May 19 (Bloomberg) -- Emission traders’ most-profitable credits, linked to greenhouse gases considered more harmful than carbon dioxide, are dragging the United Nations market to its biggest discount in a year.
The UN faces a devaluation of the tradable credits it gives investors that pay for projects to reduce hydrofluorocarbons, or HFCs, because the European Union may favor alternatives such as windfarms to combat global warming. UN offsets for 2012 traded at 3.87 euros ($4.77) a metric ton less than comparable EU permits, almost twice the spread at the end of last year.
Goldman Sachs Group Inc. and Royal Dutch Shell Plc are among investors that may get lower returns amid a clampdown on HFCs, which are known as “super gases” because they can trap 11,700 times more heat per molecule than CO2. Bloomberg New Energy Finance said the UN market may fall into two tiers by 2013, with “low quality” offsets dropping to about 7 euros versus 11 euros for those not affected by any EU discount.
“The market believes these offsets are environmentally tainted” because it is marking down HFC projects, said Alex Desbarres, an energy analyst with Datamonitor in London, which provides analysis of energy markets.
The EU’s consideration of restricted eligibility for UN Certified Emission Reduction offsets could lead to a “much deeper fragmentation of the market that potentially will kill liquidity,” Emmanuel Fages, a Paris-based analyst with Orbeo, said today in an e-mail. Orbeo is the CO2 venture of Societe Generale SA and Rhodia SA.
While CERs for delivery in 2012 are up 3.5 percent this year, their discount against EU permits for 2012 is widening on London’s European Climate Exchange. The difference was 4.20 euros a ton on May 13, the largest spread since May 20, 2009, and twice as much as in December, when envoys in Copenhagen were unable to extend the 1997 Kyoto Protocol. The December 2012 UN contract fell as much as 3.1 percent today to 11.82 euros, its lowest price since April 14.
HFCs, emitted in the production of chemicals for air conditioning and refrigeration, gained favor in the 1970s as an alternative to chlorofluorocarbons, or CFCs, which scientists linked to depletion of the ozone layer. While HFCs don’t interfere as much with the earth’s shield against damaging sunrays, they trap heat and contribute to global warming.
About half of the 408.8 million credits issued since October 2005 by the UN’s Clean Development Mechanism, the second-largest emission markets, stem from plans to cut HFCs.
The projects are profitable because investors can get credits valued at hundreds of millions of euros after spending about $12 million to construct and $2 million a year to operate facilities that burn away HFCs before they escape into the atmosphere, according to World Bank estimates.
Tires and Chemicals
For example, Indian tire and chemicals maker SRF Ltd. may get 32.6 million UN offsets through 2012 from its project to reduce HFC emissions at a facility in Rajasthan, according to data compiled by Bloomberg. Those credits would be worth 397 million euros at yesterday’s closing price of 12.19 euros for 2012 CER futures.
Investors in the project, which already received 16.5 million credits, include BNP Paribas SA, Barclays Plc, Climate Change Capital, EDF SA, Enel SpA and Goldman, the UN data show.
Those returns are in jeopardy as the EU considers restrictions on how UN offsets can be used in Europe’s cap-and-trade program, the world’s largest. The EU may force emitters to use two tons of HFC credits to get one ton of EU compliance after 2012, according to a draft of a European Commission paper circulated last month. EU leaders are set to consider the suggestions in June.
In other energy markets, a new plan for cutting U.S. greenhouse gases by creating a cap-and-trade system for carbon dioxide includes trading limits that will drive up costs, the International Emissions Trading Association said. The U.S. plan bans the use of HFC offsets.
Too many UN emissions offsets are being awarded to HFC projects and other industrial gas systems, according to the EU draft. The overuse of those credits “hampers the evolution towards using the carbon market to incentivize cost effective reductions in other areas,” the draft said.
There is currently no exchange-traded market for CERs beyond 2012. The ECX, the biggest bourse for carbon trading, may introduce post-2012 CERs with restrictions at an unspecified time, Patrick Birley, chief executive officer, said in an interview.
Doubts about the Clean Development Mechanism may extend for months or years. This November’s global climate summit in Mexico may focus on the “architecture” for reducing global warming rather than a binding agreement, the UN said.
The UN system provides a needed incentive to destroy HFCs, Yvo de Boer, the outgoing head of the UN Framework Convention on Climate Change, said yesterday in an interview in Manama, Bahrain.
“It is very disappointing for developing countries that want to bring a certain carbon commodity onto the international market to then discover that certain key buyers are not interested in buying that commodity,” de Boer said.
Trevor Sikorski, analyst with Barclays Capital in London, predicted ineligible CERs may trade at 8 to 9 euros a ton in 2013, compared with 18 euros for eligible CERs. HFC credits “are going to struggle to find a home anywhere, except perhaps in Japan and Australia,” which are considering national emission caps beyond 2012, Sikorski said May 13 by phone.
“If the EU introduces strong quality restrictions, the CER market may fragment into a market for low quality and a market for high quality CERs,” Aimie Parpia, an analyst at Bloomberg New Energy Finance in London, said in a May 12 interview.
A two-tiered UN market is “logical,” said Mark Meyrick, head of the carbon desk in Rotterdam at the trading unit of Eneco Holding NV, the Dutch utility.
The EU should consider allowing high-quality credits linked to reducing emissions from deforestation and degradation in developing countries, known as REDD Plus offsets, Meyrick said.
“It’s more environmentally credible to allow REDD Plus credits in the EU program after 2012 than proportions of industrial-gas credits,” he said.
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