Update Enel Says EU Should Limit Scope, Delay CO2-Offset Ban

November schmovember?

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Enel Says EU Should Limit Scope, Delay CO2-Offset Ban (Update1)
2010-11-19 16:14:29.228 GMT

(Adds HFC-23 projects from eighth paragraph.)

By Ewa Krukowska
Nov. 19 (Bloomberg) -- The European Union regulator should
limit the scope and delay the start of a planned ban on carbon
offsets in its emissions-trading system to avoid market
distortions, according to Enel SpA, Italy's biggest utility.
The European Commission, the 27-nation bloc's regulatory
arm, is considering a ban as of 2013 on the use of United
Nations-sponsored credits related to industrial gases including
hydrofluorocarbons and nitrous oxide. The EU wants to present
its proposal to member states "as soon as possible,"
Climate Commissioner Connie Hedegaard said today.
The EU is facing "relentless" lobbying by Enel, RWE AG and
E.ON AG, the climate group CDM Watch said yesterday in a report.
The future of the UN Clean Development Mechanism, the world's
second-biggest carbon market, and other tools to cut greenhouse
gases linked to heat waves, floods and more-intense storms will
be on the agenda when envoys worldwide meet Nov. 29 in Cancun
Mexico to discuss a climate-protection framework for when the
1997 Kyoto Protocol expires at the end of 2012.
"If the commission pursues the idea of enforcing quality
restrictions, it should bear in mind that operators took
commitments in the CDM market with a long-term perspective,
relying on the fact that the EU emissions trading system would
last beyond the Kyoto compliance period," Giuseppe Deodati,
Enel's head of carbon strategy, said by e-mail today.

Long-Term Commitments

While HFC-23 projects represent less than 1 percent of all
registered CDM projects, their credits account for half of the
450 million offsets issued so far. The 19 projects cutting the
gas under the UN program are located mainly in China and India.
HFC-23 is a by-product of HCFC-22, used in air-conditioning
and refrigeration. The EU is concerned that projects generating
offsets may be increasing HCFC-22 output simply to get credits
for controlling HFC-23 discharges, creating windfall profits for
investors and undermining the integrity of Europe's carbon cap-
and-trade program, the world's largest.
Enel is involved in seven projects that cut HFC-23
emissions in China with companies including Deutsche Bank and
Spain's Endesa SA. According to Bloomberg data, the projects
have issued 100.5 million credits, valued at 1.2 billion euros
($1.6 billion) at today's prices. They are expected to cut HFC-
23 by a total of 239 million tons of CO2 equivalent by 2012.
"We believe the EU should limit the restrictions to new
projects, and to already registered projects after expiry of the
first crediting period, which for most industrial-gases projects
expire by 2014 at the latest," Deodati said.

Cheaper Alternative

EU allowances for December 2010 traded 0.4 percent down
today at 14.88 euros a ton in London. UN offsets for delivery in
the same month were 0.8 percent weaker at 12.22 euros a ton.
More than 11,000 facilities in the EU cap-and-trade program
may now use UN credits, which are cheaper than EU allowances,
for compliance with their pollution quota.
In the current five-year trading period through 2012, the
installations in the EU cap-and-trade program can swap as many
as 1.6 billion UN credits with EU permits on a one-for-one
basis, according to the commission. The EU average annual
emissions cap for that period is 2.04 billion tons of carbon
dioxide. One permit represents one ton of CO2.

'Unintended Consequences'

"If the commission pushes forward a proposal on
qualitative restrictions, it must clarify the objectives and the
principles driving the decision to ban certain project types,"
Deodati said. "If these principles are not applied, the
unintended consequences could be market distortions,
fragmentation, credit supply gap in a moment when no other
alternative mechanism is available, discouragement of future
investments and severe undermining of trust in the international
negotiation process."
Carbon traders have said delays in issuing offsets and the
possibility of new EU restrictions may leave them with credits
that are ineligible for use in the third phase of the EU's
carbon program from 2013 and perhaps the current trading period.
The European Federation of Energy Traders said in September that
the "complete regulatory uncertainty" over the use of offsets
in the EU was unsustainable.
UN offsets include two types of credits: Emission Reduction
Units and Certified Emissions Reductions. The latter, generated
under the UN Clean Development Mechanism and known as CERs, are
are awarded to pollution-cutting projects in developing nations.
"Obviously, the restrictions should be based on when the
emissions reductions are achieved, and not when the credits are
issued, as operators should not be penalized for delays in CER
issuance process," Deodati said. "This would approximately
halve -- by 800 million tons -- the credit pipeline from these
projects to 2020, freeing up significant demand volumes."

'Windfall Profits'

Regulators of the CDM are also ramping up scrutiny after
allegations that some developers are seeking excessive credits
related to HFC-23, whose warming potential is 11,700 times more
powerful than CO2. They are assessing whether the methodology
for awarding those offsets should be changed.
"Regarding windfall profits it's worth noting that CDM
flows toward China are justified by the objective to curb global
emissions where it is most effective, and to involve developing
countries in mitigation actions," Deodati said.
E.ON, Germany's largest utility, said the EU should allow
for an "appropriate transition period" before changing its
rules on accepting offset credits. In a letter responding to CDM
Watch, E.ON also said UN carbon regulators have a certification
process that is "very robust."

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>

--With assistance from Mathew Carr in London and Nicholas
Comfort in Frankfurt. Editors: Mike Anderson, Randall Hackley.

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