More than twice as many new carbon credits were supplied to the world's second-biggest emissions market this year, damping prospects for a recovery from record-low prices in 2012.
The UN Clean Development Mechanism will generate a record of about 320 million Certified Emission Reduction credits in 2011, up from 132 million last year, according to data compiled by Bloomberg. While a 62 percent drop in UN prices may discourage new supply, Bloomberg New Energy Finance cut its 2012 price forecast this month as it estimated the glut of so-called CERs will be bigger than previously estimated.
"The outlook for the CDM is quite gloomy," said Matteo Mazzoni, an analyst at Nomisma Energia in Bologna, Italy, who estimates 275 million tons of CERs will be issued next year. "We believe there's going to be a sort of slowdown given current, unattractive prices," he said by e-mail.
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A surge in CERs from projects that destroy industrial gases known as hydrofluorocarbon-23 and nitrous oxide has led to a supply glut this year. The European Union will stop recognizing most of this category in May 2013, prompting investors to issue credits to beat that deadline just as Europe's debt crisis and a UN climate summit that failed to boost demand before 2015 exacerbate the bearish outlook for global carbon markets.
CERs fell to a record low of 3.80 euros ($4.92) on Dec. 14, a 60 percent decline in 2011 for the contract that expired earlier this month on the ICE Futures Europe exchange in London. CERs for delivery in December 2012 rose 3.7 percent to settle at 4.22 euros after reaching a low of 3.84 euros on Dec. 14.
Allowances in the EU, which lets 11,000 power stations and manufacturers in the world's biggest emissions-trading system use as many as 1.7 million UN offsets through 2020, are poised for a 50 percent drop this year on ICE. They rose 0.3 percent today to 7.28 euros.
Created in 2005, the CDM is the UN's main market tool for encouraging investment in pollution-cutting projects, such as using waste to make electricity and eliminating flaring of natural gas. The program allows richer nations to "offset" their emissions produced at home by paying for cleaner technology in emerging markets.
Investors in these projects get CERs they can sell to companies and governments that are bound by pollution caps. While the EU is the largest market for UN offsets, Australia will allow emitters to use CERs for as much as half their emissions starting in 2015.
Falling Prices
New supply of CERs may drop 13 percent to about 280 million tons next year as falling prices prompt developers to delay seeking credits from the CDM Executive Board based in Bonn, the regulator, according to Orbeo, the Paris-based joint venture of Societe Generale SA and Rhodia SA that trades emission credits.
"For 2012, we expect CER issuances to be below the amount of 2011," said Carine Hemery, a strategist with Orbeo. "CER price levels should limit the interest in requesting for issuance."
Even if the supply of CERs grows more slowly, the market is in danger of having more credits than emitters will demand through 2020, New Energy Finance analysts led by Guy Turner and Matthew Cowie said in a Dec. 22 report. The analysts cut their 2012 price forecast to 5.70 euros a ton this month from last month's estimate of 7.90 euros, as demand for credits declined at a time when supply is still increasing.
"If supply keeps rising due to projects entering the CDM pipeline, we expect to be approaching the tipping point on an oversupplied market where existing supply will be more than enough to satisfy global demand," according to the New Energy report.
Officials from almost 200 nations agreed on Dec. 11 at UN climate talks in Durban, South Africa, to seek a global climate- protection deal by 2015, with the participation for the first time of the U.S., China and India. Until that agreement is reached, it's not clear whether there will be much demand for emission offsets outside Europe, Australia and New Zealand.
The average price for CERs was 12.11 euros in the first half of 2011, making investment in cutting emissions more profitable than now. It usually takes at least six months for credits to be issued once projects are submitted, UN data show. Each CER credit corresponds to the equivalent of one ton of carbon dioxide avoided.
Issuance of credits linked to the reduction of industrial gases hydrofluorocarbon-23 and nitrous oxide are set to rise before the EU ban, even as the overall new supply falls next year. This sub-category of offset projects, known as HFC-23 and N2O, accounted for 64 percent of all CERs issued through the end of 2011, according to Bloomberg calculations using UN data. They also represent 81 percent of all CDM credits used for compliance in the EU carbon market from 2008 through 2010.
EU Ban
The 27-nation EU decided last year to prohibit the use of HFC-23 offsets and N2O credits linked to adipic acid as of May 2013. The European Commission, the bloc's regulatory arm in Brussels, has said the credits offer "exorbitant" return rates, can create a "perverse incentive" for investors and undermine the market's environmental integrity.
Total supply of offset credits in the nine years through 2020, including those from the smaller Joint Implementation program, will be 4.7 billion tons, according to a Nov. 14 forecast by Barclays Capital analyst Trevor Sikorski. Demand, including that from the EU carbon market, will be 3.2 billion tons, leaving an oversupply of 1.5 billion tons, he said.
Credit supply may surge to a record next year, said Per Lekander, an analyst for UBS AG in Paris. "CERs will not go back to the 2012 level for a long time, if ever," he said by e- mail. "I have an estimate of 360 million tons total CERs for 2012. I think it is credible, possibly on the low side."
Bloomberg New Energy Finance forecast Dec. 22 that CER prices will be 6.34 euros a ton in 2020, compared with 51.93 euros a ton for EU permits.
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