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CER price crash undermines CDM, German data show

21 Nov 2012 17:52:38 | edcm

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Governments will have to take radical steps to safeguard the future of the Clean Development Mechanism (CDM), the German GIZ climate protection programme on behalf of the environment ministry suggests, as the price of certified emissions reductions (CERs) has fallen below levels that provide an economic incentive for clean development projects.

Countries will meet to discuss the future of the CDM at next week's Doha summit.

"In October, for the first time ever, CER prices have fallen below [€1]," the GIZ noted.

According to ICIS data, the CER benchmark first fell below €1.00 per tonne of CO2 [tCO2e] equivalent on 23 October.

While briefly rising above €1.00/tCO2e on three subsequent occasions, the price has averaged €0.93/tCO2e over the period. On Tuesday, it closed at €0.80/tCO2e.

"This means prices are currently able to roughly cover transaction costs for project registration and issuance," the GIZ said.

But the low secondary price is expected to have knock-on effects on future offset supply to the EU Emissions Trading System (ETS).

"This decline undermines trust in carbon markets, and will surely not mobilise new additional CDM projects that really depend on CER revenues," the GIZ warned. It added that, at the upcoming Doha summit, policy-makers have to choose between providing "serious demand for CER or whether to further ignore the demise of the CDM market".

On Tuesday, researchers at the Stockholm Environment Institute called for tighter restrictions on CDM projects, to cut up to 67% of the oversupply (see EDCM 20 November 2012).

The low price has been driven by weak demand, on the back of Europe's economic woes, but project developers scrambling to register projects ahead of new quality restrictions under the EU ETS's Phase III has also exacerbated it.

As of 2013, or the start of Phase III, only CERs generated from projects registered in least developed countries (LDCs) will be allowed in the ETS. However, CER issuance from projects registered elsewhere before the deadline will still be eligible. This has sparked a last-minute rush to register CDM projects, most of which have historically been based in India or China.

While the number of new project submissions has started to ease off, as the deadline might now be too close to complete the registration process before the end of 2012, registrations continue to rush in, the GIZ highlighted. The United Nations Framework Convention on Climate Change (UNFCCC) has hired additional staff to deal with the surge and avoid a registration backlog.

European demand for offsets is expected to remain sluggish, but demand from other emissions trading systems around the globe could help boost prices within the EU ETS.

New Zealand is expected to retain rules that allow an unlimited use of CERs for compliance, while China plans to pilot its regional ETS by the end of next year, having published guidelines on offsets earlier this year.

These outline China Certified Emission Reductions (CCERs), or voluntary offsetting, and are similar to the guidelines for UN CERs, according to the GIZ.

The oversupply could also grow if new types of projects are included in the CDM, but this is unlikely at current low prices.

The unsuitability of carbon capture and storage (CCS) for the world's LDCs, for instance, also means that the EU ETS is unlikely to see an influx of credits from such projects (see EDCM 28 May 2012). The GIZ also pointed out that the EU remains against the inclusion of carbon capture and storage projects in the CDM, which could see it introduce further quality restrictions for CERs in the EU ETS if needed, "due to the lack of incentives for good practice operation of sites, and due to the simplification of liability requirements". MLDB

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