EU ETS emitters converted some 255.64 million UN-backed carbon credits into EU allowances over the year to April, more than double the amount exchanged a year earlier, according to data published on the European Commission’s website late on Monday.
The Commission said a total of 388.44 million credits had been exchanged by EU firms over the two compliance years since the conversion became possible, indicating that companies had opted to convert far more to cover 2014 emissions than when they swapped 132.8 million a year earlier.
The data indicates that companies have surrendered slightly more offsets against 2014 emissions than the 225-250 million analysts were expecting and means companies have up to now likely handed in 1.5 billion of the market’s estimated total usage limit of just over 1.6 billion between 2008-2020.
Annual offset use data is closely watched by EU market participants as it could impact the amount of EUAs in circulation. A higher-than-expected use of offsets this year could be slightly bearish for EUAs because it would mean there are more of the allowances outstanding.
However, several analysts and traders have told Carbon Pulse they do not expect a major impact on either EUA or offset prices as a result of the data this year, partly because the market is already so vastly oversupplied by more than 2 billion EUAs.
In a bid to limit costs, EU ETS rules entitle firms to use a limited number of offsets (CERs or ERUs) to meet their annual compliance obligation.
Yet, 2014 was the last compliance year it was possible for companies to surrender offsets issued to carbon-cutting projects for emission reductions made before 2013, which still represent the vast majority of credits in circulation globally.
This meant prices for offsets credited for pre-2013 reductions dropped to near zero ahead of the March 31 compliance deadline, while post-2013 units trade near €0.50, making it more attractive for companies to turn in a large chunk of their remaining offset limit using older credits to cover last year’s emissions.
EU ETS companies can make considerable cost savings by making the maximum use of their offset provision as EUAs currently trade at around €7.60 each.
Campaign group Sandbag pointed out that last year’s offset use was so heavy that it almost cancelled out the EU’s attempt to revive the ETS via backloading, which saw 400 million EUAs withheld from sale over 2014 in a bid to push prices high enough to drive more low carbon investments.
“The failure of the backloading decision to tackle the over-supply crippling Europe’s carbon market should serve as a stark warning against timid new fixes to the scheme,” said Sandbag’s Damien Morris.
UN offsets are generated by projects that reduce greenhouse gas emissions in countries mostly outside Europe.
The Commission data showed that over 82% of the offsets exchanged over the past two compliance years were from projects in China, Ukraine and Russia.
Environmental campaigners Carbon Market Watch have said this undermines the EU’s aim of encouraging the use of units from only the poorest nations while restricting access to credits from more advanced economies with more capacity to pay for their own emission reductions.
From 2013 the EU banned the use of credits from newly registered projects unless they were located in Least Developed Countries, but this had no effect in stimulating new investment as ETS firms have been able to cover almost all their remaining offset limit using credits from schemes already running in richer nations.
By Ben Garside – firstname.lastname@example.org