Hungarian recycling intensifies CER risk
Moves by national governments to sell retired certified emission reductions (CERs) instead of assigned amount units (AAUs) could slap an extra risk discount on secondary CERs, carbon market analysts and investors said on Friday, following news that Hungary had carried out one such deal. The CER discount had started to widen already on Friday in response, ICIS Heren data show.
Hungary has sold 2m CERs to a Japanese buyer for €15m, or €7.5 per tonne of carbon dioxide equivalent (tCO2e).
These CERs were originally submitted for compliance with the EU Emission Trading System (EU ETS) by private Hungarian companies. However, the government - as the administrator of the registry - can choose to cancel AAUs, instead of CERs, in order to comply with the EU ETS cap.
Hungary struck the deal on the condition that the Japanese buyer would not sell the CERs back to Europe.
But this has not reassured traders that the credits will not find their way back to the EU ETS, where they would be rejected by the Commission. To avoid double-counting, Brussels does not allow the same CER to be surrendered twice for compliance, and has software to flag this up if it happens.
Traders, in contrast, currently have no easy way of checking if a credit has already been retired once. This means they risk ending up with a CER that cannot be used for EU compliance - putting its market value in line with depressed voluntary credits.
"Potential recycling of any type of carbon credit would be a real problem in the market. Traders and buyers may have to individually trace the provenance of every carbon credit right through the supply chain, which would effectively kill market liquidity," Geoff Sinclair, head of carbon trading at Standard Bank, told ICIS Heren.
The European Commission has now started to publish an Excel spreadsheet showing retired CERs and emission reduction units (ERUs), updated on a weekly basis (http://ec.europa.eu/environment/climat/emission/pdf/100203_cer_eru_surrendered.xls).
But traders were unimpressed by this solution. "[The EU] has to close this loophole, and this idea of an Excel spreadsheet is nonsense. Am I suppose to check every single ID number against this list?" one participant asked.
Trevor Sikorski, a carbon analyst from Barclays Capital, said that it would now be up to exchanges to filter out any recycled CERs, in the same way that they filter out other credits that fail to meet EU criteria: "Without such guarantees, you may see CER trade moving off exchange and back into the bilateral market, as it will be easier to cover you from the risk of unwittingly taking such CERs for delivery."
Patrick Birley, chief executive of the main carbon futures platform, ECX, wrote in an email that the exchange would disallow these credits on a similar basis to CERs from large hydro projects (also barred by the EU).
Market participants are now braced for a dip in both CER prices and liquidity. How serious this would be depends on whether more countries follow Hungary's example, they said.
"If this becomes normalised, it could be a very serious problem," said Miles Austin, head of the Carbon Markets & Investors Association (CMIA).
A trader added: "It is all right if you use an exchange with a filter, but what about [over-the-counter] OTC trading?"
The EU has so far not commented on whether it will move to close down the CER loophole. Jos Delbeke, head of climate action at the Commission, only said that he was "concerned about the government sale of CERs previously surrendered by companies in the EU ETS", but added that these kinds of sales are allowed by the Kyoto Protocol. IS
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