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Carbon Credits Surge to Six-Month High as EU Refines Eligibility

United Nations Emission Reduction Units surged 39 percent after Europe specified which credits are ineligible for use in its carbon market, the world’s biggest.

ERUs for December jumped as high as 25 euro cents ($0.33) a metric ton, the highest since Jan. 31, on the ICE Futures Europe exchange in London. The European Commission, the bloc’s regulatory arm, upgraded its carbon registry yesterday to clarify which offsets can be used to meet emissions obligations.

ERUs fell to a record low in May after the European Union said it may restrict the use of some offsets from countries including Russia and Ukraine should they fail to adopt new carbon goals as of this year. The credits, created from carbon-reducing projects in developed nations and emerging countries, may now narrow the price gap with more expensive Certified Emission Reductions from developing countries, according to Bloomberg New Energy Finance.

The majority of ERUs issued since the start of the year are “likely to be confirmed as eligible” because they have been certified by an audit firm, Richard Chatterton, a London-based analyst for New Energy Finance, said in an e-mailed note.

ERUs closed at 23 euro cents a ton in London, while CERs fell 7.5 percent to 49 euro cents. Factories, power stations and airlines in the EU market can use either CERs or ERUs to match a limited portion of their emissions obligations.

“The difference between the CER and ERU price will continue to narrow as the market gains confidence that ERUs will ultimately be able to be exchanged for EU allowances,” Chatterton said.

Price Plunge

ERUs plunged to a record 6 cents on May 1 amid a surplus of carbon permits in Europe, where slowing economic growth has damped demand for the credits. EU lawmakers are still debating a plan to temporarily reduce supply and boost prices.

EU carbon allowances closed unchanged at 4.14 euros a ton.

The UN 1997 Kyoto Protocol supports the development of carbon-cutting projects by awarding investors ERUs or CERs that can be sold to companies and governments with pollution caps. One credit is equivalent to a one-ton reduction of carbon dioxide.

CERs have retained more value than ERUs because the credits originate in developing nations that don’t have targets under the protocol. Russia has decided not to adopt Kyoto targets beyond 2012, while Ukraine has said it will.

Seven months after the climate talks in Doha that extended the Kyoto agreement, only the United Arab Emirates has confirmed its intention to participate with a legal commitment to the United Nations Framework Convention on Climate Change.

ERU Supply

Nations have handed out 806 million ERUs, including 473 million from Ukraine and 247 million from Russia, according to data on a UN website. EU carbon-market emitters used 383 million of the units in the five years through 2012, leaving the rest for future years or to be used by nations with Kyoto targets, according to New Energy Finance data.

The difference between CER and ERU prices may not close immediately because market participants will be waiting to see how a change in an offset’s designation in the registry from “pending/ineligible” to “eligible” is handled, said Nick Eagle, a trader at Clean Energy Group Ltd. in London.

For its credits to be accepted in the EU market, Ukraine needs to submit its legal commitment accepting the Doha extension. The amendment enters into force 90 days after at least three-quarters of parties to the protocol provide their legal acceptances, according to a UN website.

“Now that eligibility issues are almost resolved, there is not much reason for the spread to remain,” Eagle said today in an e-mailed response to questions. “Any correction may lack impetus over the summer.”

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