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Carbon Credits Becoming ‘Junk’ Before 2013 Ban Closes Door: Energy Markets

Investors are rushing to sell some United Nations emission credits before they become almost worthless in 2013, pushing prices to a record low.

With Europe set to stop recognizing credits for projects that destroy industrial gases known as hydrofluorocarbon-23 and nitrous oxide in little more than a year, holders are “racing to beat” the ban, according to Bloomberg New Energy Finance. A UN program that encourages reductions in the industrial gases awarded almost twice as many credits for them this year as in 2010, according to data compiled by Bloomberg. They account for about two-thirds of all so-called Certified Emission Reductions supplied by the UN-managed program.

Enel SpA, Honeywell International Inc. (HON) and Solvay SA (SOLB)’s Rhodia unit are among investors in projects from Mexico to China and India that will lose their biggest market for emission credits as the European Union, home of the world’s largest cap- and-trade system, phases out so-called offsets it has linked to “windfall” profits that undermine the market’s integrity. Emissions-trading systems in Australia and New Zealand also will forbid so-called industrial-gas credits, compounding a glut that sent prices for the credits to an all-time low last month.

“It’ll be a junk market” for the banned credits, Geoff Sinclair, London-based head of carbon trading at Standard Bank Plc, said in an interview in Singapore. After 2013, nobody will buy industrial-gas credits and countries that have yet to rule them out, such as New Zealand, are preparing to do so, he said.

Record Low

Prices for Certified Emission Reductions, known as CERs, for December delivery settled today at 4.90 euros ($6.57) a metric ton on the ICE Futures Europe exchange, the lowest closing price since they began trading in 2008. The credits have lost 80 percent from their peak of 25 euros in July 2008.

The discount of EU-banned credits for 2012 over those accepted in 2013, traded as a separate contract, widened 12 percent to 48 cents.

HFC-23 and N2O projects have racked up about 500 million CERs valued at more than 2.5 billion euros at today’s prices. Developers received 144 million CERs in 2011, including those that will still be accepted in the EU system. That compares with 78 million in 2010 and 82.8 million in 2009, according to UN data. The projects stand to earn at least 150 million credits by the end of 2012, according to Bloomberg estimates.

Supply in 2011 may surpass 300 million tons this year and next under the UN-run emissions credit market, from 132 million last year, said Trevor Sikorski, a London-based analyst at Barclays Capital. It will keep rising in 2012, he said.

“Next year is another difficult one for the carbon market” Sikorski said in an interview in Singapore. “It looks a heavily supplied year.”

Last Resort

The UN market, known as the Clean Development Mechanism, was set up by the 1997 Kyoto Protocol as a way of letting richer nations offset their emissions at home by paying for cleaner technology in emerging markets. Investors in these projects get CERs that they can sell to companies and governments with pollution caps. While the EU is the largest market for UN offsets, Australia will allow emitters to use CERs for as much as half of their emissions starting in 2015.

Envoys from 190 nations are meeting this week in Durban, South Africa, to discuss climate rules. A failure to get a second compliance period to follow the Kyoto Protocol would be a “new low” for the UN program, Sikorski said.

Industrial-gas credits may eventually find buyers in Japan, which is planning to set up bilateral emissions trading with other countries. Still, the ban on these credits may be extended to the governments of 38 nations with emissions targets under the Kyoto Protocol, the European Commission said in a Nov. 14 statement. That would remove the only remaining markets for industrial-gas credits after 2013.

Environmental Poison

HFC-23 and NO2 are so damaging to the environment that they should be banned outright and not entitled to get emission credits, the EU and other governments have said. HFC-23 can trap 11,700 times more heat per molecule than carbon dioxide and remain in the atmosphere for over 200 years, according to the U.S. Environmental Protection Agency.

