Carbon credit rating services launched

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LONDON – The Carbon Rating Agency, a new company formed by IDEAcarbon, has launched the first carbon credit rating service today at the London Stock Exchange in London.

The service will provide detailed credit ratings for carbon offset in the clean development mechanism (CDM), joint implementation (JI) and voluntary markets. Project-based mechanisms such as CDM and JI were created by the Kyoto Protocol to encourage investment in carbon-sensitive projects in developing countries. The rating service plans to analyse these emissions-reducing schemes and assess whether they are likely to achieve their stated targets.

Lord Stern, author of the influential Stern report on the economics of climate change and vice-chairman of IDEAglobal Group, attended the launch to lend his support to the scheme. “The carbon markets are showing their potential to reduce global emissions and should form a key plank for any future global climate agreement. If we are to attract the levels of finance necessary to make this a mainstream market and have a strong impact on emissions reduction, risks must be clearly understood, articulated and managed. A detailed ratings system is a vital tool to bring greater clarity, transparency and certainty to the market.”

Ian Johnson, chair of the Carbon Rating Agency and previously at the World Bank, introduced the service, stating that the carbon markets are “absolutely destined to be much larger”. He expects the market will be valued easily at €100 billion by 2020. His hope is that the provision of a ratings service for green energy and emission-reducing projects will increase investment, and help to establish carbon as a true asset and a real financial market through increased transparency and better risk management, while promoting a deeper understanding of the operational element of these projects.

There are 25 CDM projects rated in the initial portfolio, but the Agency aims to add up to 10 a month from July 2008. Once it has a substantial number in its portfolio, it hopes to establish benchmarks against sectors and comparable projects.

Like existing rating agencies, the projects are rated from triple A, for the highest quality with the lowest risk offset assets, to D for the highest risk assets that are least likely to meet their stated goals. The report accompanying the launch revealed that few of the projects achieve AA ratings and a large proportion is liable to under-perform compared with volumes projected at the project design stage. Each rating provides a detailed analysis of a wide range of risks to project performance, including implementation risk, which is often overlooked.

The Carbon Rating Agency will provide ratings to market participants on a mandated basis or through the Agency’s Market Initiated Rating Services, which gives subscribers ongoing access to a representative range of carbon assets. The Agency’s management team and ratings committee includes ratings experts, financial market professionals, UN climate change negotiators and former senior managers from development agencies such as the World Bank – a combination that ensures the broad range of risks facing carbon projects are taken into account by the ratings process.

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