A surplus of carbon offsets has caused a swim in certified emission reduction (CER) prices, reported Reuters last week. The headlines agency further predicts that carbon credits are yet to hit rock bottom.
CERs are carbon credits issued under the Clean Development Mechanism (CDM) – among three flexibility mechanisms stipulated in the Kyoto protocol by the United Nations Framework Convention on Climate Change (UNFCCC). CDM allows industrialised countries to achieve their emission reductions by buying offsets generated by projects in developing countries. The CDM Executive Board then evaluates the carbon reducing capacity of the offsets and issues carbon credits.
In the present sluggish economic conditions, the market has seen an archive number of issued certified carbon credits, explained Reuters. To date in 2010, 254 million CERs have already been certified. In contrast, the number of CERs certified in 2010 was 132 million and in 2009– 123 million.
But are low carbon prices so bad after all? Not quite, in the event that you ask Tim Worstall, fellow at the UK Adam Smith Institute. The dropping price of carbon credits, explained Worstall, means the device is, indeed, working, which is “excellent news.” In a write-up for Forbes magazine, he writes: low energy blockchain “A higher price would show that it is difficult to lessen [emissions]: individuals are willing to cover the high price for the permit rather than stop emitting. Similarly, a good deal tells us that individuals are finding it easy to lessen emissions.”
But beyond environmentally friendly functionality of emission units, their lower costs may even bring some investment benefits. The timing is, perhaps, suitable for investors to forward-buy carbon credits, given that in 2013 the EU ETS will undoubtedly be entering its third phase. In line with the Department of Energy and Climate Change, one of many main adjustments which will occur post 2013 is that allocation of emission certificates won’t be done via allowances, but via auctioning. This implies parties, which fall under the compliance program, will need to bid for CERs.
“At the very least 50 per cent of allowances will undoubtedly be auctioned from 2013, in comparison to around 3 per cent in Phase II. This can improve environmentally friendly effectiveness and economic efficiency of the EU ETS. In the UK, you will see 100 per cent auctioning to the energy sector. This may also be the case across the majority of the EU,” states the DECC website.
1. Limiting the number of allowances and making polluters bid due to their offsets after 2013 means that, in 2012, before these changes take effect, more industries would desire to take advantage of pre-auction costs and stock on credits for future use. Higher demand in 2012 could subsequently lead to higher charges for CERs.
2. Limited use of carbon credits produced not in the EU — in, say, China-means the price of CER production will go up. All things considered, developing offset projects in Europe typically costs significantly more than outsourcing them to China. Higher production costs will lead to higher prices after 2013. Again, polluters would desire to take advantage of pre-Phase III carbon credit prices, that may potentially drive up demand in 2012 and help carbon credit prices bounce back sooner rather than later.
Carbon credit prices are, obviously, influenced not merely by the evolution of the EU ETS, but in addition by the overall state of the global economy. It could be unreasonable to check out them as commodity units, which exist in a vacuum. Therefore, we cannot exclude the chance that the overall decline in commodity prices and the financial market crunch can adversely affect carbon trade.
We also need to bear in mind that the Kyoto Protocol, the agreement under which these units are defined and exist, is due to expire in 2012. The compliance carbon market will probably see some changes depending where signatory countries re-commit to reducing carbon emissions and which, if any, pull away.