The CRA's independent ratings and risk assessment services bring value to a broad range of market participants. For instance, our work is essential in helping Carbon Market Buyers to assess the risks associated with their purchasing decisions, and crucial in assisting Project Developers to position their projects and access the desired levels of finance. As a whole, CRA's ratings aim to ameliorate the overall working of the carbon market by increasing transparency and improving the understanding of risk.
Below you will find an overview of the different types of companies and institutions we work with, and the broad range of clients that approach us.
In the area of pricing opinions, the Carbon Rating Agency (CRA) has been engaged on a long term basis by a Regional Development Bank in Asia for periodic valuation of specific projects in its investment portfolio. The CRA's role has been to assess the regulatory cycle and performance risk in order to come up with a market-consistent valuation.
The CRA carried out an extended Rating Scan of a proposed CDM project based on a planned supercritical coal project in China. The client, a leading, UK based oil trading firm & compliance buyer, was considering buying into the project at an early stage (draft PDD) and commissioned the CRA to provide an initial evaluation of risks, including the aspects of sustainable development and reputational risk, which would not normally be included in a Rating Scan.
CRA's opinion addressed the regulatory risks associated with the relatively new methodology adopted by the EB, covered the technology and operational aspects of the plant and its probable load factor, and outlined the potential reputational risks - unfair or not - of the client being seen to be supporting expansion of Chinese coal power production.
The client team maintained a dialogue with CRA analysts during the process of the assignment, in the course of which specific points were raised and clarified. The Rating Scan was then used by the client team in discussions with their management. CRA's views highlighted several concerns and as a result the client saved human and financial resources by cancelling project investment based upon CRA guidance.
A subsequent commission for the same client focused upon an outlook on the forest sector and on key risks and opportunities in Reduced Emissions from Degradation and Deforestation (REDD). The report cast doubt on the oft-quoted low costs of development of REDD credits, pointing out that the commonly referenced economic analyses on which these figures were based tended to underestimate project level transaction and implementation costs. (Later upward adjustment of such figures confirmed the CRA's viewpoint.)
The CRA report suggested that the company should consider a more limited "learning by doing" involvement in REDD projects.The CRA view was accepted by the client team and incorporated in advice to senior management.
CRA carried out an extended Rating Scan of a proposed CDM project based on a partially implemented biodiesel plant in China. The client, a leading UK based global oil trading firm & compliance buyer - different from that in the preceding section - was in discussions with a Chinese broker about a project in its early stages and commissioned CRA to provide an initial evaluation of risks.
CRA's opinion identified particular risks: markets risks associated with price fluctuations for biodiesel and feedstock used, regulatory issues with regard to the project's additionality, and potential problems with regard to the economic viability of the plant in light of decreasing profit margins - which eventually could impact performance.
The client team maintained a dialogue with CRA analysts during the process of the Ratings Scan, in the course of which specific points were raised and clarified. The Scan was then used by the client team in discussions with its management. CRA's views highlighted several concerns that the client team had previously not fully considered. As a result, the client requested and obtained further details from the carbon broker of the CDM project in order to address the areas of concern to the point that they felt comfortable to go ahead with the investment.
Several clients have expressed an interest in using analytical tools employed by the Carbon Rating Agency, in particular the CARBONrisk platform. This web-based application simulates volumetric delivery risk by parameterizing the regulatory process and issuance cycle. Particularly useful for transaction modeling, CARBONrisk informs buyers' and sellers' views of volumetric risk in transaction negotiations.
CARBONrisk captures CRA's rating services in the form of a software product which embeds analytical rigor and a quantitative modeling framework needed to appraise carbon offset transactions. The model disaggregates risk into two regulatory-process steps—validation and registration— and then, into project performance. It threshes out the risk disaggregation on a per-project basis and reports risk quantiles. Appropriate for decision-making bodies within organizations, the application produces PDF-formatted summaries of these disaggregation, which can be shared electronically or printed for review. CARBONrisk differs from competing offerings in that no software is installed on a user’s desktop, thus eliminating the need for upgrades and difficulties of PC installation. In addition, the web-based framework allows for portfolios of arbitrarily large sizes and delivery horizons, which is otherwise computationally burdensome for some traditional workstations.
