Carbon’s Longest Rally to Persist on Supply Crunch
The longest-ever rally in United Nations carbon prices shows little sign of easing as traders bet companies running emission-reduction projects will stop creating credits because it’s no longer profitable to do so.
UN-approved Certified Emission Reductions, or CERs, for December have more than doubled to 49 cents (64 U.S. cents) from a record low in April on the ICE Futures Europe exchange. It costs a combined 50 to 80 cents a ton to have emission cuts at clean-technology projects verified and the corresponding certificates issued by the UN, said Luca Bertali, an emissions broker in London at TFS Green, a unit of Cie. Financiere Tradition SA, one of the largest inter-dealer brokers.
Prices for the credits used by 34 of the richest nations from Germany to Australia to offset domestic emissions by investing in greenhouse-gas-reduction projects elsewhere tumbled 98 percent since peaking at 23.38 euros in 2008 as the global economic slowdown cut demand. The number of CERs being issued by the UN in 2014 may drop 23 percent from this year, according to Bloomberg New Energy Finance.
“Unless the price of CERs covers the costs of verification and the UN share of proceeds, people aren’t going to deliver them,” Bertali said in a telephone interview. “We’ll see the result a year from now.”
UN contracts climbed to a seven-month high of 56 euro cents a ton on July 3, when the European Parliament approved a plan to reduce the region’s record surplus of permits and buoy prices that had dropped to all-time record lows. They closed at 49 cents on the ICE Futures Europe exchange in London after seven weeks of gains, the longest streak since they were first offered in March 2008.
The UN’s Clean Development Mechanism, set up by the 1997 Kyoto Protocol, has supported the development of more than 6,900 projects in 87 countries and was worth 6.6 billion euros last year, according to New Energy Finance. Falling UN and European Union carbon prices shrank the value of emissions traded worldwide by 36 percent to 61 billion euros last year, New Energy Finance said in a January report.
Investors in CDM projects get CERs that they can sell to companies and governments with pollution caps. The EU allows emitters to use UN offsets to comply with obligations in its cap-and-trade program, the largest in the world. One credit is equivalent to a one-ton reduction of carbon dioxide.
One such investor is the Climate Cent Foundation, a group formed by the Swiss Petroleum Federation, the Swiss Trade & Industry Federation and the Swiss Road Traffic Federation, which buys CERs from a 15 megawatt hydroelectric plant in Peru, according to the United Nations Framework Convention on Climate Change, or UNFCCC. The facility is designed to generate 42,000 CERs a year for as many as 21 years from July 2009, which can be used to meet emission caps.
The low UN carbon offset price may mean new emission-reduction projects won’t be built or existing facilities are dismantled, according to Renat Heuberger, chief executive officer of project developer South Pole Carbon Asset Management in Zurich.
“It’s going to be a significant amount,” he said July 12 in an e-mailed response to questions. “For example, in the landfill and biogas space there is no point keeping the collection systems in place if CER prices are so low.”
CER supply in 2014 will total 260 million tons, down from the record 339 million supplied in 2012, according to New Energy Finance. July issuance of CERs will be 12.5 million tons, the fourth consecutive month of declines and the lowest since February, according to UNFCCC data. The UN regulator has issued 202 million credits this year.
UN credit price gains may be limited because of caps on demand for existing and future certificates together with oversupply. Market rules will restrict European demand for CERs from 2013 through 2020 to 578 million tons, compared with an immediately available supply of about 500 million tons, according to New Energy Finance. Any shortfall will be met by future issuance, which may be as much as 1.3 billion tons through 2020.
“There’s a total of about 500 million tons of offset supply in the market at the moment that hasn’t been submitted as part of compliance,” Richard Chatterton, an analyst at New Energy Finance in London, said by phone on June 19. “That’s a huge overhang, which could push the price back below the cost of issuance.”
Trading volume in CER futures has dwindled this year to 10 million tons a week on average, a 67 percent slump from 2012, according to ICE Futures data. This decline in activity is contributing to price volatility as there are fewer parties available to buy or sell at a given time, said Fred Payne, a carbon trader at CF Partners (U.K.) LLP, a risk advisory and investment firm specializing in renewables and commodities.
“If you want volume, you’re going to have to pay the offer price, and that’s squeezed prices higher,” Payne said in a July 3 phone interview.
Project owners and investors may still be generating CERs on expectations that prices will recover, according to Trevor Sikorski, a London-based analyst at Energy Aspects Ltd. By issuing credits now, they can profit from an increase in price, he said July 12 by e-mail.
“It’s hard to understand why issuance occurs at prices below 0.50 euros, which either suggests enough projects have issuance costs below that or you have some project developers that are happy to punt on the CER price going higher,” said Sikorski, a former head of carbon analysis at Barclays Plc. “I think that this would be relatively odd behavior unless you had very deep pockets and a high risk threshold.”
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