The Anatomy of the CER Price Melt Down

July 28, 2011

Some 6 weeks ago the price of a CER (certified emission reduction created from reducing greenhouse gas emissions in developing countries using the CDM or clean development mechanism of the kyoto protocol) was 13 Euro and the emissions markets were looking healthy.

Then a matter of couple of weeks later a CER was fetching 9 euro. Why the rapid and precipitous meltdown in prices?

Simply the market rapidly lost its liquidity after a series of events starting with renewed concern as to the sovereign debt of the so called PIGS Portugal, Ireland, Greece and Spain, and the likelihood of defaults. Soon after that the EC issued a directive on energy efficiency targets. Simple analysis of this meant that companies meeting these targets would not need as many CER to comply with the EUETS restrictions.

Combining this with the German markets being on summer holidays the market reacted negatively. Soon brokers stop loss triggers started to intervene and the market flooded with CER as speculators dumped CER in the face of large losses. This overreaction cascaded into a slump that went below 9 euro. Then the EC announced any energy efficiency targets would be designed not to damage the carbon markets and the market  according to sources bottomed.

Since finding the bottom CER have traded in two tight ranges between 9-9.20 Euro and peaked at 10.50 Euro. Further announcements of substantial CER issuances coming to the market have dampened demand. December 2011 and December 2012 CER sit around 9.80 as of the 27th July 2011.

The effect on the NZETS has been swift. Coupled with a strengthening dollar the NZETS has seen NZU prices fall to the low $16 range before recovering. CER have become very attractive to buyers as they can be purchased as an option for delivery in March 2012 thereby reducing holding costs. The down side of course is an exchange rate risk but this can be managed. Foresters all expecting $20 or more are way out of the money. Should those post 1989 owners who sold for $22 be buying back and covering their risk?

How are other buyers and sellers reacting? And how are projects being held up in the face of slumping prices?

Whilst China has a floor price at which CER are not to be sold the floor changes depending on the type of CDM project, for instance biomass CER floor price is 10.50 Euro. Whilst the lowest floor of 8.50 Euro was not breached it would not in our opinion have mattered as the trading was triggered by stop loss orders and not any real rational response.

Buyers that EITG and its consortium partners are working with continue to offer long term off take contracts. These contracts ameliorate risk by providing fixed floor prices of 7.50 and 8.50 euro with purchase at varying discounts to market in staged tranches. Project developers entering into these contracts can in effect fix their down side and keep the upside paying small premium to market.

Project developers are slow to take up such offers as they appear greedy for all the CER income. This of course tests the fundamental concept of whether their projects are actually additional? Would the project have happened without the carbon credit income? If the developers can take all the price risk of the CER price you have to ask the question in EITG opinion.

Realistically smart project developers, including those working with EITG are using our expertise in structuring and managing risk with our consortium partners are entering into these type of fixed off take contracts. In certain cases as a further inducement buyers are reimbursing project development costs when certain milestones are achieved. This further reduces project developer risk.

As a world leader in managing risk from plantation forestry carbon credits via its carbon pool system EITG has been extending this philosophy to its ever expanding CDM portfolio on 3 continents.


Identifying the 500 Entities Liable Under the Australian Carbon Scheme

July 12, 2011

The Carbon Pricing Mechanism is expected to cover around 500 businesses operating in Australia.

Which companies will be required to pay a carbon price?

Most are companies operating large facilities (with over 25,000 tonnes annual CO2-e emissions) that directly emit greenhouse gases, such as power stations, mines and heavy industry. Some are public authorities responsible for emissions from landfills.

Of these businesses, it is estimated that around:

  • 135 operate solely in New South Wales and the ACT
  • 110 operate solely in Queensland
  • 85 solely in Victoria
  • 75 solely in Western Australia
  • 25 solely in South Australia
  • 20 solely in Tasmania; and
  • fewer than 10 solely in the Northern Territory.
  • a further 45 liable entities operate across multiple states.

