update/CO2 Exchanges Ready Contracts as EU Weighs Offset Ban


CO2 Exchanges Ready Contracts as EU Weighs Offset Ban (Update1)
2010-11-26 14:08:36.180 GMT

(Adds EU caps in seventh paragraph, ICE futures in eighth.)

By Ewa Krukowska and Mathew Carr
Nov. 26 (Bloomberg) -- The European Union proposed a ban
from the start of 2013 on tradable credits linked to certain
industrial gases, prompting exchanges to begin creating new
futures contracts to reflect a change in emissions regulation.
The regulatory arm of the 27-nation EU is taking aim
against projects that may create "excessive" profits for
investors and undermine the market's integrity. The EU said
yesterday it wants to prohibit United Nations credits related to
hydrofluorocarbon-23 and some nitrous oxide credits. The news
widened the price gap between UN Certified Emission Reductions
and EU allowances for 2012 to the most since May 20, 2009.
"We expect to launch new contracts early next year for
CERs eligible for the EU in the post-2012 period," said Henrik
Hasselknippe, a managing director at The Green Exchange, a group
including Chicago-based CME Group Inc. "The discussion among
regulators will continue for several months. We are not going to
sit back and wait for that to conclude."
More than 11,000 facilities in the EU system, the world's
largest cap-and-trade program, are allowed to use UN credits as
a cheaper way to comply with pollution quotas. Regulators around
the world are clamping down on HFC-23, whose warming potential
is 11,700 times more powerful than carbon dioxide. Officials at
the UN carbon market called for a revision of its procedures.

Clean Development Mechanism

The commission proposed banning the use in the EU system of
UN credits linked to HFC-23 and nitrous oxide from adipic acid
production from the Clean Development Mechanism, the world's
second-biggest CO2 market, and the Joint Implementation program.
The ICE Futures Europe exchange, the biggest platform for
trading emission rights, said it has the right to determine the
type of offset credits that can be used to settle CERs futures
contracts. It will make a further statement on the EU proposal
by Dec. 11, ICE said in an e-mailed statement dated yesterday.
While the UN CDM issues CERs to pollution-cutting projects
in developing nations, the Joint Implementation program
generates tradable Emission Reduction Units. Installations in
the EU program can now 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 about 31 billion euros ($41 billion) at
today's prices. One permit represents one ton of CO2.
CERs for delivery in 2012 dropped 0.5 percent to 11.40
euros on ICE today, taking their loss to 2.6 percent in the past
two days. Given the uncertainty about the UN market after 2012,
exchanges don't offer benchmark futures for 2013 or later. ICE
Futures's CER contract for delivery in March 2013 dropped 5.5
percent at yesterday's close to 10.56 euros, a record low.
"As for futures traded on exchanges, it's really up to
exchanges to decide how they are going to deal with it, although
you have to expect some kind of a discount," Guy Turner,
director for carbon markets at Bloomberg New Energy Finance,
told a panel at the EMART conference in Amsterdam. "ICE may be
reluctant to add technology-specific contracts because it would
reduce liquidity," he said today by e-mail.

'Material' Impact

The impact of the proposed EU regulation on the price of
offsets traded on the over-the-counter market will be
"material" because investors will be able to differentiate
credits related to HFC-23 and nitrous oxide from credits from
other types of projects, according to Turner. The effect on EU
carbon allowances will be "very slight," he said.
EU allowances for 2012 fell 0.8 percent to 15.70 euros
today. The spread between the EU permits and UN offsets for that
year, traded as a separate contract, widened to 4.36 euros,
constituting the biggest discount on UN credits in 18 months.
The EU regulator's operational objective is to restrict the
use of credits linked to HFC-23 and adipic acid projects from
being used within the bloc's emissions-trading system "as soon
as legally possible," the commission said.

Financial Losses

As some project developers, financial intermediaries and
compliance buyers have signed some contracts for the delivery of
credits by March 2013, curbs imposed as of January 2013 would
require "adjustments by market participants which could entail
some financial losses," according to the commission.
"Due to commercial interests of individual market
participants it was not possible to collect factual information
on the importance of these delivery contracts," it said. "But
in particular to the extent that they were agreed after the date
of adoption of the revised EU ETS, these contracts may contain
provisions in the event use restrictions are introduced."
The future of the UN carbon market and other proposals to
cut greenhouse gases will be on the agenda when envoys worldwide
meet Nov. 29 in Cancun, Mexico, for climate talks. They will
discuss a climate-protection framework for when limits in the
1997 Kyoto Protocol expire at the end of 2012.
Continuing to pay "high rents" for HFC-23 and N2O
abatement under the CDM would not be in line with the EU
negotiating position for Cancun that advanced developing
countries should contribute to global emission-reduction
efforts, the commission said.

Short Payback Time

"The payback time of the capital and operational costs of
HFC-23 and adipic acid plant N2O destruction is less than a
year, even with a yearly weighted average cost of capital of 30
percent, while projects can earn revenues up to 21 years in the
future," the commission said. "Within the first year they even
generate sufficient profits to also compensate all operating
costs for the remainder of the lifetime of the project. This
results in extremely high returns on investment."
While HFC-23 projects represent less than 1 percent of all
registered UN offset projects, their credits account for 69
percent of about 465 million offsets issued so far. The 19
projects cutting the gas under the CDM program are located
mainly in China and India, according to UN data.
CDM projects cutting nitrous oxide in adipic acid plants
are present in Brazil, China and South Korea. In Europe, three
adipic acid plants participate in the Joint Implementation
program: one in France and two in Germany, according to the
In 2009, EU emitters used 82 million CERs or ERUs for
compliance in the bloc's cap-and-trade, according to the
commission data. Operators from Germany, Poland, Italy, Spain,
UK and France used the highest number of HFC23 and nitrous oxide
CERs, the commission said.

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: John Buckley, 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