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(Updates with Barclays comment in eighth paragraph.)
Oct. 17 (Bloomberg) -- The United Nations’ carbon program, the world’s second biggest, needs “ambitious” emission- reduction targets to rescue a market that has shrunk by nearly 80 percent since 2007, according to the European Commission. Greenhouse gas credits dropped to a record.
More than 190 nations will discuss climate-protection rules for the period after 2012, when the current targets for developed nations under the Kyoto Protocol expire. Talks will take place in Durban, South Africa, starting Nov. 28. The European Union is open to the so-called second commitment period under certain conditions and hopes to have a new agreement binding all countries to cut emissions within five years, said Artur Runge-Metzger, the bloc’s envoy to the talks.
“We’re hopeful that countries within coming years will increase their level of ambitions and that would create additional demand for the Clean Development Mechanism,” Runge- Metzger said in an interview on Oct. 14. “That’s something we’ll have to see. I wouldn’t close the door.”
The UN Clean Development Mechanism, which generates credits for investment in emission-reduction projects in developing countries, shrank to $1.5 billion last year from $7.4 billion in 2007, according to World Bank estimates. Offset credits issued under the mechanism, known as the CDM, can be used for compliance by companies in the EU emissions trading system, valued at $119.8 billion in 2010 and ranked as the world’s largest.
Least Developed Countries
From 2013 the EU will accept only new offset projects based in least-developed countries. Additionally, the import of credits generated by reducing industrial gas hydrofluorocarbon- 23 and of those tied to some nitrous-oxide projects will be banned as of May 2013.
Supply from existing CDM projects, excluding activities related to HFC-23 and N2O, may be enough to satisfy demand from EU emitters by 2020, according to Bloomberg calculations based on data by the Risoe Centre on Energy, Climate & Sustainable Development. The Roskilde, Denmark-based Risoe is a unit of the UN Environment Program.
“In terms of calculations, if everything stays as it is, it seems that supply is sufficient to meet demand,” Runge- Metzger said. “But we’d hope that, like what we’ve seen in Australia, which is planning to introduce emissions trading as of 2015, there may be more demand coming into the system. There could be several others.”
Australia will add demand for 450 million metric tons of credits in the five years through 2020, Trevor Sikorski, an analyst for the investment banking unit of Barclays Plc, said today in an e-mailed research note. That’s equivalent to about a quarter of yearly emissions in the EU market.
“With EU emissions-trading-system demand likely to become thinner in the period beyond 2016, then this could provide some much-needed demand for those international offsets,” Sikorski said.
Investors and traders including Geoff Sinclair, head of carbon trading at Standard Bank Group Ltd., have expressed concern that demand for the Certified Emission Reduction credits known as CERs will dry up without a global treaty with binding emission-reduction goals.
The UN talks to fix post-2012 climate architecture, which involve extending emission-reduction goals under the Kyoto accord and creating a new globally binding treaty, have stalled amid differences between rich and developing nations.
Countries including Japan and Russia have said they don’t want to extend the Kyoto treaty. Their absence, along with that of the U.S., China and India, would leave the Kyoto pact without targets for the five biggest national emitters of pollution from burning fossil fuels.
As part of the EU negotiating mandate for Durban, environment ministers agreed last week that the bloc would consider signing up for the second commitment period under Kyoto if the treaty guarantees environmental benefits and other nations determine a road map for a legally binding global deal.
“CER demand is really only driven by binding targets, and the only people providing that right now are the EU,” Sinclair said by e-mail. “Investors need the demand side to be based on legally binding caps and anyone who genuinely believes anything different is on another planet.”
Mehran Massih, head of the environmental and climate change practice at Shearman & Sterling LLP in London, says the market is moving “two steps forward and one step back.”
Back Up Needed
Demand stemming from new targets is needed to back up markets in California and Australia, he said by phone. “While the grand, global plan may not happen the way people envisaged in 2008, smaller programs are getting off the ground,” Massih said. “The engine continues to roll. Projects continue to be sponsored. The interest by big carbon funds and energy traders continues.”
UN offsets for delivery in December dropped as much as 1.9 percent to a record 7.12 euros ($9.80) a ton on the ICE Futures Europe exchange and were at 7.13 euros as of 5:11 p.m. in London today.
“From December, all investment in CDM projects outside least-developed countries is likely to cease,” unless the EU reconsiders its rules, said Brett Jordaan, vice president of global carbon for the White Plains, New-York-based carbon and energy broker Evolution Markets Inc.
--Editors: Alessandro Vitelli, Rob Verdonck.
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