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Update: Offset use surges in 2012 to close in on total cap

02 May 2013 16:14:00 | edcm

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(Updated throughout to add information about the length of CERs and ERUs in the market.)

Companies used around half a billion carbon offsets to cover their 2012 emissions the same amount as for all of the rest of phase II in a bid to offload these credits before quality restrictions take effect.

Figures on how many offsets the UN will continue to issue suggest this will inflate the surplus of this kind of carbon credits by the end of the current trading phase and put further pressure on already weak prices.

Polluters have handed in just over a billion carbon offsets to cover their emissions in phase II (2008-2012) of the EU emissions trading system (ETS), EU data published on Thursday shows, leaving little demand for these credits in phase III (2013-2020).

The data shows that operators have used around 1.059bn certified emission reductions (CERs) and emission reduction units (ERUs) combined over the five years of phase II.

The cap for offset use is set at 1.6bn for both phase II and phase III. Companies can now only surrender 541m for compliance over the next seven-year period.

The surge in offset use in 2012 means operators covered almost a third of their 2012 compliance needs.

ERUs accounted for just over half the 2012 surge in offset use, in contrast to previous years when more CERs have been handed in. Out of the total 503m offsets used for 2012 emissions, 284m were ERUs compared with 219m CERs.

The figures are in line with market expectations, as companies were due to maximise the use of carbon offsets for compliance with 2012 emission caps to minimise the risk of keeping them on their books.

This is because of the combination of record low offset prices and quality restrictions, which kick in as of the next 2013 compliance date in April 2014. Experts say the high use of offsets in phase II, along with a huge oversupply, would push these credits on to the sidelines of the carbon market in phase III (see EDCM 1 May 2013).

Market length

The volume of offsets predicted to come onto the market in phase III clearly outstrips the remaining share of their cap within the EU emissions trading system (EU ETS).

CER issuance is expected to reach 2.41bn in 2012 alone, with a total of 11.65bn CERs due to be issued by 2020, according to figures from UN-backed research body UNEP Risoe.

In the first 17 weeks of 2013 alone, cumulative CER issuance came to 168m, UNFCCC figures show. This has brought total CER issuance to date to 1.305bn.

That means the market is already heavily oversupplied and that its length is likely to grow significantly by the end of phase III.

Thursday's EU figures show that over the course of phase II operators surrendered 676m CERs and 383m ERUs.

As operators have now used only around half of the issued 1.3bn CERs over the course of phase II, this leaves a 642m surplus CERs in the system. And as EU ETS companies are only allowed to use another 541m by 2020, against a projected CER issuance of 11.65bn, the market could be oversupplied by as much as 11.1bn CERs.

Existing ERU length and additional ERU issuance will compound the problem.

No predictions for ERU issuance are available at present, however, because the future of these credits is unclear. The high use of ERUs in 2012 in particular is a response to a European Commission proposal to ban this type of offset from projects registered after 31 December 2012 (see EDCM 29 October 2012).

UNEP Risoe senior scientist Jorgen Fenhann, who has most recently updated the CER and ERU data, said the body has suspended updating the ERU data after 2012 on the back of this political uncertainty at EU level as well as elsewhere.

"There is nothing going on in Russia, and they have a lot of issuance left," he said. "People don't tell the UNFCCC what's been issued to date so it's impossible to make a prediction [as to what will be issued by 2020]."

But by the end of 2012, 1.34bn ERUs had been issued, according to UNEP Risoe figures. This means that the length of the ERU market grew by 1.055bn in the final year of phase II alone. Marie-Louise du Bois

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