Price of California emissions offsets could collapse – traders

Market participants suggest the price for Californian offsets could erode further if demand continues to wane and a more cost-effective protocol is adopted, but developers believe there is a rosier path for credits.

A carbon analyst said low allowances prices are hindering demand for offset credits, and mine methane capture (MMC), expected to be approved in spring 2014, could cause offset prices to dip further because of the protocol’s low costs.

“I expect prices between the $4.00 to $5.00 range,” the analyst said. “Coal mine methane is a very cheap protocol.”

An emissions trader added that MMC could bring a glut of offset credits to the market that could cause prices to decouple from allowances. If that happens, the trader said prices could drop.

“I do not know [how low],” he said. “But I think $5.00 is certainly possible.”

Traders said many compliance companies are hesitant about offsets because of invalidation risks and the small amount of savings. But a lower price could cause some companies to take on some of that risk, another trader added.

Offsets are selling in the $8.00-$10.00/tonne range, or a 15-30% discount from the $11.70/tonne (€8.54/tCO2e) price for allowances.

Developers forecast supply gap

A large offset developer said prices are unlikely to collapse because of the small supply on the market.

So far, the Air Resource Board (ARB) has approved nearly 4m offsets, with about half of those credits coming from ozone depleting substances (ODS) projects. The ARB approved an additional 700,000 credits last week for three ODS projects.

The developer said the future price of offsets would likely still be tied to the allowances market price, and the inclusion of mine methane would not alter the supply-demand curve.

“We don’t believe that the addition of MMC is going to close the offset supply gap by enough that offset supply starts to drive pricing,” the developer said.

The American Carbon Registry (ACR), one of two companies who vet offset projects, estimates there could be a 95m supply gap if companies look to use the full 8% limit of offset credits. Mine methane is forecast to provide 25m credits to the market, and a bulk of offsets are forecast to come from forestry, according to ACR.

But traders and brokers do not expect compliance entities to use their full measure of offsets to reach their future obligation, especially if prices stay near the $11.34/tonne floor price for 2014. Dan X. McGraw