ANALYSIS: Australian buyers drive flurry of bargain deals in old cheap CERs

Published 17:42 on October 29, 2015  /  Last updated at 05:55 on October 30, 2015  /  Asia Pacific, Australia, EMEA, EU ETS, International, Kyoto Mechanisms, Voluntary Market  /  No Comments

Demand from a small number of Australian buyers has led to an unexpected flurry of deals in soon-to-expire CER credits at rock-bottom prices, a rare spike in trade in the UN's moribund carbon market.

Demand from a small number of Australian buyers has led to an unexpected flurry of deals in soon-to-expire CER credits at rock-bottom prices, a rare spike in trade in the UN’s moribund carbon market.

The UN-approved offsets, generated from emission reductions made by CDM projects during the Kyoto Protocol’s first commitment period of 2008-2012 (CP1), were seen by many as near-worthless and as a result had barely traded in the last couple of years.

That’s mainly because demand for the units evaporated as most Kyoto signatories outside of Europe snubbed the credits, and EU emitters all but exhausted their usage quotas under the bloc’s emissions trading scheme before CP1 CERs were banned from the market as of Apr. 2015.

But to the surprise of many observers, demand for 20-40 million of these credits has emerged in recent weeks, market sources told Carbon Pulse, ahead of a Nov. 18 deadline that will see many of the CP1 CERs still in circulation cancelled when Kyoto’s first True-up period ends.

“There is a nominal value attributed to CP1 CERs with offers to purchase them ranging from €0.05 to €0.15,” Redshaw Advisors wrote in a note to clients on Thursday.

Several million CP1 CERs have already changed hands at around €0.12-€0.15 per unit over the past few weeks, according to traders at three separate firms.

This is well below the more liquid CP2 CER futures trading in Europe for around €0.60 – credits generated during Kyoto’s second commitment period (2013-2020) that remain eligible in the EU ETS.

It’s also a fraction of the cost of generating most of the hundreds of millions of CP1 CERs still in circulation.

The demand for CP1 credits is being driven by a July deal between Australian landfill owners and the Australian Local Government Association, which lets the firms use CERs to compensate for income earned by passing on to customers costs relating to the country’s now-repealed carbon tax.

CARRY OVER

Despite very few signs of CP1 credit demand elsewhere, traders have struggled to prise supply from potential sellers, who are instead taking steps to bank their units into the future in the hope that they someday fetch a higher price.

“Holders of the CP1 units have not really been keen to get rid of them. Although it is still unclear what these credits would be used for later on, the option of carrying them over is already enough for them not to sell,” said Bernadett Papp, an analyst at Budapest-based brokers Vertis.

At least one European government, the UK, is letting account holders at its emissions trading registry to carry over a limited number of CP1 credits into Kyoto’s CP2, thereby preventing their cancellation following the looming True-up deadline.

Other EU member states including Germany, France, Ireland, and Luxembourg, however, have opted not to allow the banking forward of CP1 credits.

Under the rules for Kyoto’s CP2, CERs equal to 2.5% of an Annex I country’s total emissions quota in CP1 can be carried over.

The same number of ERUs – credits issued under the Joint Implementation scheme – can also be banked, bringing the total carry-over percentage to 5%.

The UK’s Environment Agency said that as of Oct. 28 the country had reached its ERU carry-over limit, whereas its CER quota was only 30% filled, leaving room for roughly another 60 million CERs, based on Carbon Pulse calculations.

Account holders in the UN’s CDM registry are also able to preserve their CP1 CERs.

FUTURE USE

It is unlikely CP1 CERs will be accepted for future compliance, however, as governments are keen to drive new abatement and many have since banned project types such as industrial gases, which represent a sizeable share of all CP1 units.

In theory, demand could come from other sources such as the voluntary carbon offsetting market or a future international aviation offsetting scheme, for which airlines have been keen not to rule out any potential supply.

As a result, a handful of dealer firms started to market custodial services, offering to help preserve CP1 CERs for future use.

For €100 per transfer, Melbourne-based WeAct said it would store the units for up to two years or until Australia’s registry opted to cancel the units, while Vertis offered a similar service from Europe.

However, the relative ease of banking CERs translated into scant interest in the offerings.

MORE TO COME?

Observers have estimated that the Australian landfill owners’ total compensation bill may be as much as A$100 million (€64.8 million), meaning the waste firms must spend that much on UN offsets or funding emission reduction projects at home by the end of 2017.

That amount would theoretically be enough to buy more than 400 million CP1 CERs, or most if not all of the credits left in circulation, if prices remained near current levels, although Max Spedding of the Landfill Owners Association told the Guardian earlier this month that around A$10-20 million had been set aside to buy UN offsets.

In contrast, demand for EU ETS-eligible CERs from European emitters is forecast at around 17-20 million units per year to 2020, according to analysts, with Norway and a few other European governments shelling out €2 or more per unit to pick up credits from select CDM projects for use towards their national Kyoto CP2 goals or to help keep alive market infrastructure while supporting very poor nations.

Beyond that, virtually no CER demand currently exists elsewhere in the world.

But traders don’t expect many more CER sellers to be interested at prices below €0.20, which is seen as a floor for credit issuance costs.

So far Veolia Environmental Services is the only waste company to have received CERs into its account in the Australian registry, according to data.

An Oct. 28 update of the registry showed that Veolia holds 11.86 million CP1 CERs, 4.8 million more than a week ago.

One trader said other waste companies had expressed interest, and a handful of Australian trading firms involved in the market, including Carbon Financial Services, COzero, Perenia, WeAct and Westpac, collectively hold nearly 2.5 million CP1 CERs.

As part of the landfill owners’ compensation agreement, the CERs will be transferred to an Australian government holding account.

Environment Minister Greg Hunt’s office did not respond to queries about whether the CERs would be used towards meeting Australia’s Kyoto target in CP2, if they would be cancelled, or face another fate.

By Ben Garside, Stian Reklev and Mike Szabo – ben@carbon-pulse.com

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