Carbon at Risk: A Value-at-Risk Approach to Carbon Removal Risk Management

19 Pages Posted: 3 Apr 2024 Last revised: 14 Dec 2024

See all articles by Nick Gogerty

Nick Gogerty

Carbon Finance Labs

Paul Johnson

Columbia Business School; Fordham University - Gabelli School Business; Gabelli Center for Global Investment Analysis

Date Written: February 22, 2024

Abstract

Carbon at Risk (CaR): Revolutionizing Carbon Removal Risk Assessment Through Financial InnovationAbstract

This paper introduces a groundbreaking framework for quantifying uncertainty in carbon removal projects: Carbon at Risk (CaR). Inspired by Value at Risk (VaR) methodology from financial markets, CaR provides a standardized approach to measuring and communicating carbon reversal risk across multiple time horizons. Just as VaR transformed financial risk management in the 1990s, CaR has the potential to revolutionize the rapidly growing carbon removal industry by creating a universal "language of risk."

In an industry projected to reach $1 trillion annually, the lack of standardized risk metrics has created significant barriers to scaling carbon removal solutions. This paper presents a novel solution by introducing four temporal risk buckets (1, 10, 100, and 1000 years) with associated confidence intervals, allowing stakeholders to quantify expected carbon losses in kilograms per metric ton removed. This innovation enables precise risk assessment, efficient capital allocation, and the development of new financial instruments like insurance and derivatives.

Drawing on real-world examples from biochar and forestry projects, we demonstrate how CaR can transform abstract carbon risks into concrete, actionable metrics. This standardization has profound implications for project developers, investors, insurers, and regulators as they work to scale carbon removal solutions to meet climate challenges.

Keywords: Carbon at Risk (CaR), Value at Risk (VaR), Risk Management, Carbon Removal, Carbon Emissions, Normalization, Temporal Buckets, Confidence Level, Median Expected Loss, Correlation Matrices, Biochar, Direct Air Capture (DAC), Investors, Regulators, Insurers, climate finance, environmental finance, carbon markets

JEL Classification: Q54, Q58, G22, G32, C51, Q51, O44, Q32, Q56

Suggested Citation

Gogerty, Nick and Johnson, Paul, Carbon at Risk: A Value-at-Risk Approach to Carbon Removal Risk Management (February 22, 2024). Available at SSRN: https://ssrn.com/abstract=4745542

Nick Gogerty (Contact Author)

Carbon Finance Labs ( email )

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HOME PAGE: http://www.carbonfinancelab.com

Paul Johnson

Columbia Business School ( email )

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New York, NY 10027
United States

Fordham University - Gabelli School Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Gabelli Center for Global Investment Analysis ( email )

113 West 60th Street
New York, NY 10023

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