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The year in review: Offsets

28 Dec 2012 14:55:52 | edcm

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Prices of offset credits such as certified emission reductions (CERs) and emission reduction units (ERUs) crashed in 2012, and were even relatively weaker than the low EU allowance (EUA) prices. The most important developments for the offset market this year included:

CERs crash

The CERs benchmark contract shed 87% of its value, during the course of the year, ICIS data shows.

Between the start of December 2011, when the December 2012 contract became the benchmark, and the end of November 2012, when it expired, the contract went from closing at €5.25/tonne of CO2 equivalent (tCO2e) to €0.70/tCO2e.

At its highest, the contract closed at €5.30/tCO2e on 20 December 2011, but fell as low as €0.70/tCO2e on a number of occasions in November 2012.

The average closing value for the contract over the 12-month period was €3.19/tCO2e, the data show, which is 69% lower than the 2011 benchmark average of €10.34/tCO2e.

The 2012 average is also the lowest of all the phase II (2008-2012) years, which stood at: €12.46/tCO2e (2010); €11.91/tCO2e (2009); and €17.60/tCO2e (2008), according to ICIS data.

ERUs crash

Similarly, the ERUs benchmark contract shed €4.75/tCO2e of its value, or 92%, over the course of the year, ICIS data shows.

Between the start of December 2011, when the December 2012 contract became the benchmark, and the end of November 2012, when it expired, the contract went from closing at €5.15/tCO2e to €0.40/tCO2e.

At its highest, the contract closed at €5.25/tCO2e on 9 and 20 December 2011, but consistently fell below €1 as of 19 October 2012.

The average closing value for the contract was €3.02/tCO2e, the data show, which is 68% lower than the 2011 benchmark average of €9.42/tCO2e.

Quality restrictions

Experts have called on the EU to ban large-scale power projects from the Clean Development Mechanism (CDM) to cut the existing oversupply of offset credits, which was built up over the course of phase II of the EU Emissions Trading System (ETS), and restore the mechanism's environmental integrity.

The EU has previously suggested it could curb the oversupply through further restrictions on CERs, even if the UN does not introduce additional quality restrictions, after an EU-commissioned report criticised large hydro projects for failing to cut emissions beyond a "business as usual" scenario. 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 that were set out in the 2009 World Commission report on dams before they approve the imports of these credits into the EU ETS.

An EU-wide ban could instead make it impossible to use certain CERs for compliance, no matter whether a state had allowed the import.

LDCs

This was the last year for CERs from CDM projects registered in countries such as China to be eligible for use in the ETS.

The EU has introduced quality restrictions on CERs for phase III of the ETS, meaning only credits from CDM projects registered before 2013, or located in least-developed countries (LDCs) when registered after 2012, can be used as offsets in the ETS.

COP

Negotiations during the UN Framework Convention on Climate Change in Doha, Qatar, in November 2012 delivered only marginal progress.

Most importantly, the EU affirmed its commitment to participate in a second Kyoto period, running from 2013 to 2020, parallel to phase III of the ETS, but noted that the parties that have signed up account for only 14% of global emissions.

The parties also committed to an extended year-long work programme on long-term finance, which will try to identify $100bn (€75bn) in climate aid already pledged by developed countries to developing ones, over the course of phase III.

And countries agreed to meet under UN auspices in Poland at the end of 2013 to discuss setting up international mechanisms to address the cost of climate change to developing countries.

In addition a 2013 work plan and actions to potentially increase the ambition of 2020 reduction targets is to be adopted.

Global market

Australia and the EU have agreed to link their carbon markets in phase III of the EU ETS. They are the world's largest carbon markets.

Australia is expected to allow a maximum of 50% international offsets as of 2015 and to introduce quality restrictions on credits similar to those imposed by the EU, but not limit them to being sourced from LDCs. This would provide a market for CERs from, for instance, India and China, where the majority of CDM projects are based.

New Zealand is expected to allow an unlimited number of international offsets, but introduce similar restrictions on them as Australia.

ERU rules change

The European Commission has proposed new rules on ERUs that say to avoid "double counting" of ERUs 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 that 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 track two procedures. MLDB

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