Emissions Pioneer Losing Clout as EU Ban Looms: Carbon & Climate

Thirteen years after the United Nations set up the first carbon emissions market, the global trading system’s influence is waning as it gives way to local and regional plans to combat climate change.

Fewer markets are accepting UN Certified Emissions Reductions, credits created from investment in carbon-reduction programs, as nations from China to California adopt their own standards. In Europe’s $54 billion market, where lawmakers are tackling a record glut, utilities and manufacturers from EON SE to ThyssenKrupp AG may reach the limit on the CERs they can use by March 2015, data from Bloomberg New Energy Finance show.

The slide in demand for UN credits is hurting the worldwide effort agreed at Kyoto in 1997 to keep increases in temperatures, blamed for floods, droughts and rising sea levels, to less than 2 degrees Celsius (3.6 Fahrenheit) from pre-industrial times. There’s no global alternative to the UN’s Clean Development Mechanism that’s plowed $315 billion into projects from Brazilian wind parks to Cambodian hydropower.

“The CDM’s been on life support since 2011, when it became clear that CER demand would be hit by the growing glut of European Union allowances,” said Gareth Phillips, chairman of the Project Developers’ Forum lobby group, whose members include OAO Gazprom’s trading unit and Mitsubishi Corp.

It’s “failing due to a lack of demand and a lack of any sign that there’s going to be any demand in the future,” he said last month by phone from Edinburgh.

Project Slump

Prices dropped 47 percent since the end of December, the worst start to a year since 2008 when trading began on the ICE Futures Europe exchange and compares with a 39 percent jump in EU permits. The MSCI All Country World Index of stocks rose 0.7 percent. The benchmark CER contract closed at a record-low 0.16 euros ($0.22) a metric ton on ICE yesterday after peaking at 23.38 euros in July 2008. The contract was at 0.18 euros at 2:57 p.m. in London today

The 99 percent drop eroded the incentive for investments in clean energy projects, with only two registered in December, compared with 901 at the same time in 2013, according to UN data. Since 2005, the CDM has issued credits covering 1.4 billion tons of emissions, or the equivalent of 78 percent of this year’s cap in the EU, where UN credits are used for compliance.

The program has supported more than 7,000 installations cutting emissions in 113 countries. Investors in UN-approved projects get CERs they can sell to companies and governments bound by pollution caps. They use credits to offset emissions.

It’s too soon to scrap the market mechanism when there’s no other global option and the key will be making it attractive to new markets, Hugh Sealy, the chairman of the CDM Executive Board, said March 3. “We’re going to keep the CDM going,” he said by phone from Grenada, where he is a professor at St. George’s University.

Trading Plunge

Trading in CERs slumped to a six-month low with 24 million tons of credits changing hands in February, or a quarter of the average volume for the past five years, data from ICE Futures Europe in London show. One CER covers the right to emit one ton of carbon dioxide.

As many as 600 million offsets may be bought over the next six years on a voluntary basis by nations keen to use the CER standard to highlight their carbon-cutting credentials, according to Miles Austin, the executive director of Climate Markets and Investment Association.

“Through 2020, most demand will come from sovereign buyers who want CERs only to prove that emission reductions have been made,” Austin said.

Climate officials are meeting this week in Bonn to negotiate the next global agreement in reducing greenhouse gas emissions, which may be adopted next year and come into force in 2020. The treaty will replace the Kyoto Protocol, which applied only to industrial nations.

EU Surplus

The EU limited the use of UN offsets in its cap-and-trade program as it battles a surplus of emission permits that drove prices to a record low in April. European polluters used 1.06 billion tons of a 1.6 billion-ton limit on UN credits in the regional market from 2008 through 2020. That cap may be reached as soon as March 2015, according to Bloomberg New Energy Finance in London.

Demand may fall further when CERs and Emission Reduction Units, another type of UN carbon credit, created before 2013 lose their eligibility next year as offsets under Kyoto rules aimed at spurring new reductions.

2015 Ban

More than 250 million CERs and 350 million ERUs are available to companies in the EU trading system, and must be used before they become worthless in March 2015, said Richard Chatterton, an analyst at New Energy. If companies use their full quota by then, European demand for CERs could be as little as 50 million after that, he said.

Georg Oppermann, a spokesman for Dusseldorf-based EON, Germany’s biggest utility, declined to comment on its use of CERs. Stefan Ettwig, a spokesman for Essen, Germany-based ThyssenKrupp, Europe’s second-largest steelmaker, didn’t return a call seeking comment.

The European Commission plans to ban the use of UN offsets completely from 2020 unless a global climate agreement for 2020 allows it to adopt an even tougher goal.

New markets such as those in China, the world’s biggest emitting nation, and California aren’t incorporating UN offsets, preferring to set their own rules and select their own monitoring systems. Mexico designed its own domestic offset mechanism while Costa Rica and South Africa are looking at similar programs, according to the World Bank’s Partnership for Market Readiness, which provides funding for carbon market development.

“International credits made sense under the Kyoto Protocol, under the idea that a global market could be realistically possible,” Matteo Mazzoni, an analyst at Bologna, Italy-based energy adviser Nomisma Energia srl, said by e-mail last month. “With regional emissions trading systems, they don’t make sense anymore.”

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