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EU Proposes Ban on Some UN Offsets to Stop 'Excessive' Profits
2010-11-25 14:21:47.384 GMT
By Ewa Krukowska and Mathew Carr
Nov. 25 (Bloomberg) -- The European Union proposed a ban
from the start of 2013 on tradable credits linked to certain
industrial gases, closing its emissions market to offsets
accounting for two-thirds of the supply from outside the bloc.
The regulatory arm of the 27-nation EU is taking aim
against carbon projects that may create "excessive" profits
for investors and undermine the market's integrity. The EU said
today it wants to prohibit United Nations-sponsored credits
related to hydrofluorocarbon-23 and some nitrous oxide credits.
The news widened the price gap between UN and EU allowances for
2012 to the most since May 20, 2009.
More than 11,000 facilities in the EU system, the world's
largest cap-and-trade program, may use UN credits as a cheaper
way to comply with their 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.
"The acceptance of credits from industrial-gas projects
has been controversial for some time," the European Commission
said today in a statement. "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 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.
Fragmented Market
"We expect the UN carbon market to fragment, with
industrial gas credits trading at a considerable discount to
renewable energy, energy efficiency and agriculture credits,"
Aimie Parpia, a London-based analyst at Bloomberg New Energy
Finance.
UN offset known as Certified Emission Reductions from the
areawarded to pollution-cutting projects in developing nations
under the UN Clean Development Mechanism. CERS for delivery in
2012 dropped 0.4 percent to 11.65 euros at 11 a.m. on the ICE
Futures Europe exchange in London.
EU allowances for the same year rose 0.6 percent to 16
euros on ICE. The spread between the two futures, traded as a
separate contract, widened to 4.35 euros, constituting the
biggest discount on UN credits in 18 months.
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.
'Higher Prices Today'
A ban on the industrial gases would lift EU permit prices
over the next few years because it removes some supply in that
period, said Trevor Sikorski, an analyst at Barclays Plc's
investment bank.
"The impact is higher prices today and slightly more
moderate prices in the future," as the restrictions shift
offset use towards 2020, Sikorski said today in a phone
interview from Amsterdam.
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.
The climate change committee, composed of national
officials and chaired by the commission, will first discuss the
proposal on Dec. 15, according to today's statement.
Cancun's Agenda
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. They will discuss a climate-
protection framework for when limits in the 1997 Kyoto Protocol
expire at the end of 2012.
"Restrictions on credits from HFC-23 and N2O destruction
from adipic acid production may improve the prospects in the UN
negotiations to agree on CDM reform and the creation of new
mechanisms," the commission said. "The CDM should be reformed
in such a way that its environmental integrity is improved while
focusing on least-developed countries."
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.
Inefficiencies
The destruction of HFC-23 can be carried out at a cost of
0.17 euros per ton of CO2 equivalent, according to a report from
Environmental Investigation Agency and CDM-Watch.
"Revenues from the sale of HFC-23 credits in the EU ETS
represent up to 78 times the initial capital investment and
operational costs of these projects," the commission said. "In
other words, the rates of return of these projects are
excessive. These projects are not reducing global emissions in
an efficient manner."
Carbon traders have said delays in issuing UN offsets and
the possibility of new EU restrictions may leave them with
credits that can't be used in the third phase of the EU's carbon
program or in the current trading period.
In the current five-year trading period, 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."
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
ekrukowska@bloomberg.net;
To contact the editor responsible for this story:
Stephen Voss at +44-20-7073-3520 or sev@bloomberg.net
