The most popular carbon credit used as the offset is the Certified
Emission Reductions (CERs) which is the carbon credit generated
from the Clean Development Mechanism (CDM) project activity. This
thesis examines how to manage risk in the CDM market. Three
categories of risks were found: 1) compliance risk; 2) non-creation
risk; 3) volume risk. The top-down approach was applied to assess
the risks by using the global CDM pipeline data as an input. In the
end, the statistically analysis provides the result of assessment
from each type of risk. The results show that project type and
location have high correlation to the risks. On average, most
projects have the volatility of the performance around 25%-40%. To
manage risk efficiently, an investor should apply risk factors to
discount the expected number of CERs to reflect an individual risk
profile of the project. Buying an option or insurance could also
help to mitigate and hedge an unforeseen incident to the project.
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