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Value-at-Risk of carbon constraints : an input oriented approach of resource scarcity

  • An increasing number of publications about theoretical approaches and new findings illustrate the relevance of the topic environmental risk assessment. The actual discussion about high oil prices is not incorporated under this headline; but it should be, as natural resource scarcity is a crucial economic factor. In practical experience, more and more banks, insurance companies as well as investors realize that there are certain areas with a high correlation between sustainable development and corporate success, corporate risk exposure and corporate performance. In this discussion one of the most obvious topics are risks related to climate change. According to the findings of surveys evaluated in this paper climate change starts to affectAn increasing number of publications about theoretical approaches and new findings illustrate the relevance of the topic environmental risk assessment. The actual discussion about high oil prices is not incorporated under this headline; but it should be, as natural resource scarcity is a crucial economic factor. In practical experience, more and more banks, insurance companies as well as investors realize that there are certain areas with a high correlation between sustainable development and corporate success, corporate risk exposure and corporate performance. In this discussion one of the most obvious topics are risks related to climate change. According to the findings of surveys evaluated in this paper climate change starts to affect economic development and companies' performance in various ways. Over the next decade, economic losses due to climate change are estimated by US$ 150 billion per year. As result world's business leaders have described climate change as the biggest challenge of the 21st century. Hence, the incorporation of climate change as a risk factor is essential, but risks related to climate change feature a severe issue of complex structure and uncertainty; traditional risk assessment tools appear in the light of not being able to either reflect the multifaceted system nor provide sufficient outcomes. Environmental risk assessments in general so far have mainly emphasized - if at all - on actual and possible impacts of the release of materials or emissions (external effects). But an overall sustainable risk assessment has also to take into account the risks related to the inflow of materials. The main reason for neglecting the inflow risks from an environmental perspective can be seen in the fact that these risks seem to be less tangible and more uncertain. Nevertheless, in a world where economic development and the use of natural resources is not uncoupled yet, a steadily increasing economic power will result in a continually rising extraction of resources. As all resources are limited, the risk of scarcity will rise; and the example of water illustrates that it already exists. Indeed, scarcity is not tangible for all kind of resources from a present point of view. Hence, a specified analysis is needed considering different market and supply conditions. A comprehensive analysis of environmental risks needs to encompass risks affecting the output as well as the input side of a value chain. This paper enlarges the discussion on environmental risk assessments upon the input dimension using the example of carbon risks. Firstly, carbon risks are defined as risks related to climate change at the corporate level with a focus on the input as well as the output dimension. Secondly, an analysis of the current discussion on the topic of carbon risk evaluates the status quo of scientific work in this field. Thirdly, in terms of developing a practically oriented tool, the Value-at-Risk approach and it's application to measure input oriented carbon risks are scrutinized. The results discuss how future volatility and market prices can be utilized to describe the uncertainty resulting from markets acknowledging and pricing oil scarcity as a risk factor. Finally recommendations with a focus on strategic management decisions and financial performance analysis are given and further research opportunities are drawn. The conclusion is; once markets have acknowledged the depletion mid-point as a measure of oil scarcity, natural scarcity will result in a significant higher Value-at-Risk. The Value-at-Risk of one barrel of crude oil could then be as high as US$ 15.5 in the short term and even US$ 17.2 in the long term. The scope of this paper is neither intended to predict one likely development nor to demonstrate how this tool can actually work in terms of forecasting single companies' performance. But in order to point the way ahead, this paper provides scenarios for potential future developments and sets a frame for risk assessments due to oil scarcity.show moreshow less

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Metadaten
Document Type:Working Paper
Author:Timo Busch, Paul Raschky
URN (citable link):https://nbn-resolving.org/urn:nbn:de:101:1-200911033559
Publisher:Wuppertal Inst. für Klima, Umwelt, Energie
Place of Publication:Wuppertal
Year of Publication:2004
Pagenumber:48
Series Title (English):Wuppertal Papers
Volume:144
Language:English
Release Date:2011/11/04
Division:Nachhaltiges Produzieren und Konsumieren
Dewey Decimal Classification:330 Wirtschaft
Licence:License LogoIn Copyright - Urheberrechtlich geschützt