5.1.1. Scope.
Fair value measurement applies to the measurement of all Embedded Carbon Assets.
5.1.2. Definition of fair value for an Embedded Carbon Asset.
The fair value of an Embedded Carbon Asset represents the current value of the carbon which has already been used to build the existing asset. This value is different from the price that has (or should have been paid) at the time of the construction of the asset.
The fair value of an embedded carbon asset is the theoretical price that would need to be paid at the reporting date to produce an asset that would allow the reporting entity to achieve similar economic benefits then the asset under consideration. The new asset is assumed to be produced by a reasonable market participant using readily available technology.
5.1.3. Measurement.
The fair value of an Embedded Carbon Asset is equal to:
Embedded carbon asset at fair value= c × p
Where:
c is the amount of carbon that would be needed by a reasonable market participant using readily available technology to produce an asset that would achieve similar economic benefits,
p is the price of carbon at the reporting date.
In the case of the Embedded Carbon Asset related to an existing office building for example, the fair value of the Embedded Carbon Asset would consider the average CO2 emission that is currently achieved in the market where the asset is located for the production of a building of similar size, using the construction technology which is the most commonly used in the market.
5.1.4 Change in the fair value of Embedded Carbon Asset.
Changes in fair value of Embedded Carbon Asset is driven either by. (i) a change in the price of carbon or (ii) a change in the technology used to produce the asset.
As carbon usage becomes restricted it is expected that carbon prices will go up, therefore increasing the fair value of Embedded Carbon Assets, while the technology evolution toward a carbon free economy will drive fair value of Embedded Carbon Asset down, as less carbon is needed to replace existing assets.
Assuming the economy manages to translate to a complete carbon free structure then Embedded Carbon Asset value will tend toward zero.
Change in Fair Value are booked in the Carbon balance sheet with the counter booking being reflect on the carbon P&L and shall differentiate between the impact of the change which is driven by the change in carbon price and the impact of the change which is driven by change in the change in the carbon emission needed to replace the asset.