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ERU price collapses as vote postponed; issuance hits high

13 Dec 2012 16:31:40 | edcm

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The European Commission will propose new rules on emission reduction units (ERUs), it said on Thursday, after it presented a draft text to the Climate Change Committee (CCC). The price of ERUs crashed on Wednesday, as news hit the market that the EU would postpone a long-awaited vote on the future of these offsets in its Emissions Trading System (ETS).

The changes presented by the Commission on Thursday include the following:

• to avoid "double counting" of ERUs, those member states that participate in the ETS in phase II "directly or indirectly" cannot issue credits later than 31 December 2012;

• member states "directly or indirectly" excluded from the ETS in phase II, but covered by it in phase III, may only issue ERUs up to 30 April 2013;

• ERUs from projects cutting emissions before 31 December 2012, that are located in countries which do not have legally binding emissions targets in phase III (2013-2020), such as countries that have not signed up to a second Kyoto commitment period, can be held in the EU's common registry until 30 April 2013 if verified according to the Joint Implementation (JI) track 2 procedures.

"Based on today's positive outcome, a formal proposal will now be finalised by the Commission and submitted to the Climate Change Committee for a vote," it said in the statement. "As soon as it has been submitted, the proposal will be posted on the Commission's ETS website."

Price decline

The latest Commission decision is likely to put more pressure on already-weak ERU prices, after news that the actual vote would be postponed had hit them hard on Wednesday.

The price of the ERU benchmark contract has averaged €2.80/tonne of CO2 equivalent (tCO2e) over the course of the year to date. The average hides that during the first six months of 2012, prices were significantly higher than in recent months. Between January and July, the contract closed at an average price of €3.75/tCO2e, rising as high as €4.90/tCO2e on 27 February.

However, since the end of June, this average has fallen to €1.80/tCO2e as the ERU benchmark has steadily shed value. On 19 October, prices fell below the €1.00 level for the first time.

The contract hit a new low on 12 December, as it closed at €0.30/tCO2e, while the Spot contract closed at an even lower €0.25/tCO2e. These figures reflect a 93% decline in value for the benchmark contract since 1 January.

Regulatory uncertainty

The recent crash is due to the ongoing oversupply, as well as a regulatory response to this which has fuelled uncertainty over the future of these offsets. The EU took the market by surprise last month when it said in a recently published document that it was considering banning the use of these offsets (see EDCM 14 November 2012).

The matter was scheduled to be discussed at a Climate Change Committee (CCC) meeting on Thursday, which had raised market participants hopes that they would have more clarity over the use of ERUs before the start of phase III (2013-2020) of the EU ETS. But late on Wednesday, it emerged that the matter had dropped off the meeting's agenda.

"The CCC [...] will discuss the main features of a forthcoming amendment to the Regulation governing the registry infrastructure underpinning the EU ETS," the Commission said in a statement, making no mention of the previously proposed ERU discussion.

The Commission reiterated, however, that it would not present a formal proposal at this meeting. It has previously emerged that such a proposal and actual vote will now only take place in 2013 (see EDCM 20 November 2012)

Traders polled by ICIS on the day said that this had once again sparked growing uncertainty over the future of these offsets that had crushed demand for ERUs. As a result, prices dropped. Once source pointed out that market participants would sell, and even hold off buying more ERUs as long as the uncertainty persisted, given that they could not be sure that they would be able to use them for compliance beyond 2013. This would also likely prompt a rush to submit joint implementation (JI) projects which generate the ERUs, in a bid to sell them on the market or use them for compliance before a potential ban comes in place, exacerbating the existing oversupply.

"The delay in voting means ERU originators have more time to get supply to the market, which will intensify the frontloading of submissions", said Jeffries Bache analyst Matthew Gray in a briefing note on Thursday.

Five-year issuance record

Meanwhile, the UN Framework Convention on Climate Change (UNFCCC), which oversees the JI mechanism, also on Wednesday published updated figures that show total ERU issuance to have exceeded the 500m mark.

A total of around 504m ERUs has been issued since the start of the JI in 2008, of which the UN issued the majority in 2012. While issuance in the first year stood at only 120,000, this has increased steadily over the course of phase II to 6.0m (2009); 31m (2010); 93m (2011); and 374m (2012). The last year's issuance comprises 74% of the total issuance figure since the start of the JI.

This helped put further pressure on these offsets. The figures also reveal that the lion's share of ERUs, 233m, was issued by the Ukraine over the five-year period. This was followed by Russia's issuance (207m) and 11m by Germany.

"Whether all these units will be used for EU ETS compliance is debatable," Gray said. MLDB

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