Developers of United Nations- sanctioned emission-reduction projects say they are “bitter” as polluting factories in Europe may be making more money buying their credits than they can by selling them.
ThyssenKrupp AG (TKA), Germany’s biggest steelmaker, and Tata Steel Ltd. (TATA) can profit from emissions trading at a time when share prices for two publicly listed project developers, Camco International Ltd. (CAO) and Trading Emissions (TRE) Plc, are slumping amid last year’s record oversupply in the European Union market. And the economy slows. The euro region will contract 0.4 percent this year, according to the median of 43 forecasts compiled by Bloomberg.
Factories and power stations can get 3.88 euros ($4.76) a metric ton today by selling European Union permits they were given for free by the bloc’s governments and replacing them with purchases of UN emission credits generated in developing countries. That’s 91 euro cents a ton, or 31 percent, more than the 2.97 euro price of UN credits themselves. The differential matched a record 1.21 euros earlier today.
“All the hard work and the risk we take is not being rewarded,” said Gareth Phillips, chairman of the Project Developer Forum, the London industry group representing 30 greenhouse-gas cutting companies. He is chief climate change officer at Sindicatum Sustainable Resources Group Ltd., the Singapore-based developer of carbon offset credits. “It’s a big windfall profit for the compliance companies” and some emission-cutting companies are somewhat “bitter” about that, he said.
Bob Jones, a spokesman for Tata Steel in London, declined to comment when reached by phone July 17. Erwin Schneider, a spokesman for ThyssenKrupp in Essen, Germany, didn’t return a call July 18 seeking comment.
CERs for December declined to a record 2.82 euros a ton today, and were at 2.97 euros as of 5:31 p.m London time. EU permits fell 3.8 percent to 6.88 euros. The discount of CERs to EU carbon allowances shrank 7.2 percent to 3.88 euros, narrowing at the fastest pace since May 4.
The EU’s emissions-trading system requires companies to surrender European carbon permits or UN credits matching their verified carbon-dioxide pollution each year. The bloc’s regulator limits the number of CERs that may be used to an average 14 percent of total emissions. Unused quotas can usually be “banked” to later years.
EU nations handed out about 97 percent of their carbon allowances for free in the five years through 2012, the second phase of the biggest greenhouse-gas-reduction program by traded volume.
UN CER credits have plunged 70 percent in the past year, cutting profits for project developers from China to Kenya, who wait on average 21 months for their first credits after their project is registered by UN-overseen regulators, according to data compiled by the UN Environment Programme’s Risoe Centre. The certification process can take from several months to several years.
Steel company costs associated with carbon-permit expenses in electricity prices, administration of the allowances and energy-efficiency investments are more than the revenue from any carbon allowances sold, Axel Eggert, spokesman for the European Confederation of Iron and Steel Industries, the Brussels lobby group, said July 17 by phone. Steelmakers favor some form of adjustment of carbon allowance supply, depending on levels of economic activity, he said. “This has been refused by the European Commission.”
“There is tremendous disappointment” at the low prices, Ram Babu, chief executive officer of General Carbon Advisory Services Pvt. Ltd. in Mumbai, said by phone July 17. “Investors will think twice about re-entering the market.”
Babu focused on Clean Development Mechanism projects in 1999 and his company expected a CER price of at least $10 a ton, more than double today’s level, he said.
The Clean Development Mechanism of the 1997 Kyoto Protocol, which governs the approval and supply of CERs, was established to cut the cost of industrial-nation greenhouse gas targets through this year and beyond, and to help place emerging nations on a lower-emitting economic path.
“We need more demand,” Phillips said. The EU’s financial crisis has helped curb consumption of permits and credits, while the failure of UN climate-protection talks to extend or replace the targets in the protocol that expire this year means the outlook is unclear, he said. CERs may also be used by developed- country governments to meet their own national emissions targets set under the Kyoto pact.
The EU won’t accept credits from projects registered after 2012 unless they are in least-developed countries, according to the rules of the bloc’s carbon market. Most registered by the end of this year can continue to sell credits to factories, power stations and airlines in the EU market through at least 2020.
Listed project developers have seen their share price fall as demand for credits has been outweighed by the oversupply. Trading Emissions slid 74 percent in the last twelve months, while Camco shares have declined 77 percent.
“We don’t see any circumstances where CERs will rise above 5 euros for at least a year,” Babu said. Still, prices near 3 euros were “a temporary blip.”
Some of General Carbon’s clients predict credits may rise to 8 euros, he said.
The price drop this month has been exacerbated by supply from Russia and Ukraine, which create credits under the Joint Implementation mechanism of the Kyoto agreement, Matthew Gray, an analyst in London at Jefferies Bache Ltd., said July 16 by phone. “These mechanisms are competing against each other,” and the UN offsets have more to lose than EU allowances, he said.
Emission Reduction Units for December from that program fell to close at a record 2.68 euros a ton today.
Additional programs around the world are needed to back up Europe’s climate fight by creating more need for emission reductions, Babu said. “The EU alone cannot be expected to support the international carbon price, given its economic circumstances.”
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