Bloomberg News

Record Project Flows Test UN CO2 Market as Future in Doubt

October 03, 2011

(Adds debate on market’s future in 16th paragraph.)

Oct. 3 (Bloomberg) -- A record inflow of projects into the world’s biggest greenhouse gas market threatens to swamp auditors who validate these activities, and they may be forced to reject business, said an industry group.

“I think the next 12 months will test the capacity” of audit firms, said Jonathan Hall, president of the Designated Operational Entities and Independent Entities Association. So- called DOEs are auditors that check that emission-reduction projects in developing nations comply with rules before and after getting greenhouse gas credits. “I don’t think there are any DOEs that are refusing validations” though that might happen, said Hall.

A record of at least 592 projects entered the validation stage of the Clean Development Mechanism program in the three months ended last week, about 14 percent of all projects seeking registration under the program of the 1997 Kyoto Protocol. Almost 3,000 projects have already been approved since the program started. Emission reduction projects are seeking registration by the end of next year because of a deadline imposed by the European Union, whose factories and power stations are the main buyers of credits.

The credits are important because they are used to slash compliance costs in the EU, one of the only regions in the world with mandatory carbon constraints. A German coal-burning power utility can make a profit of 7.21 euros ($9.62) a megawatt hour in 2013 using EU carbon allowances. By using cheaper CDM credits, that profit jumps 36 percent to 9.81 euros, according to a so-called clean-dark-spread calculator on Bloomberg.

‘There’s a Concern’

UN CDM credits, known as Certified Emission Reductions, for December delivery dropped 3.4 percent today to 7.58 euros a metric ton on the ICE Futures Europe exchange in London. They’ve fallen 34 percent this year. EU carbon allowances fell 5.1 percent to 10.19 euros.

“I’m aware that there’s a concern” about the ability of the program to meet demand from projects through 2012, said Martin Hession, chairman of the CDM executive board, the market regulator based in Bonn. “There’s been discussions about what we need to do.”

The board has sought more information from the audit firms on the number of project validations planned and resources available and one option was a “more flexible assessment approach,” Hession said, without being more specific. “From an administrative point of view, I think we are fine.”

How busy next year becomes depends in part on what happens at climate talks in November and December this year in Durban, South Africa, said Hall, who is head of the global climate change program at SGS SA. Other audit firms include Det Norske Veritas Ltd., Tuev Sued and Bureau Veritas SA.

Program Future

Some developing nations may boost the risks for investors in the market by preventing an orderly extension beyond 2012, Climate Change Capital Ltd. said last week.

Some nations, especially small countries not receiving money from selling CDM credits, may be tempted to vote against proposals to extend the market, said Steven Gray, a policy expert at the London fund manager who helps represent investors at UN climate talks.

“It’s highly unlikely that the CDM will stop,” Gray said today by phone. Still, there’s enough uncertainty surrounding the future of the program that investors may start to hold back spending, and service providers to the market may find it difficult to keep hiring the people needed to approve projects.

CERs can be used to a limited extent by power stations and factories to comply with caps on greenhouse gas emissions under the EU’s carbon market, the world’s biggest, and the New Zealand trading system. They can also be used by nations who exceed targets in the Kyoto agreement.

Bargaining Chip

Developing nations are using the CDM as a bargaining chip in negotiations, Gray said, citing a document published in August after a meeting of developing-nation environment ministers in Brazil. China, the biggest seller of CDM credits, and India were among nations represented at the meeting.

The ministers “stressed that the continuation of the flexibility mechanisms of the Kyoto Protocol, in particular the CDM, is contingent upon the establishment of quantified emission-reduction commitments” by developed nations under a second commitment period of the protocol. Kyoto has targets applied to 37 rich nations for the five years through 2012.

The audit firms, which carry out checks to make sure projects are not overestimating greenhouse-gas reductions, may struggle to justify spending more on technical staff over the next five years, Gray said. Companies will have less incentive to come up with new methodologies for cutting greenhouse gases, he said. “It’s difficult to take investment decisions under the current environment.”

Cookstove Distribution

Hession last week called for “dialogue” with nations and investors on how the CDM should be adjusted to take advantage of its ability to deliver finance for sustainable development in emerging nations. He cited the program’s success in distributing “tens of thousands” of fuel-efficient cookstoves in a few years, after other programs achieved “only limited penetration,” according to a statement from the United Nations Framework Convention on Climate Change.

Should climate negotiators fail to sort out the uncertainty, there’s a possibility the rush over the next year or so will be less intense than expected, said Hall. “I don’t think anyone will say it’s not going to be busy.”

--Editors: Alessandro Vitelli, Rob Verdonck.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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