Europe Can Lift CO2 Market From Gridlock, Gazprom Says

Europe needs to reinvigorate the world’s second-biggest emissions market as global climate talks to reduce greenhouse gases stall, the head of a carbon-trading unit of Russia’s OAO Gazprom said.

United Nations carbon offsets for delivery in a year fell 4 percent last week amid signals that differences between 190 developing and industrial nations may preclude a binding treaty at the climate meeting that started Nov. 29 in Cancun, Mexico.

The $2.7 billion UN Clean Development Mechanism is an offspring of the 1997 Kyoto Protocol, which expires in 2012 unless governments decide to extend it. Carbon offsets generated by the CDM may be used for compliance in the European Union’s emissions-trading system, the world’s largest cap-and-trade program, also known as the EU ETS.

“Given that nothing is likely to fundamentally change between now and the next summit in South Africa in 2011, the EU ETS will continue to be the global driving force in the international carbon market,” Dan Barry, head of carbon trading at Gazprom Marketing & Trading, said in a interview from London.

The EU, whose carbon market was valued at $119 billion last year, could bolster investors’ confidence in the UN market by giving more “certainty and clarity” on what types of offsets it will accept in the next trading period, which runs from 2013 through 2020, Barry said.

The ETS is a cornerstone of European efforts to tackle the heat waves, storms and floods that scientists have linked to climate change. The system, started in 2005 with a three-year trading period, is now in a second phase, which ends in 2012.

European Demand

Demand from European emitters has helped the CDM expand to more than 2,500 registered projects that generate credits to investors for cutting greenhouse gases in developing nations. The UN program has issued 476 million credits so far and expects projects in the pipeline to generate 2.7 billion offsets by the end of 2012.

Gazprom Marketing & Trading’s carbon unit is involved in more than 100 UN emission-reduction projects globally and plans to add more, according to Barry. Gazprom and Trans Wonderland Ltd., a Papau New Guinea transport company with contracts to provide liquefied natural gas services there, will cooperate on projects with plans to win UN credits, they said today in an e-mailed statement.

The European Commission, the EU regulator, proposed last week to stop recognizing as of 2013 UN credits related to projects that cut nitrous dioxide from adipic acid production and hydrofluorocarbon-23, an industrial gas whose warming potential is 11,700 times bigger than carbon dioxide. The EU said it is concerned the projects create excessive credits and undermine the market’s integrity.

Insufficient Clarity

While HFC-23 projects represent less than 1 percent of all registered CDM projects, their credits account for more than half offsets issued so far.

“Clarity that HFC-23 credits won’t be eligible is useful, but the EU has failed to give clarity on what will be eligible for the next phase,” Barry said. “That’s a fundamental requirement that needs to be sorted out very soon.”

More than 11,000 operators in the European program can swap as many as 1.6 billion UN credits with EU permits on a one-for-one basis in the phase from 2008 through 2012. The bloc has signaled it wants the CDM to continue, but said the mechanism must be overhauled to improve its effectiveness and governance.

‘Quite Comfortable’

“The EU appears quite comfortable with credits from UN projects registered pre-2012 to continue generating credits eligible for the next phase,” he said. “We may start to see new mechanisms for future projects. The general consensus seems to be as much support as possible to as many different project types as possible in least developed countries.”

UN Certified Emission Reductions for December 2011 closed at 11.39 euros a metric ton on Dec. 3. EU allowances for delivery in December 2011 were at 15.03 euros.

The EU is unlikely to accept credits backed by forestry for compliance in its cap-and-trade system in the near future, Barry predicts. Even though deforestation may be one of the few areas where envoys reach a deal in Cancun, the program will work only if governments adopt emission-reduction commitments, he said.

“We need to see a meaningful price on carbon, otherwise forestry conservation just won’t be able to compete against palm oil,” he said.

Gazprom Marketing & Trading announced last month its method for generating carbon credits by voluntary forestry projects was approved by auditors. The method will generate around 100,000 credits over the next 30 years in a project in the Rimba Raya Biodiversity Reserve in Borneo, southeast Asia.

First issuance of the credits should take place by the end of this year, and Gazprom Marketing & Trading has already brokered a sale of more than 5 million of the Rimba Raya offsets, Barry said.