An area worth mentioning includes the efforts being made to enhance carbon market liquidity through design of indices that look deeply into the transaction cycle and risk profile of carbon projects. Currently, we are engaged with brokers, buyers, and sellers to design indices that build value in the carbon markets.
The CRA is engaged in discussions with the insurance industry in Europe to offer insurance products for mitigating risks borne by the Annex I buyers in procuring programmatic CDM projects.
IDEAcarbon/CRA is currently engaged with Markit to offer its products on their proposed environmental markets platform.
CRA ratings are applicable to both the existing OTC world and the emergent exchange-traded ones. In the OTC world, delivery risk is conveyed from seller to buyer and this produces the need for ratings and ratings assessment. For trading on exchanges, the risk is borne by the seller who brings offset credits onto the platform. Thus, even though/ Although the risk is not conveyed, it becomes all the more pertinent for sellers to estimate delivery risk conservatively in order not to pay on commitments where there are delivery shortfalls. Ratings will thus play a part in helping the growth of the OTC and exchange trading, especially as more traditional institutional investors look for transparency and understanding of carbon delivery risk.
Beyond the aforementioned transactional merits, the ratings business will grow as a consequence of institutional investors’ other requirements. Assessments concerning sustainability, the nature of reductions, and their likelihood to deliver, give institutional money the touch points it seeks in an investable asset class.
Complementing traditional CDM that focuses on emission reductions (ERs) achieved in a single site, Programmatic CDM allows the aggregation of ERs achieved in a dispersed manner. It offers developing countries with many benefits comparable to traditional CDM projects including registering unlimited number of specific CDM project activities under a single CDM program of activities (POAs).
Understanding the performance risks, along with any revisions made to the regulatory framework, is crucial to potential investors in pCDM. As much of the cost of PoAs is front loaded, there is a high financial risk that strengthens the requirement for an early understanding of the attached risk.
The CRA provides a risk evaluation of any pCDM scheme that focuses on the registration risk of the PoA and the performance risks of the first CPA. By refining the regulatory analysis, the additional framework requirements, such as the eligibility criteria and the related inclusion risk, are included in the CRA’s pCDM rating methodology.
Recently, CRA has caused a significant transaction in the history of CDM by enabling a pCDM project client in India to transact with a US based bank for selling credits from biomass boilers and biomass chillers. The overall risk evaluation and ratings have enabled this transaction, worth over 80 Million Euros, till 2010.
CRA is currently engaged in ratings of several pCDM projects across the globe to cause liquidity by enabling transactions of these projects in several sectors viz; biogas, building energy efficiency, fuel switching, CFL and solar.
Japanese corporations and financial players are sophisticated participants in other markets and are bringing the same high standards into carbon markets. This was reflected in the very early initiative by JBIC and the Japan Overseas Institute to partner with us in 2007, to introduce our product to the Japanese market.
Subsequently, JBIC and CRA signed an agreement to create liquidity for rated carbon projects on their primary CERs transaction platform during November 2008. Since then, CRA's product suite has deepened considerably, and indeed, Carbon Rating Agency is planning to create CRA Japan, a new group company, to reflect the growing interest and need for our services in Japan.
The regulatory risks (CDM registration) and the performance risk (CER issuance) are keys to the success of any CDM project. Indian project developers and service providers are currently facing the challenge of a comprehensive understanding of these two risks. Such limited understanding has profound effect on the success of these CDM projects.
In India, CRA is currently working with several clients in rating their projects, projects portfolio and enable transaction. CRA offers rating services to these clients implementing standalone projects, pCDM projects and voluntary CDM projects on a "buyer paying tonnage fee" basis. Thus, CRA offers its services at no additional transaction cost to the Indian sellers, and at the same time, create liquidity for Annex I buyers, who find it extremely difficult to negotiate and transact with Indian sellers.