Large emissions offset swap likely for compliance year 2014 but quota set to remain

A significant number of international emissions offsets could be swapped for standard European carbon permits for compliance year 2014, but some of the quota is likely to remain for use in coming years, according to analysts.

Compliance players in the EU emissions trading system (ETS) are able to use offsets such as certified emission reductions (CERs) and emission reduction units (ERUs). However, there is a maximum cap on offset use and they need to be swapped for standard EU emission allowances (EUAs) for compliance use.

Analysts polled by ICIS varied widely in their predictions of how many offsets would be swapped for EUAs during 2014. Italian-based Nomisma Energia expects 80m offsets to be exchanged, ICIS analysts Tschach Solutions forecast 127m, while Thomson Reuters Point Carbon expect 200m-250m.

A total of 133m offsets were used in 2013 out of a quota of 542m-642m available in phase III of the EU ETS from 2013-2020.

Swap deadline

A high number of international offsets could be swapped for EUAs for compliance year 2014 ahead of a rule change deadline. Offset credits which concern projects leading to emissions reductions before 2013 will no longer be eligible for use in the EU ETS after 31 March.

Using the offsets in 2014 could meet the rule change deadline, minimise risk related to potential changes to the offset-EUA spread, while still offering reduced compliance costs.

“It lowers the number of EUAs they’ll need to buy so it will be cheaper for compliance and the transaction comes without any risks,” Hege Fjellheim, senior policy analyst at Thomson Reuters Point Carbon, said on Thursday.

The benchmark EUA contract settled at €7.12/tCO2e on Thursday, according to platform Intercontinental Exchange’s data. This was significantly more than the €0.46/tCO2e for the December ’15 CER, so a straight swap under EU ETS rules could reduce compliance costs by 15 times.

Better spread opportunities

But other analysts had expectations for a larger amount of offsets to be kept for later in phase III.

Some market participants may also be locked into longer-term CER contracts, offset specialist at Tschach Solutions, Judith Schroeter, said on Thursday.

In addition, “if you wait the [offset-EUA] spread might be bigger”, Schroeter said.

EUA prices are expected to rise over phase III due to reform of the EU ETS to better manage supply in an oversupplied system.

EUAs could hit €21.00/tCO2e by 2020, according to a forecast from London-based analysts Energy Aspects in November 2014. Under this projection, a market stability reserve buffer mechanism would start in 2017 and 900m temporarily delayed auction supply would go into the reserve.

The reserve is still being debated by the EU and its implementation and parameters are not a given.

A total of 157m offsets had been swapped in phase III, according to the latest EU update in November 2014 (see EDCM 5 November 2014). Ben Lee