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Offset prices in 2013 and prospects for 2014: ERUs

31 Dec 2013 10:07:21 | edcm

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Offsets cost only a fraction of their 2012 price in 2013, as emission reduction unit (ERU) prices in particular crashed to a record low.

The fall was mainly due to the glut of offset credits as well as the uncertain status that has plagued ERUs in 2013.

ICIS data shows that the benchmark contract closed on average 92% lower in 2013 than in 2012, at €0.22/tonne of CO2 equivalent (tCO2e) compared to €2.69/tCO2e.

While the contract started the year at a €0.45/tCO2e, it quickly dropped to around €0.10/tCO2e later in January – around the time that the EU’s industry research and energy committee (ITRE) came out against measures to reduce the oversupply in the EU emission trading system (ETS).

But demand for ERUs remained lacklustre throughout the year, with utilities rejecting the option of reducing the supply of offsets ( see 22 March 2013 ) and as a question mark hovered over their eligibility for months.

Eligibility

In September, the EU delayed eligibility confirmation of around 80% of emission reduction units in the bloc’s ETS ( see EDCM 17 September 2013 ). This extended the uncertainty over the status of “pending/ineligible” credits that hampered liquidity and capped demand-driven price support for ERUs in with only months to go before the compliance deadline in early 2014.

The check concerned ERUs issued by non-EU countries before 2013, to determine whether they are eligible under the ETS rules: ERUs from projects in countries lacking post-2013 legally-binding reduction targets are only eligible if they represent pre-2013 emission cuts.

When the Commission finally did mark millions of ERUs as eligible for compliance in the EU ETS it had little price impact. This reflected the lack of demand for these credits and that even if some had been declared ineligible, a surplus of offsets would have persisted – while the exact figure of how many ERUs now once again are eligible was unavailable from the EU.

Outlook

Failure at UN-level to update the rules governing ERUs in 2013 could help stem the rise in supply in 2014.

While ERUs are offset credits that can be used to comply with the EU ETS, they are issued either for project-based emission reductions or by converting an equivalent number of tradeable Kyoto credits, so-called assigned amount units (AAUs). Under UN rules, ERUs are only issued in countries deemed to have economies in transition by the Protocol, many of which are in eastern Europe - most notably Russia and Ukraine.

AAUs were issued to signatory countries of the Kyoto Protocol in line with the emission levels signed up for under the first (2008-2012) commitment period. Because industrial output has fallen since the start of the global recession in 2008, and amid an over-allocation, countries have accumulated an oversupply of AAUs. The AAU surplus has prompted many signatories to convert these credits into ERUs that can then be sold on the secondary ETS market.

However, under the current system, AAUs from the first commitment period cannot be exchanged for ERUs generated by projects after 2013.

Only AAUs handed out to countries that have signed up to a second commitment period are eligible for such an exchange. If the rules are not amended, annual ERU supply in 2014 and 2015 will be much lower than the issuance in the first Kyoto commitment period (2008-2012). This offers a more bullish picture for these credits in the coming year. Marie-Louise du Bois

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