UN Cuts Emerging-Nation Carbon Out of EU, Sindicatum Says

United Nations regulators are probably cutting emission projects out of the European market by failing to reform processes fast enough and by changing existing rules, said Sindicatum Sustainable Resources Group Ltd.

Regulators in the largest greenhouse gas-offsetting market probably won’t start a risk-based sampling system to approve registration of emerging-nation activities this year, according to a management plan for the Clean Development Mechanism executive board. On Oct. 20, Martin Hession, chairman of the board at the time, said the system would start as early as 2012.

“It’s disappointing that it’s not coming in this year,” Gareth Phillips, chief climate change officer at the Singapore-based developer of carbon offset credits, said April 3 by phone. “Hopes for improvement are getting knocked down one after the other,” he said. Phillips is chairman of the Project Developer Forum in London, a lobby group for companies that implement greenhouse gas-cutting plants and programs from Brazil to China.

UN Certified Emission Reduction credits for 2013 dropped to a record 3.95 euros ($5.16) yesterday on the ICE Futures Europe exchange in London. The EU won’t accept credits from projects registered after 2012, unless they are in least-developed countries, according to the rules of the bloc’s carbon market. Most registered by the end of this year can continue to sell credits to factories, power stations and airlines in the EU market through at least 2020.

New Documentation Requirements

The UN has approved 41 proposals, or 1 percent, in least-developed countries, or LDCs, out of a total of more than 3,900 registered to date. New non-LDC projects missing this year’s registration cut-off won’t be able to access the EU market, the world’s biggest cap-and-trade compliance system.

Meeting the EU deadline “is what most project developers are concerned about right now,” Phillips said.

The executive board is requiring new document formats from activities seeking registration, according to the management plan published on the website of the UN Framework Convention on Climate Change. Those new requirements may inadvertently force developers to miss the deadline and the opportunity to sell credits, as regulators seek resubmission “because of minor issues,” Phillips said. There was no evidence the board was deliberately seeking to limit supply to the EU market, where allowances this week reached record lows, he said.

The executive board is striving to improve the application process by implementing the “risk-based” approach, David Abbass, a spokesman for the board, said yesterday.

Risk-Based Approach

The assessment model would mean the executive board could closely assess a statistically based sample of projects and credit-supply requests instead of investigating each application as it currently does, Hession said last year.

A risk-based approach “is not connected with any EU deadlines,” Abbass said in an e-mailed response to questions. The approach may be introduced as early as the fourth quarter of this year for credit-supply requests, the plan indicates.

Information technology solutions for the approach for submissions for registration is planned for the first quarter of 2013, according to the document. The plan is subject to change, Abbass said.

The EU market has also banned industrial gas-cutting projects at some air-conditioning-chemical factories and adipic-acid manufacturers starting May next year. Those credits have made up about two-thirds of supply since the CDM began supplying credits in 2005, according to UN data. Removing them potentially leaves a gap for new projects.

Discounted Compliance

UN credit supply matters to EU emitters because using them cuts the cost of compliance by 45 percent, based on today’s market prices. EU benchmark 2012 prices were at 6.51 euros a ton today, compared with 3.60 euros for UN Certified Emission Reduction offsets on ICE as of 1:08 p.m.

The EU program has a shortfall of 2.4 percent through 2020 without UN credits, according to an estimate by Deutsche Bank AG yesterday. Including the offsets, the market is oversupplied by

3.7 percent, the bank forecast.

The falling prices have hurt the value of developers. Camco International Ltd. dropped 2.9 percent today to a record after plunging 17 percent yesterday. It decreased 0.125 pence to 4.125 pence as of 12:44 p.m. in London, valuing the company at 7.8 million pounds ($12.4 million). It’s fallen 77 percent in the past year.

New Demand

New demand from airlines and Australia, as well as a potential move by EU regulators to temporarily cut supply, may boost carbon prices during the next three years, Scott McGregor, Camco chief executive officer, said last month in an interview. “We’re happy with the progress at the executive board,” and its effort to streamline processes, McGregor said, citing the push to risk-based assessment.

“There’s still room” for new projects, he said.

Ultimately, the failure of UN climate-protection talks to extend or replace the targets in the Kyoto Protocol that expire this year is hurting the offset program, said Mark Owen-Lloyd, head of carbon trading at CF Partners (U.K.) LLP in London, which develops greenhouse-gas cutting projects.

“It’s difficult to persuade people to invest when there’s this much uncertainty about the future shape of the CDM,” Owen-Lloyd said in an interview last month.

“This is a ruthlessly political market,” where rules will continue to change, he said. “The CDM is very attractive. You’ve just got to get it right.”

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