
Forward purchase agreements for yet-to-be delivered carbon credits are subject to a number of variables that can drastically alter the value of holding the notional commitment. Carbon valuation involves quantifying the project specific risks for a given CDM project and calculating, under current prices, the “fair value” of holding that ERPA commitment at the ERPA price.
The valuation must be refreshed at different stages of the project cycle, under current prices, with different risk predictions and expectations. As a result the ongoing change of a position’s value can easily be tracked over time.
This helps to simplify the complex process of the risk management of carbon portfolios and provides signals for potential re-balancing of a portfolio’s risk exposure from time to time.
Mark to Market Valuation
In a number of countries, the accounting treatment of carbon credits, as well as their tax treatment, has yet to be clarified. While the matter of the actual profits or losses arising from the holding or the trading of issued carbon credits is a simple concept, the same is not true for a forward commodity whose delivery is uncertain. Option pricing models are useful, but their applicability is constrained by the limited number of benchmark data and by the sheer fact that no two projects at a given moment exhibit the same delivery risk profile.
While the uncertainties surrounding delivery and therefore the positive or negative financial impact of shortages and surpluses make it difficult to assess the value of a carbon credit portfolio, some regulators, accountants, shareholders or risk managers may still wish to obtain an assessment. Such an assessment can be done in-house or be obtained from a reliable third party such as CIS. Often the combination of both sources would smooth out inaccuracies.
What we offer
CIS is well positioned to act as a third-party provider of Valuation and Mark-to-Market opinions on forward carbon credit streams.
The CIS proprietary valuation model was developed for calculating the intrinsic value of carbon credit streams. The model can be adjusted to consider a range of ERPA contractual structures including various fixed or formula prices.
While the valuation model provides the basis for CIS’ extended Pricing Report services, line by line valuations or cross portfolio valuations and position pricing are also available either on a one off basis or on an ongoing monthly or quarterly basis.
