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EU mulls further CER restrictions as report slams hydro projects

19 Dec 2011 17:13:36 | edcm

The EU could curb a current carbon credit oversupply through further restrictions on certified emission reductions (CERs) generated under the clean development mechanism (CDM), in a U-turn after ruling out any further quality restrictions as recently as earlier this month.

The surprise move comes after the results of an EU-commissioned report on the integrity of the CDM was unveiled on Friday (see EDCM 22 September 2011).

The report, prepared by the Stockholm Environment Institute (SEI), The Centre for European Policy Studies and CO2logic, found that large hydro dam projects were particularly problematic under the CDM as they failed to cut emissions more than a "business as usual" scenario.

Large hydro dam projects make up a growing share of registered CDM projects, representing around a third of all projects by mid-2011 and are expected to generate 331m CERs next year, around 15% of the total issuance expected for 2012.

The EU will feed the results of the study into the UN CDM policy dialogue, which was launched in at the UN-led climate change summit in Durban, South Africa, earlier this year. "Depending on the outcome of this policy dialogue, we may consider further action in Europe to potentially restrict the use of certain project categories, like we did earlier this year for industrial gas credits," Jos Delbeke, the EU's climate change department's director general, said in a statement on the Commission website.

The EU already places certain conditions on CERs from hydro projects with a capacity above 20MW. Under the emissions trading linking directive, states are obliged to check that the projects meet criteria set out in the 2009 World Commission report on dams, before they approve the imports of these credits into the EU Emissions Trading System (ETS). This has pushed down the price of CERs from large hydro projects in the primary market but not curbed any trading of the credits across EU borders (see EDCM 9 July 2008). A blanket EU-wide ban could instead make it impossible to use certain hydro CERs for compliance, no matter whether a state had previously allowed the import or not.

Weekly issuances surges

According to UN data on Monday, the weekly issuance of certified emission reductions (CERs) increased by 24% to 7.12m credits. This meant week 50 issuance was up 10% on the year-to-date average.

The project awarded the greatest number of CERs was a wind power project in northeastern China, which received 1.1m credits, or 15.7% of the total.

The UN lists project developer EcoSecurities, now owned by JP Morgan, as one of the main parties backing the project.

The latest issuance brings the number of CERs issued in December alone to 21m, while the total for the year now stands at 323m CERs. Last year this time, issuance stood at 123m CERs, or 40%, of the 2011 issuance level by week 51.

The high issuance this year to date has weighed down CER prices in a market which is already bloated with supply. Over-the-counter spot CERs last closed at €4.40/tonne of carbon dioxide equivalent (tCO2e), a €7.50/tCO2e discount compared with the closing price recorded the same time last year.

Background

Only the UN can suspend issuance of CERs. It froze credits from coal projects from the CDM in November, but there are no current curbs on hydropower projects (see EDCM 25 November 2011).

While the European Commission cannot freeze CER issuance, it can strangle supply in the world's largest CER market, the EU ETS. If EU buyers are blocked from using a certain CER, the seller is likely to struggle to find another market. The EU has already blocked CERs from certain large-scale industrial gas projects, and its laws allow it to introduce new restrictions at any time until 2020. It recently said it had no current intentions on blacklisting more CERs, however (see EDCM 6 December 2011). MLDB

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