`Homeless' Industrial-Gas Offsets May Flood New Zealand, IdeaCarbon Says

United Nations offsets from industrial-gas projects may flood the emissions-trading program in New Zealand and push the country’s carbon prices lower if the European Union prohibits their use, according to IDEACarbon.

The EU proposed last week a ban for use in its carbon program, the world’s largest, of credits linked to HFC-23 as well as nitrous oxide from adipic acid production. The European Commission, the EU regulator, said that projects related to those industrial gases may create “excessive” profits and undermine market integrity.

UN Certified Emission Reduction credits, known as CERs and awarded to projects that cut emissions in developing countries, can be used for compliance in the EU’s and New Zealand’s carbon programs as an alternative to allowances issued by the systems.

“Beyond Europe, New Zealand is currently the only established marketplace for the decreasingly relevant HFC-23 and N20 CERs,” Matthew Gray, an analyst at IdeaCarbon in London, wrote in a note. “If there is cost-parity between New Zealand’s units and CERs, the illiquid and shallow New Zealand market will quickly be flooded by foreign CERs looking for a home.”

As EU national governments prepare for a debate on the proposed ban, the regulators of the UN Clean Development Mechanism, the world’s second-biggest emissions market, consider a change of methodology for awarding credits to projects that cut HFC-23 amid allegations of misuse.

Business-as-Usual Case

Under a scenario where a change of methodology by the CDM regulator cuts yields at HFC-23 projects by 70 percent, total issuance of credits related to this gas will be at 908 million tons through 2030, according to IdeaCarbon. It will rise to 1.63 billion tons under a business-as-usual case.

UN CERs for delivery in December this year traded 0.9 percent higher at 11.95 euros a ton in London today, while EU allowances gained 1.2 percent to 15.01 euros. Spot prices for carbon credits in New Zealand were NZ$20.80 ($15.70) last week, according to a Nov. 26 report by Auckland-based broker OMFinancial Ltd.

Companies in New Zealand’s emissions-trading scheme have the option to pay a tax of NZ$25 a ton of carbon dioxide discharges or buy credits backed by forestry. The program, also known as NZ ETS, was legislated in 2008 and expanded in July to include energy producers.

“Because of the sluggishness of the NZ ETS market and the cumbersome nature of over-the-counter deals, NZ ETS participants can enter the more liquid and transparent CER market to secure compliance,” Gray said.

HFC-23 Credits

Interest in UN offsets from New Zealand’s emitters could rise if EU member states give the green light to the ban proposed by the commission and the CDM regulators change the methodology for awarding HFC-23 credits, according to the IdeaCarbon research note.

This could push the price of offsets related to nitrous oxide and HFC-23 credits below the New Zealand units, Gray said.

“The New Zealand government needs to make a decision on this issue,” he said. “Compared to Europe, New Zealand currently takes a cavalier approach to emission reductions, but the inclusion of HFC-23 and N2O CERs would undermine their clean green image.”

HFC-23, which can trap 11,700 times more heat per molecule than carbon dioxide, is a byproduct of HCFC-22 used in air- conditioning and refrigeration. The EU and environmental lobbyists including Bonn-based CDM Watch have said some plants may be increasing HCFC-22 output simply to generate credits for controlling HFC-23 discharges.

While HFC-23 projects represent less than 1 percent of all registered UN offset projects, their credits account for more than half of about 476 million offsets issued so far. The 19 projects cutting the gas under the CDM program are located mainly in China and India, according to UN data.

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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