CO2eVA : Pricing the transition of carbon externalities

Banks representing 40% of global banking assets are members of the Net-Zero Banking Alliance (NZBA) who commit to net-zero carbon in their portfolio impacts by roughly 2050. Here we present methods for steering their derivative portfolios based on the mitigation cost (benefit) of CO2-equivalent emissions (sequestration) these derivatives enable with NZBA counterparties. Thus, we price the cost-benefit of transitioning carbon externalities into changes affecting deals won and lost to steer the portfolios to net-zero based on a CO2-equivalent valuation adjustment (CO2eVA). This CO2eVA can be used in return-on-capital calculations, or as a shadow cost-benefit. We provide numerical examples considering interest rate swaps with a stylized regional airline, and a stylized shipping company that demonstrate highly significant effects in both cases