Is it possible to rate pre-issue CDM projects?
Someone along the line in the CDM process has to accept the risk that the CDM board might not award CERs to projects in time or at all. Last autumn Ecosecurities lost almost half its share price as the CDM process could not keep up with applications.
IDEACarbon yesterday launched the Carbon Ratings Agency to help investors separate investment grade and sub-prime projects. It will award instruments backed by pre-issue projects with grades from AAA to D. AAA means that it is highly likely a project will deliver its promised emission reductions and be awarded carbon reduction credits (primarily CERs, but also voluntary offsets).
Carbon Rating Agency may make allocation of capital in carbon markets more efficient and reduce volatility in CER prices (an event like the Ecosecurities crash causes sudden supply concerns). The important thing to remember is that it will not address environmental concerns – particularly around additionality – within the CDM and other offset quality regimes. It assesses the risk of a projects successfully getting through the regimes.
And on what basis should investors trust the ratings? CERs are not a tested product and no-one really knows where the CDM is going long term. Plus – look where our AAA-rated mortgage backed securities ended up.