China Carbon Blockage Begins to Ease: Energy Markets

China CO2 Hiatus Ends as Mercuria Seeks Answers
A coking factory discharges a plume of exhaust in Linfen, Shanxi province. Photographer: Qilai Shen/Bloomberg

China is starting to approve emission credits after a seven-month freeze, stoking speculation a glut that’s contributed to an unprecedented decline in European carbon prices will keep growing.

The world’s second-biggest economy this month began issuing letters approving credits in the three years starting 2013, according to Tricorona, a unit of Barclays Plc. The Project Developer Forum, a lobby group whose members have received credits worth about 3.7 billion euros ($4.9 billion), said China, which doesn’t publish carbon-governance rules, halted the approvals in August last year.

The resumption of Chinese credits is the latest blow to prices in the 92 billion-euro market set up by the 1997 Kyoto Protocol, which imposed greenhouse-gas targets on most developed nations through 2012. European carbon fell to a record this year amid a surge in the supply of credits, cutting costs for companies from Royal Dutch Shell Plc to Enel SpA that are required to buy them to protect the climate. Mercuria Energy Trading SA, the Geneva-based energy trader, said April 24 that China’s plans remain unclear to investors.

“Crystallizing the volume from China may help send credit prices below their record,” said Tom Greenwood, an analyst in London at IdeaCarbon Ltd., which rates United Nations emissions offsets for utilities and banks. “Supply is already perceived to be well above demand.”

All-Time Low

Certified Emission Reduction credits for December slid for a fourth consecutive quarter through the end of March, their longest decline on record. The UN offsets, known as CERs, have fallen 70 percent in the past year and dropped 1 percent today on the ICE Future Europe exchange in London to 3.81 euros a metric ton as of 5:13 p.m. local time. They traded at an all-time low of 3.27 euros on April 4. EU permits for this year were at 7.37 euros, almost unchanged this year.

CERs may drop a further 48 percent this year to 2 euros a ton, according to Nomisma Energia Srl, a carbon researcher in Bologna, Italy. Barclays forecast on March 26 the credits will remain at about 4 euros in 2012 and rise to 7 euros next year.

By using cheaper UN credits, European utilities including EON AG and Enel can cut compliance costs in the region’s trading system and boost profits on power sales.

China’s National Development and Reform Commission in August implemented new procedures governing so-called letters of approval, which are required before projects can be registered to receive UN credits, Gareth Phillips, chairman of the London-based Project Developer Forum, said by phone on April 25.

EU Tightening

The group sent a letter seeking clarity on Dec. 22 to Su Wei, China’s lead climate negotiator, and hasn’t received a reply, Phillips said. Wei didn’t return three e-mails from Bloomberg News seeking comment this week. Li Pumin, a spokesman at the Beijing-based commission, didn’t answer three telephone calls to his office.

“It’s getting easier to receive letters of approval from NDRC,” said Susanne Haefeli-Hestvik, technical director at Tricorona, a Stockholm-based emission-reduction developer. The potential import of credits underlines the need for the EU to tighten its carbon market, she said yesterday by phone from Beijing.

“The visibility for the UN carbon trading system is certainly not past this year or the early part of next year,” Marco Dunand, chief executive officer and co-founder of Mercuria, said in an April 24 interview in Lausanne, Switzerland. “China may actually start developing an internal market for CO2” next year or in 2014, he said.

Climate Negotiations

China may still decide to withhold its offset credits to comply with its own climate targets after 2015, limiting supply to the EU, the world’s biggest market, Pradeep Perera, an official at the Asia Development Bank, said in January. In September, developing nations including China, India and Brazil said extending the UN market beyond this year was contingent on developed nations setting greenhouse-gas reductions after 2012, according to documents published after a meeting of environment ministers in Brazil.

A decision by China, the biggest supplier of CERs, to stop approving the creation of credits after this year might cut the number available for European import through 2020 by about 50 percent, or 1.3 billion tons, Joergen Fenhann, a senior scientist at the UN Environment Program’s Risoe Centre on Energy, Climate & Sustainable Development in Roskilde, Denmark, said April 24 in a phone interview.

“It would help with prices,” he said.

Measuring Oversupply

The EU will allow about 1.8 billion tons of UN credits into its market in the 13 years through 2020, including an allocation for airlines that entered this year, according to Bloomberg New Energy Finance. About 3.9 billion tons of credits may compete to fill that quota, including offsets from China, Russia and Ukraine, data from Risoe and New Energy Finance show.

Eliminating the Chinese credits would cut the EU’s oversupply of UN credits in the 13 years to 2020 by 62 percent to 800 million tons from 2.1 billion tons, according to the Risoe and New Energy estimates.

“The fact that China is releasing these letters of approval suggests it could allow its developers to export credits” beyond this year, said Abyd Karmali, head of carbon markets for Bank of America Corp. in London and president of the Climate Market Investors Association, an industry lobby group. “This phenomenon might lead the EU to filling its quota earlier rather than later this decade.”

Least-Developed Limit

EU lawmakers are debating how to tighten their market. They have banned credits from some air-conditioning and adipic-acid plants starting in May 2013. Rules of the program limit access to it only from new projects in least-developed nations after this year.

“To help boost prices, I would like the EU to adopt a 30 percent target in 2020 and widen the access beyond least-developed nations,” Haefeli-Hestvik said. The current target is for a 20 percent cut on 1990 levels. More ambition would be “a win-win situation” because it would increase low-carbon investment in the EU and in developing nations, she said.

Sluggish economic growth in the EU has cut the cost of adopting the tighter target, Haefeli-Hestvik said. Still, lawmakers may be reluctant to boost carbon prices soon because that would increase power prices, she said.

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