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Carbon offset trade moves to OTC as exchange fees outstrip prices

01 Feb 2013 19:07:45 | edcm

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As the price of offset credits has plummeted to historic lows, market participants have raised the possibility that the carbon products could return to being traded over the counter (OTC) only because the cost of exchange fees increasingly outstrips their value.

Both certified emission reduction (CER) and emission reduction unit (ERU) prices were under pressure in 2012 and have remained so in early 2013 on the back of a large oversupply, with no sign of recovery on the horizon (see EDCM 28 December 2013).

In January, the benchmark CER 2013 price averaged €0.38/tonne of CO2 equivalent (tCO2e), down from an average of €3.76/tCO2e in January last year, ICIS data show.

As for ERUs, last month the average price of the benchmark was €0.24/tCO2e, significantly below its average of €3.66/tCO2e in January 2012, according to the data.

As prices for both CERs and ERUs have collapsed, the January spread between their respective benchmarks remained relatively stable year on year.

CERs' usual premium over ERUs averaged €0.10/tCO2e in January 2012, while last month its average was €0.14/tCO2e, the data reveal.

This state of affairs has led some on the market to speculate that the inevitable consequence is the emissions credits' retirement from exchanges as interest in them has nosedived along with their prices.

"We think it is only a matter of time before these products are removed from the exchanges and traded solely on a bilateral, over-the-counter basis," Jeffries Bache carbon analyst Matthew Gray said in a research note this week.

Mixed expectations

Both the EEX and ICE exchanges dismissed the view that they would suspend the credits but traders' views on the matter varied.

"I don't think they are going to remove them from the exchange," one said, adding that the credits' current low prices make it difficult to pay for investments. "But, still, I believe traded volumes will continue to drop as people will gradually lose interest in them," he said.

Another source said the exchanges could consider scrapping the products once liquidity hits zero, adding that ERUs in particular could return to being traded OTC only. "The cost of clearing relative to the price of asset is quite significant [as the price has plummeted], so maybe [they will consider removing ERUs and CERs]," he said.

A third source said: "The reality is there is already very little trading on these products."

A fourth said the uncertainty surrounding the products because of low prices and perceived regulatory risk could depress the already poor interest even further.

Spot trading fee cut

Meanwhile, EEX said on Friday it would cut transaction fees for the trading and clearing of carbon on its spot market in a bid to attract activity to its secondary carbon products.

The exchange halved the fee from €6.00/1,000 tonnes of CO2 to €3.00/1,000 tonnes of CO2 with immediate effect. However, it is still significantly higher than the value of the CER and ERU benchmarks, which closed at €0.35/tCO2e and €0.15/tCO2e respectively on Friday.

The German exchange said the new flat fee covers all spot products - EU allowances, EU aviation allowances and both green and grey CERs. Transaction fees for the auction are not affected by the change. MLDB/SM

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