(BN) EU May Ban Some UN Offsets to Stop ‘Windfall’ Profits (Update1)


EU May Ban Some UN Offsets to Stop 'Windfall' Profits (Update1)
2010-11-25 11:46:24.428 GMT

(Adds market reaction in second paragraph.)

By Ewa Krukowska
Nov. 25 (Bloomberg) -- The European Union proposed banning
some credits linked to industrial-gas projects in its carbon
program from the start of 2013, limiting the options available
to the continent's emitters to cut pollution costs.
The European Commission, the regulatory arm of the 27-
nation EU, wants to prohibit United Nations-sponsored offsets
related to hydrofluorocarbon-23 and nitrous oxide in response to
concern they create "windfall" profits for investors and
undermine the market's integrity. The discount of UN credits
relative to EU allowances for delivery in 2012 widened 3.1
percent today in London to the most since May 20.
More than 11,000 facilities in the EU cap-and-trade program
may use UN credits as a cheaper alternative to EU allowances for
compliance with their pollution quotas. Regulators of the UN
carbon market are also ramping up scrutiny after allegations
that some developers are seeking excessive credits on projects
tied to HFC-23, whose warming potential is 11,700 times more
powerful than CO2.
"The acceptance of credits from industrial-gas projects
has been controversial for some time," the commission said in a
statement in Brussels today. "Certain gases have a very high
global-warming potential, and abatement is very cheap. This can
create huge financial rewards for project developers."
The commission proposed banning the use of credits linked
to the two industrial gases from adipic acid production from
the UN Clean Development Mechanism, the world's second-biggest
market, and the Joint Implementation program.

Fragmented Market

"The Commission's decision to ban HFC and N2O credits from
Jan.1, 2013, is very much in line with our expectations," said
Aimie Parpia, a London-based analyst at Bloomberg New Energy
Finance. "We expect the UN carbon market to fragment,
with industrial gas credits trading at a considerable discount
to renewable energy, energy efficiency and agriculture
The EU emissions-trading program is a cornerstone of
European efforts to tackle the heat waves, storms and floods
tied to climate change. The system, started in 2005 with a
three-year trading period, is now in a second phase and will
enter a third stage running from 2013 through 2020.

Abundant Alternatives

In the current five-year trading period, the installations
in the program can swap as many as 1.6 billion UN credits with
EU permits on a one-for-one basis. The EU average annual
emissions cap for that period is 2.04 billion tons of carbon
dioxide, valued at around 31 billion euros at today's prices.
One permit represents one ton of CO2.
"There are expected to be enough credits available from
the 2,300 other projects (non HFC-23, non- N2O) to supply the EU
ETS up to the limit allowed over the next 10 years, without
including any new credits from sectoral crediting," the
commission said. "Therefore allowance prices should be
relatively unaffected. "
UN offset credits generated under the CDM, known as
Certified Emission Reductions, are awarded to pollution-cutting
projects in developing nations. The UN Joint Implementation
mechanism issues the so-called Emission Reduction Units.
The commission and environmental campaigners including CDM
Watch are concerned that overseas plants that reduce
hydrofluorocarbon gases called HFC-23 may be increasing output
simply to generate credits, handing investors windfall profits.

'Cheap Reductions'

"The EU considers that cheap emission reductions, such as
those from certain industrial gas projects, should not be done
through the carbon market, but instead should be the
responsibility of developing countries as part of their
appropriate own action or possibly funded based on incremental
costs only," the commission said.
The commission proposal will require EU member state
approval to become binding. Climate Commissioner Connie
Hedegaard, who has also called for international action to phase
out the production of hydrofluorocarbons, said on Oct. 15 the
bloc's nations will likely support curbs on the use of offsets
from industrial gases in the EU emissions program.
The climate change committee, composed of national
governments officials and chaired by the commission, will first
discuss the proposal on Dec. 15, according to today's statement.
The CDM Executive Board is due to discuss at its meeting
due to end Nov. 26 whether the methodology for awarding those
offsets should be changed.

For Related News and Information:
Emission market news: NI ENVMARKET <GO>
Today's top energy stories: ETOP <GO>
European power-markets home page: EPWR <GO>
--Editors: Mike Anderson, Alex Devine

To contact the reporter on this story:
Ewa Krukowska in Brussels at +32-474-620-243 or

To contact the editor responsible for this story:
Stephen Voss at +44-20-7073-3520 or sev@bloomberg.net