Carbon Value-at-Risk (CVaR)

What is “Carbon Value at Risk”?

Value at Risk (VaR) is a measure of the worst expected loss that a portfolio or company can suffer over a given time horizon and for a given confidence level. PAL’s Carbon Value at Risk metric is used to determine the extent of carbon liability risk and potential losses attributable to carbon emission related anthropogenic (manmade) climate change.

Why is it important?

Burning fossil fuels, which triggers manmade climate change and global warming, has been on the increase since the Industrial Revolution began, some three hundred years ago. We’re still hard at it, and with every tonne of CO2 emitted as a result, our precious atmosphere warms, putting the planet at ever greater peril of becoming uninhabitable – within just a few generations, if we don’t set a course towards a safer, more sustainable future.

Carbon and other Greenhouse Gas (GHG) emissions are associated with nearly every aspect of our lives from production to consumerism: the electricity you use at home is likely in generated in part from burning fossil fuels, the TV you watch is built in a factory that uses electricity similarly supplied and so that TV has what we call embedded carbon.

There is no standard metric for measuring long-term carbon liability risk consistently across portfolios and companies. PAL’s CVaR methodology and metrics provide that carbon metric for comparing portfolios and companies globally.

How are emissions classified?

GHG emission are classified into three scopes by the GHG Protocol[1]: direct emissions, indirect emissions arising from purchased electricity and indirect emissions arising from other indirect emissions. In summary

Scope 1: Direct GHG Emissions Direct GHG emissions occur from sources that are owned or controlled by the company, for example, emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.; emissions from chemical production in owned or controlled process equipment. Direct CO2 emissions from the combustion of biomass shall not be included in scope 1 but reported separately. GHG emissions not covered by the Kyoto Protocol, e.g. CFCs, NOx, etc. shall not be included in scope 1 but may be reported separately.

Scope 2: Electricity Indirect GHG Emissions Scope 2 accounts for GHG emissions from the generation of purchased electricity consumed by a company. Purchased electricity is defined as electricity that is purchased or otherwise brought into the organizational boundary of the company. Scope 2 emissions physically occur at the facility where electricity is generated.

Scope 3: Other Indirect GHG Emissions Scope 3 is an optional reporting category that allows for the treatment of all other indirect emissions. Scope 3 emissions are a consequence of the activities of the company, but occur from sources not owned or controlled by the company. Some examples of scope 3 activities are extraction and production of purchased materials; transportation of purchased fuels; and use of products and services.

Understanding CVaR

PAL’s Carbon Value- at-Risk (CVaR) methodology uses a multi-scenario approach that considers future global emission, temperature anomaly and loss & damage trajectories and their likelihoods, in conjunction with individual portfolio or company emissions data to measure the worst exposure to carbon liability risk.

For example, a company may be measured as having 25 year CVaR of $1 bn with a 90% confidence level. In other words there is a 90% probability CVaR would be no worse than $1bn when considering all scenarios. Conversely there is a 10% probability that CVaR would exceed $1bn.


Carbon Value-at-Risk (CVaR) was last modified: February 12th, 2018 by admin