ERUs remain bearish as EU waters down ban proposal
The latest announcement from the European Commission on the use of emission reduction units (ERUs) within the EU Emissions Trading System (EU ETS) has had a bearish effect on the offsets market, with the benchmark ERU 2013 declining from €0.55/tCO2e to €0.15/tCO2e last week.
On an annual basis, in January 2012 the ERU spot averaged €3.74/tCO2e according to ICIS assessments. In contrast, during January 2013, the contract has averaged €0.10/tCO2e so far, a decline of 97%.
The decline in ERU values owes itself directly to the prevailing regulatory uncertainty regarding the use of ERUs within the EU ETS, observers say, as successive changes have undermined confidence in the products.
Last week, the European Commission submitted its latest proposal to the Climate Change Committee (CCC) regarding the use of ERUs. The document outlined that ERUs from projects located in countries without legally-binding emission reduction commitments would be eligible for use in the EU ETS as long as they represented emission reductions verified as having taken place before 2013.
This follows on from an announcent by the Commission in December that the aforementioned ERUs from countries without legally-binding targets would be eligible, as long as they were issued by 30 April 2013 (see EDCM 13 December 2012); even though in October there had been talk of banning wide bands of ERUs altogether.
All of this has added to the existing regulatory uncertainty in the market.
The International Emission Trading Association (IETA) on Wednesday called for more clarity on the practical impact of the new proposed rules to avoid price volatility and confusion within the market (see EDCM 16 January 2012).
Voting on the latest proposals will take place on 23 January. Should the amendments be voted for, the changes will be implemented into the EU ETS after three months unless the European Parliament or the Council raise any objections.
Last week's bearishness comes after a bullish period in November. The Commission's first mention of banning ERUs encouraged a spike in prices in the offsets market pushing spot ERUs to an average of €0.60/tCO2e. However the contract has since lost 81.7% of its value when compared to the January-to-date average, as the Commission has weakened its stance on the eligibility of ERUs.
The decline in prices since November has also seen a decline in the spread between the spot certified emission reductions (CERs) and spot ERUs - from €0.31/tCO2e in November to €0.10/tCO2e this month. Likewise, traders told ICIS that there had been an increasing interest in CERs instead with the future of ERUs constantly changing.
With ERU prices remaining firmly in negative territory during 2012 and this trend set to continue into 2013 despite the upcoming vote next week, questions on the profitability of investing in Joint Implementation (JI) projects remain.
Although it depends on the type of technology used to generate ERUs, one project developer said that prices would need to be at least €0.50/tCO2e to make JI projects a worthwhile enterprise. "If you only talk about the cost to get ERUs issued the ERU prices should at least be above 50 cents, but to justify a new investment in a project you are talking about much higher numbers. This ranges from €1.00/tCO2e to €30.00/tCO2e depending on the type of investment (i e HFC or energy efficiency)," said Lennard de Klerk, Chair of the JI Action Group (JIAG), an industry group.
"It is very hard to be bullish on ERUs. At the moment, I cannot see any reason to for ERU prices [to be] much higher than today," said one carbon analyst, who added that the market was still reeling from the recent amendment to the EU proposal which meant that more Russian ERUs will be eligible in the EU ETS than previously thought.
"ERU prices have suffered for a while, but the latest negotiations at EU comitology level have certainly played a role. I do not see any meaningful price incentives at the moment for JI investments. Probably more important than the spot price signal is the regulatory limbo that we are facing for JI projects," said Moritz von Unger, Director of Atlas, an environmental law advisory firm.
"Coming up with a financial plan for future investments is hardly possible at the moment. This being said, we should all keep an eye out for new systems, including in places that so far have not been very active in the area of emissions trading, such as Kazakhstan. JI or the JI format may become increasingly relevant here," he added. CR
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