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Grey CER expiry raises lucrative swap hopes

24 Apr 2012 18:47:35 | edcm

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Many carbon traders are banking on prices for UN-backed offsets ineligible for compliance after this year crashing by as much as 75% in 2012.

But a survey of analysts shows disagreement that so-called 'grey' certified emission reduction units (CERs) will lose such a high proportion of their current €3.95 per tonne of carbon dioxide equivalent (tCO2e) value before the December '12 delivery deadline.

'Green' CERs - those that can be used at any point during phase III (2013-2020) of the EU Emissions Trading System (ETS) - are trading at a premium of €0.38/ tCO2e to grey CERs, according to broker ICAP Energy.

Many expect grey CERs, ineligible for EU ETS compliance beyond phase II, to decouple from green CERs and from EU allowances (EUAs) in the weeks leading up to the expiry of the Dec '12 contract, and to fall as low as €1.00/tCO2e.

That's because "panic selling" is expected to prompt a rush to offload any grey CER surplus before they become ineligible, one trader predicted. A second trader agreed: "In October and November, people will be trying to liquidate [grey CERs]. But at the moment, there's no big scare." In the event of a grey CER price crash, companies under the EU ETS could sell EUAs and buy cut-price CERs for 2012 compliance in April 2013, a third trader said. Such "swaps" were a popular trade in the run up to this year's compliance deadline.

"People are betting on [grey CERs] going down so now they are waiting. What they are betting is for the [EUA/grey CER] spread to widen towards the end of phase II [2008-2012]," the third trader said.

But according to analyst Trevor Sikorski of Barclays Capital, the spread between CER prices for March '13 and December '13 delivery is the best indicator of where the green-grey CER spread will go. It now stands at around €0.60/tCO2e, "a fair assessment of the current difference in value", he said. "While CER prices might well come under pressure, particularly after Dec '12, and that spread might go out, at the moment anything above €0.60/tCO2e is just wishful thinking," Sikorski added.

A second analyst, Matteo Mazzoni of Nomisma Energy, said a price of around €2.00/tCO2e for grey CERs could be seen in November. "Right now, the [green/grey] spread is €0.40/tCO2e, and it's likely to get wider and wider. Green CERs will start to follow EUAs instead of grey CERs. I think it will be past the summer, when new [phase III EU] allowances are sold into the market, that the spread will widen," Mazzoni said.

But analyst Matthew Gray of broker Jefferies Bache disagreed, saying in the run up to the Dec '12 contract's expiry grey CERs could fall to as low as €1.00/tCO2e.

There are limits on using offsets for EU ETS compliance, but most companies have not exhausted their quota for phase II. Widespread use of grey CERs could help make 2012 one of the cheapest years ever for energy and industrial compliance under the EU ETS.

"If you look at CER usage to date, [excluding 2011], it hasn't been as high as it could be under the limits, but that will change for a variety of reasons, and perhaps the biggest is grey CERs," Gray said.

There may still be a small demand for grey CERs from Kyoto-signatories such as Japan after the EU deadline expires. But Australia and New Zealand will ban grey CERs from their emissions trading systems (see EDCM 22 December 2011).

Grey CERs originate from projects breaking down greenhouse gases emitted by the chemical industry. But the EU has banned them from May 2013, because they create a perverse incentive to keep producing the gases in question - N2O and HFC-23 (see EDCM 21 January 2011). VF

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