UN Carbon Credit Rescue Fund Needs 2.5 Billion Euros, Vivid Says

A fund backed by nations would need at least 2.5 billion euros ($3.3 billion) to help protect the world’s biggest greenhouse gas offset market, where prices dropped to a record in April, according to Vivid Economics Ltd.

The fund would pay more for credits from projects using certain technologies to mop up much of the oversupply in the United Nations-overseen Clean Development Mechanism for a lower cost, said John Ward, a director of the London practice that advises on energy and climate change. It would probably be backed by nations or sovereign-wealth funds, he said.

United Nations envoys met last week in Bonn as they sought to prepare a global climate agreement for 2015 that would begin in 2020. Benchmark Certified Emission Reductions from the CDM plunged 88 percent a metric ton in the past year as supply rose and emissions declined in the European Union’s carbon system, the biggest source of demand.

“Whoever buys the credits could hold on to them in the hope that there is a fundamental increase in demand, at which point they could make a return,” Ward said June 14 by e-mail. “If the demand did not increase, there would be little prospect of a return and the fund would need to retire the credits.”

UN credits for December rose 2.2 percent to 47 euro cents a ton at 3:55 p.m. London time on the ICE Futures Europe exchange.

The market is so oversupplied that boosting prices to 2.50 euros a ton without discriminating between technology types would require a fund with 12 billion euros, Vivid said in a report published June 10 on its website.

Ambitious Targets

Under a discriminating purchasing policy, the fund could offer to pay more for some credits, Ward said. While most CER projects require less than 2 euros a ton to cover costs, some energy-efficiency projects need more than 6 euros a ton, according to the report.

It’s not clear whether there is appetite for a rescue fund because there’s doubt whether nations will set targets ambitious enough to create enough demand, according to Ward.

Global emissions in 2020 will be at least 52 billion tons of carbon dioxide equivalent, or 18 percent more than the 44 billion-ton limit needed to meet a target to keep temperature gains to 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial levels, the UN said in a report on Nov. 21.

Should money become available, protecting emission-reduction project developers and the audit firms that measure greenhouse-gas cuts is “definitely feasible,” Ward said. Prices for some credits could be boosted to 5 euros a ton for 2.7 billion euros using price discrimination or 22.1 billion euros without, according to the report.

‘Bleeding Away’

The fund may motivate developers and auditors to stay in the CDM, Ward said.

“The concern is that the infrastructure of the CDM is bleeding away,” he said.

Alternatively, the fund may choose not to buy credits from projects including industrial-gas reduction and hydropower, Vivid said.

Another option is a new-projects-only fund that may generate more interest from nations, would be smaller and wouldn’t help mop up existing oversupply, Ward said. That could provide a bridge to a global UN offsetting program linked to any post-2020 agreement, Vivid said.

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