Of the 500 businesses:

  • around 60 are primarily involved in electricity generation
  • around 100 are primarily involved in coal and other mining
  • around 40 are natural gas retailers
  • around 60 are primarily involved in industrial processes (cement, chemicals and metal processing)
  • around 50 operate in a range of other fossil fuel intensive sectors; and
  • the remaining 190 operate in the waste disposal sector.

It should be noted that these numbers are estimates only, and are largely based on emissions data previously reported under the National Greenhouse and Energy Reporting system. In particular, the number of landfills covered will depend on regulations to be developed prescribing the coverage of smaller (over 10,000 kilotonne) landfills that are in close proximity to covered landfills.

Approximate breakdown of covered entities by state and territory [1]
State Companies operating each state (excluding companies operating in multiple states)
New South Wales & ACT 135
Queensland 110
Victoria 85
Western Australia 75
South Australia 25
Tasmania 20
Northern Territory 5
Operating in multiple states 45

 

  1. Source: Department of Climate Change and Energy Efficiency: National Greenhouse and Energy Reporting data; Hyder Consulting (2008) Options for covering waste facilities under an emissions trading scheme Final report 10 June 2008; state and territory government gas retailing regulations.

Australian Carbon Scheme Press Conference Announcement 10th July 2011

July 12, 2011

Australian Prime Minister Announces the Carbon Scheme

 


Australian Carbon Scheme – Carbon Tax moving to ETS 10th July 2011

July 12, 2011

Australian Carbon Tax

A price on carbon pollution creates incentives for businesses to reduce pollution and invest in clean technologies and clean energy generation. The claim is a market based approach ensures that pollution is reduced at the lowest cost to the economy.

Under the pricing mechanism, around 500 of the country’s biggest polluters will be required to pay for each tonne of CO2 they emit into the atmosphere. Modelling by the Australian Government suggests that this will create economic incentives to reduce pollution in the cheapest possible way. The carbon charge will be revenue recycled into industries at risk, low income families (less than 150,000) and clean energy initiatives. This is intended to transform not only the tax system but the Australian economy triggering a ‘clean energy future’.

Australian Minister for Climate Change and Energy Efficiency, Greg Combet, stated the four key components of Australia’s policy to combat global warming:

  1. Establishment of a carbon price;
  2. Support for renewable Energy;
  3. Support improvements in energy efficiency; and
  4. Store carbon through changed land-use practices.

Key elements of the Australian Carbon Pricing Mechanism

Price

The carbon pricing mechanism will commence on 1 July 2012 with a price that will be fixed for the first three years at AU$23 per tonne indexed to increase at 2.5% per annum.

The carbon tax will transition to an emissions trading scheme, with the price determined by the market.

There will be a price ceiling and floor that will apply for the first three years of the flexible price period. The price ceiling will be set at $20 above the expected international price and will rise by 5% each year. The price floor will be $15 rising annually by 4%.

Coverage

There will be broad coverage from the commencement of the program encompassing approximately 60% of Australia’s emissions (360M t per annum) in the stationary energy sector, transport, industrial processes, non-legacy waste and fugitive emissions.

International linking

There will be international linking to credible international carbon markets and emissions trading schemes from the commencement of the flexible price period (i.e. 2015). At least 50% of a liable party’s compliance obligation must be met through the use of domestic permits or credits (i.e. Australian Carbon Credit Units – ACCUs).

Carbon Farming Initiative – CFI

Subject to a 5% limit during the fixed price period Kyoto-compliant Australian Carbon Credit Units (ACCUs) created under the CFI can be used to meet a compliance obligation under the carbon pricing mechanism.

Carbon Pricing at Work

Benefits of a Carbon Price?

Link to the Australian Government site


Carbon Monitor Volume 16 Issue 6 July – 2011

July 8, 2011

NZETS again Dominated by CER Price

 

Back in late 2010 the NZU price was effectively capped by the price of Certified Emissions Reductions or CER from projects in developing countries. These units were purchased by emitters to cover their NZETS obligations. An arbitrage opportunity arose when the price of a CER climbed above that of an NZU in early 2011 creating a windfall for emitters who sold CER and purchased NZU in effect swapping their compliance units.

