Credit ratings aim to clean up carbon project uncertainty

UK analyst IDEACarbon has today launched a new carbon credit rating service designed to bolster confidence in the carbon offsets issued through the CDM, JI and voluntary markets.

As reported last week, the new service will assess carbon reduction projects and issue a rating based on the likelihood of the project delivering its stated emission reductions. Like standard credit ratings, those projects with the lowest risk attached will be awarded AAA ratings, while those with the highest risk will be assigned C or D ratings.

The company said projects would be independently assessed by a team including ratings experts, financial market professionals, UN climate change negotiators and former senior managers from development agencies such as the World Bank. It argued that the assignment of credit ratings would help to standardise carbon as a commodity and establish a genuine asset class.

Lord Stern, the author of the influential Stern Review and vice chairman of IDEAcarbon's parent company IDEAglobal Group, said the new ratings system represented "a vital tool to bring greater clarity, transparency and certainty to the market".

"The carbon markets are showing their potential to reduce global emissions and should form a key plank for any future global climate agreement," he said. "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."

The new service was launched as IDEAcarbon released a new report showing that there is a high level of risk attached to many carbon reduction projects. The firm assessed a sample of 25 CDM projects across a range of technologies and geographies and found that only a small minority would have attained a AA rating or above and that a significant number were badly underperforming.

The study also looked at all projects that had started to issue UN-certified credits and found that these were delivering 96 per cent of the credits expected at the project design stage. However, it noted that these figures were skewed by the presence of just 20 large-scale projects which account for three quarters of all credits issued. The rest of the portfolio – more than 300 projects – are delivering just 70 per cent of the expected credits.

Ian Johnson, chair of IDEAcarbon and former vice president for sustainable development at the World Bank, said there was enormous variation between different projects. "Our analysis shows that the concern of many investors is justified – carbon projects are risky and until recently these risks have been underestimated," he explained. "But the analysis also highlights the enormous potential in this market. Well-designed projects are delivering genuine emissions reductions at an increasing scale."

The findings are largely in line with similar data from rival analyst Point Carbon, which assessed all CDM projects in the pipeline that have reached validation and estimated that only 68 per cent of the expected credits will be issued. Arne Eik, CDM and JI manager at Point Carbon, agreed that the overall market covered up huge variations between different projects. "Some projects are regularly delivering well over 80 per cent of the expected credits, while others are performing far worse," he said.