Bloomberg News

Carbon Offsets Tumble as EU Said to Eye Russian Credits Ban

October 19, 2012

United Nations carbon offset contracts slumped to records after the European Union proposed to ban from its market certain credits issued from next year by countries that fail to adopt new carbon goals.

The European Commission, the EU’s regulatory arm, proposed draft rules for the use of UN-sponsored Emission Reduction offsets as of 2013 in a modified draft amendment to the bloc’s carbon registry regulation at a meeting of officials from national governments on Oct. 17, according to two people with knowledge of the matter, who declined to be identified because the gathering was private.

European law allows companies in its emissions trading system to use international offsets, including ERUs, for compliance with their greenhouse-gas reduction quotas.

“ERUs could be set to become the hot potatoes of the carbon markets as projects rush to issue and compliance buyers look to submit as quickly as possible,” Richard Chatterton, an analyst at Bloomberg New Energy Finance in London, said by e- mail.

ERUs for delivery in December tumbled as much as 28.6 percent to 90 euro cents ($1.17) a metric ton on the ICE Futures Europe exchange, the lowest level since the contract began trading in 2010. They ended the session at 92 cents.

Track One

Emission Reduction Units are generated under the UN Joint Implementation program, which encourages investments in low- carbon energy by industrialized countries in other nations that have emission-reduction goals under the Kyoto Protocol, whose first period runs from 2008 to 2012.

The EU proposal would bar emitters in the bloc’s cap-and- trade from holding in their accounts ERUs issued after 2012 by non-EU countries such as Russia, the people said. That nation is not planning to adopt a new set of binding climate goals under the Kyoto Protocol after its first phase expires. It generates credits in a procedure overseen by the government known as Track One.

ERUs from countries without new emission-reduction targets in place until 2020, and whose greenhouse-gas cutting projects are approved by UN regulators, would be allowed for use in the EU as long as they were issued before the end of April 2013, and covered emissions reductions achieved before the end of 2012, according to the people. This procedure, where issuance of ERUs under the Joint Implementation program is supervised by UN authorities, is referred to as Track Two.

International Offsets

Along with Certified Emission Reduction offsets issued under another UN program, the Clean Development Mechanism, ERUs offer emitters in the EU program a cheaper form of compliance with their pollution limits.

CER credits for December, which are not subject to any restrictions under the commission’s proposal, fell as much as 26 percent to a record of 1.05 euros a metric ton. The contract closed 23 percent lower at 1.10 euros on London’s ICE Futures Europe exchange, its biggest-ever daily slump.

JI projects are hosted by some EU nations and countries including Russia and Ukraine. While the EU has declared it would adopt targets under the Kyoto Protocol until 2020, Russia has said it won’t commit to a new set of goals. Nations are set to discuss the global climate framework when they meet at a two- week UN summit in Doha, Qatar starting Nov. 26.

‘Sharp Fall’

“The sharp price fall in ERU price reflects the expectation that a ban on some track 1 ERUs issued from May next year will urge countries, particularly Russia, to accelerate ERU issuance in the short-term,” Chatterton said. “This causes selling pressure on ERUs and increases the level of swapping from CERs and EU allowances, placing selling pressure on these contracts as well.”

EU carbon permits for delivery in December dropped as much as 3.1 percent to 7.83 euros a metric ton and ended the session at 7.97 euros on ICE.

The previous version of the EU draft proposal, submitted to member states last month, sought to prohibit from the bloc’s carbon-trading program the use of ERUs issued after 2012 by countries without a new set of binding emission targets. Several EU member states objected to the original amendment, two people with knowledge of the matter said on Oct. 1.

In the next phase of the EU carbon program, starting in 2013, offset credits can only be used if they are exchanged for EU allowances, according to rules to be set in the upcoming revision of the bloc’s carbon registry regulation. Any changes to the regulation proposed by the commission need qualified- majority support from member states to pass.

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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