Carbonvestments: Appraising Investments in a Carbonomics Environment

By Janek Ratnatungaa, Chris D’Souzab

aCalwest University, USA

bInstitute of Certified Management Accountants, Australia

Abstract

In 2011, Australia introduced a Carbon Pollution Reduction Scheme (or CPRS) that was a cap-and-trade emissions trading scheme for anthropogenic greenhouse gases. It clearly indicated to companies that polluting the environment with carbon emissions will no longer be free. Companies subject to carbon caps under a carbon trading scheme can either invests in carbon sequestration project and or buy carbon credits to offset their carbon liabilities. While Net Present Value (NPV) has been recorded as the most popular appraisal technique used across the globe for project valuation purposes, finance theorist suggests that using real options (RO) analysis is a more superior techniques to value investment opportunities. Using case study data of an early mover in a CPRS scheme, this paper reveals how RO approach provides more strategic insights than traditional NPV in valuing carbon sequestration investments (termed carbonvestments).

Keywords: Carbon Emissions; Carbonomics; Net Present Value; Project Valuation; Real Options Analysis

Download: MAF Vol. 2 – Ratnatunga & D’Souza