Giuseppe Deodati, head of carbon strategy at Enel SpA, declined to comment last month on how it would sell industrial gas CERs after 2013. Enel is the largest private investor in HFC-23 projects, with stakes in seven of 19 projects globally, according to data compiled by the UN Environment Program’s Risoe Centre.

Roop Salotra, chief executive of the chemicals business at SRF Ltd. (SRF), which is set to earn 52 million CERs from its HFC-23- destroying project in Rajasthan, India, by 2020, declined to respond to an e-mail from Bloomberg.

Forward Contracts

Some industrial-gas projects have sold credits to be created after 2012 through forward contracts, according to Vishwajit Dahanukar, managing director of Managing Emissions, a Mumbai-based broker. The contracts have a clause saying the CERs to be generated must be compliant with the EU’s Emissions Trading System, he said.

“The buyers for these CERs are typically companies that are large compliance buyers and they wouldn’t expose themselves to that kind of risk,” Dahanukar said.

At least 11 publicly traded companies own projects that reduce emissions of HFC-23 or N2O, according to UN project documents. They include a plant set up by Rhodia in Brazil, a facility in Mexico started by a joint venture between Honeywell and Cydsa SAB (CYDSASAA), and at least 10 other projects owned by China’s Zhejiang Juhua Co. (600160) and Dongyue Group (189) and India’s Rashtriya Chemicals and Fertilizers Ltd. (RCF), SRF Ltd., Chemplast Sanmar Ltd. (CPI), Gujarat Fluorochemicals Ltd. (GFLC), Navin Flourine, Hindustan Fluorocarbons Ltd. (HFC) and Deepak Fertilizers & Petrochemicals Corp. (DFPC)

Closing Door

“There’s an oversupply situation driving prices down even as demand remains weak and uncertain,” said Henry Derwent, head of the International Emissions Trading Association, in an interview in Singapore. “The door to HFC credits has closed just about everywhere.”

The EU also is introducing geographic restrictions on offsets in its market. From 2013, it will accept new offsets only from projects based in least-developed countries. That will exclude China and India, which are set to supply 88 percent of all CERs to be generated to 2012, according to the Roskilde, Denmark-based Risoe Center.

Chinese producers are threatening to release the gas back into the atmosphere if they can’t find a way to sell credits, Xie Fei, revenue management director at the state-run China Clean Development Mechanism Fund, said in a Nov. 3 interview.

The industry is counting on new domestic emissions-trading systems planned in Australia, South Korea, Japan and China, said Xuedu Lu, adviser to the Asian Development Bank and a former Chinese climate negotiator.

“Some people say just scale up supply and there will be new carbon markets,” he said. “This is totally wrong. If there’s no demand, your supply has nowhere to go.”

Price Lows

CER prices may extend their slump as the credits flood the market, according to Assaad Razzouk, chief executive officer of Sindicatum Sustainable Resources Group, a developer of clean- energy projects that is partly owned by Citigroup Inc. and Cargill Inc.

“The price impact would be that they would still have a market but would sell at significantly less,” Razzouk said.

The prospect of lower prices and dwindling buyers is weighing on Indian companies, which are increasingly reluctant to register new projects with the UN program, said Anmol Singh Jaggi, director of Gensol Consultants Pvt. in Ahmedabad, India, which advises and brokers carbon projects. Filings that developers need to submit before registering projects are down by 50 percent since last year, he said.

“New registrations may be up because the UN is working overtime to process them before the cutoff, but people have stopped trying to register new projects,” Jaggi said. “What’s the point? If I start now, I won’t be able to finish in time.”

There is a “massive push” to register as many projects as possible before the end of 2012 in order to qualify for EU ETS eligibility, said Richard Chatterton, analyst for Bloomberg New Energy Finance. It’s increasingly unlikely that these projects will get through in time, he said.

To contact the reporters on this story: Dinakar Sethuraman in New Delhi at dinakar@bloomberg.net; Natalie Obiko Pearson in Mumbai at npearson7@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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