UN sees future for carbon scheme despite price drop

Reuters: The United Nations’ carbon offset market has a long future in helping the world curb man-made greenhouse gas emissions, even with carbon prices at record lows, the executive chairman of the UN Clean Development Mechanism (CDM) said last week.

UN-backed carbon credits, called certified emissions reductions (CERs), have plunged around 70 per cent over the past 12 months as a massive supply of credits has built up because of a drop in demand due to a slowing economy. The benchmark CER contract hit record lows below 3 euros this week.

Low carbon prices have stalled new investment in low-carbon technology, raising doubt about whether there is any point to the 1997 Kyoto Protocol and its market-based mechanisms, notably the CDM.

“I don’t see the current low prices as affecting the longevity of the CDM,” Maosheng Duan, the executive board chairman of the CDM, said in an emailed statement.

“The CDM is a mature mechanism that has proved its worth,” he said. “One could easily predict an expanding role for the CDM as a provider of quality offsets to the several emerging emissions trading systems in various parts of the world.”

The Kyoto Protocol is the world’s only legally-binding pact that enforces limits on greenhouse gas emissions, which are widely blamed for contributing to climatic changes such as drought and floods.

But UN offset schemes will remove at best two billion tonnes of carbon dioxide (CO2) equivalent over a five-year compliance period through 2012, barely making a dent in some 170 billion in fossil-fuel emissions over that time, analysts say.

Under the $22 billion CDM, governments and companies in developed countries can earn carbon credits by investing in low-carbon projects in developing countries. They can use the credits to achieve their Kyoto targets.

Future demand for CER credits could come from new and emerging carbon markets in countries like Australia, Mexico and South Korea, the World Bank said in May.

But the crash in prices has been hard on many project developers, particularly those that have contracted to buy carbon credits at prices much higher than current levels.

“This downward movement is extremely negative for project developers,” said Gus Hochschild, alternative energy equity analyst at Mirabaud Securities, adding low prices could cause the liabilities of some companies to outstrip their cash positions.

Some project developers, such as Camco International and Trading Emissions Plc have been renegotiating or adjusting their contracts in a bid to help cut losses.

“At Camco we have worked hard to ensure that our carbon portfolio has significant value despite current market conditions,” Scott McGregor, chief executive of Camco, said.

“We have successfully restructured to operate in the new environment and will continue to expand our business model to develop clean energy projects,” he said.

UN-backed offset prices were dealt a fresh blow this week after three separate European Union sources on Tuesday said details on how to fix a supply glut in the EU’s carbon market would now not come until after the Commission’s August recess.

This prompted falls of up to seven per cent in already low EU carbon prices and weighed heavily on the CDM market.

The EU’s emissions trading scheme and the CDM have been in an interdependent relationship since 2005, as most of the demand for offset credits comes from the 12,000 or so big polluters in the EU scheme.

Prices for CERs often follow movements in EU permits called EU allowances (EUAs) and both markets are over-supplied, which has dragged prices to record low levels.

Even if EUAs recover when details of the Commission’s fix emerge, CERs could continue to drop to near zero, some analysts warned this week.

But some market participants sought to remain positive.

“It is certainly not the death of the market and we expect CERs to carry on trading even if we won’t see the heady prices of 13 euros again,” a carbon trader said.

“I can understand panic when a lot of companies’ portfolios are five euros under water but the EU and UN have the ability to limit supply and decide which credits are eligible and where. It’s not all doom and gloom,” he added.