Utilities and refineries have retained the most flexibility among European Union industries to use lower-cost United Nations carbon offsets to comply with the bloc’s emissions caps from 2013 to 2020, according to EU data.
The industry groups used the smallest share of their quota of UN credits in the five years through 2012, Bloomberg New Energy Finance analysis of the EU data show. Unused offsets can be applied to EU targets over the next seven years, the market’s third phase, when utilities no longer get free EU permits.
Companies holding EU allowances for December can earn 2.98 euros a ton today by selling the permits and buying cheaper UN Certified Emission Reductions, or CERS. Emitters that don’t swap and instead “bank” a larger UN offset quota into Phase 3 give themselves the option to meet their future emission obligations at a lower cost.
“Utilities will have the biggest short position in Phase 3 as they now receive no free allocation, so for them the option to use CERs in Phase 3 would have looked pretty valuable,” Trevor Sikorski, an analyst at Energy Aspects Ltd. in London, said by phone. “The option is more valuable to you if you have the luxury of being able to think long-term.”
Under the EU’s eight-year-old cap-and-trade system, tradable permits are allocated to polluters that must surrender enough of them to cover their emissions or pay a fine. Utilities in most EU nations have to buy all of their permits and offsets from this year through 2020, while industrial installations will continue to get most of their allowances for free.
EU rules allowed factories and power stations to match a portion of their emissions from 2008 through 2012 with UN CERs. On top of any unused quota from the second phase, an additional share may be given in Phase 3 by the European Commission, the bloc’s regulator.
Power stations used a total of 556 million UN CERs and Emission Reduction Units, or ERUs, to meet caps on their discharges from 2008 through 2012, according to EU data released last week. That means they will be able to bank a total of 221 million tons, or 28 percent of their Phase 2 limit.
Heat and local power installations will bank 47 million tons, the second-biggest unused surplus, after using 74 percent of their quota through 2012, the data show. Refiners used 68 percent, the lowest share of any Phase 2 quota.
Industrial companies such as lime, glass, steel and cement manufacturers surrendered between 86 percent and 95 percent of their Phase 2 quota.
Installations suffering from Europe’s recession generated funds by swapping more EU allowances for CERs, according to Energy Aspect’s Sikorski.
The price spread between EU permits and CERs widened last year from from 2.53 euros a ton on Jan. 4, 2012, to as much as 8.08 euros on Nov. 12, according to ICE Futures Europe.
“For industrials, if things were tight on the credit side, then the value of the option to use offsets in the future was less than the option to generate cash at the time,” Sikorski said. “Generating cash through the spread helped keep business afloat.”