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Premium for 2013 Carbon Credits Narrows to Least in Four Months

The premium for December 2013 United Nations Certified Emission Reduction credits to those for a year earlier shrank to the lowest in more than four months, after trading in the 2012 contract jumped.

The spread narrowed 10 percent to 54 euro cents ($0.71) a metric ton on the ICE Futures Europe in London as of 5:36 p.m. local time, which would be the smallest close since Dec. 9.

Trading in 2012 futures jumped to 6.4 million tons yesterday, the highest since Feb. 1. That contract has plunged 69 percent in the past year and was at 3.87 euros a ton today. It dropped to a record 3.27 euros on April 4.

Falling prices may lead to a delay in supply until next year from projects in developing countries, where the offsets originate. Futures for 2013 were at 4.44 euros today, a 15 percent premium to this year’s contract. Traders who previously sold CER credits for this year can buy back the contracts and sell a year later, which may narrow the spread. European Union carbon allowances for December rose 2.1 percent to 7.19 euros a ton, which would be the highest close since March 30.

Trading Emissions Plc, a London-based developer of credits, said March 30 it was seeking to renegotiate some of its emission-credit purchase contracts and a few of its projects were suffering supply delays.

The spread may be narrowing partly due to the flattening of the EU-allowance forward curve over the past few weeks, said Richard Chatterton, an analyst for Bloomberg New Energy Finance in London.

Banned Credits

The EU market has 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 Clean Development Mechanism began issuing credits in 2005, according to UN data. Removing them potentially leaves a gap for new projects.

At times since last November it’s been financially viable to sell the December 2012-CER-EU-allowance spread and buy the same combination of contracts for December 2013, effectively converting a banned CER into an eligible December 2013 contract, Chatterton said.

That trade probably put selling pressure on the December 2012 CER and boosted December 2013 prices, widening the spread between the two contracts at that time, he said.

Banks may have since entered the EU allowance market, shrinking the time spreads and making that so-called four-legged trade less attractive, Chatterton said today. “The 2012-2013 CER spread may widen” if the four-legged trade again becomes attractive, he said.

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