 

CER can be used for compliance in the EUETS as well as the NZETS

 

Again the price of a CER has dropped to NZD$19 according to Carbon Match, the new platform for selling and buying NZU units www.carbonmatch.co.nz

 

CER prices dropped with market uncertainty as to future demand from the energy sector the main drivers of the EUETS where CER are regularly traded.

 

Look for this and the exchange fluctuations to create further opportunity for New Zealand emitters and perhaps the occasional forest owner to drive a margin between the two compliance unit prices.

 

European Markets Buoyant then in Freefall

 

European carbon markets have been strong as the fall out from the Japanese nuclear accidents have resulted in Germany committing to shut down its nuclear stations. Projections for summer electricity peak use (based on air conditioners) suggest that wind and solar can take up the slack as needed.

 

In France the pressure to import electricity is driven by the ability to use river water to cool nuclear reactors. A drought will curtail nuclear output and result in a requirement to import electricity.

 

Meantime the Italians voted to reject nuclear power.

 

Recently the Greek crisis along with a number of other factors resulted in a significant drop in EUA prices from 16 Euro down to 12 in a week. With CER falling only 2 Euro reducing the EUA CER spread.

 

 

NZETS Forest Measurement Regime Regulations Announced

In keeping with the consultation the final regulations have been issued for the compulsory field measurement for post 1989 forests.

These regulations apply to participants with more than 100ha of post 1989 forest. The definition of participant follows the associated persons rules modelled on the tax legislation.

That means an aggregate 100ha triggers the obligation to undertake compulsory field measurements once ever commitment period, and in this case before 2012.

MAF supplies details of the sample plots and the forest owner is required at their cost to supply the data. MAF then supplies a set of site specific look up tables to be used in calculating the NZU units for the forest.

Commentary

Post 1989 forest owners with over 100ha face significant risks, that the customised look up tables provides fewer NZU than those from the standard tables.

Had the forest owners sold their NZU allocation based on the standard tables from 2008-2011 they will be required to make an adjustment at their 2012 emissions return.

If the forest is patchy and not well managed the random sample plots allocated by MAF may significantly reduce the actual NZU issued requiring the forest owner to potentially purchase units on the market.

Public Opinion against Australian Carbon Tax, Mentions of Trans Tasman Trading

 

Reports of Trans Tasman Emission trading raise the spectre of a revived CPRS

 

In a meeting between the Prime Ministers of New Zealand and Australia it has been reported that both prefer a trans tasman exchange of carbon credits.

 

Public opinion in Australia is against the proposed carbon tax mainly due to the excessive costs perceived by families. The understanding of the process and emissions trading per se was illustrated on television where the commentators questioned how a carbon charge would be imposed on running motor vehicles.

 

Clearly there is no understanding or appreciation as to where a charge may be applied and the practicalities of implementation of a scheme. It may be the public is thinking of how they can reduce emissions and see the need for being somehow personally accountable.

 

In the NZETS the carbon obligations are placed up stream with oil companies simply increasing the cost of fuel to reflect the cost of carbon. This would be the same for either the CPRS or a carbon tax. The proposed carbon tax however appears to focus on power generation only.

 

New Zealand advised that its NZETS is on track for an annual cost of about $150 per family. This is substantially lower that Australian estimates of a carbon tax, albeit that the level of the tax has yet to be set but in any event is above that of the NZETS NZU price.

 

One wonders if the Carbon Tax has simply been a ruse to push acceptance of  the CPRS and it will after these revelations be looked at again.

 

Following those statements a tax relief package was announced for families with incomes under $150,000 AUD per annum to reduce the impact of the expected $500 per annum in carbon taxes. The figure was calculated at $20 AUD per tonne of CO2

 

Meanwhile both New Zealand and Australia at a sovereign level are reportedly able to comply with their 2008-2012 commitments with no domestic response or need to purchase off shore credits.

 

New Zealand is reportedly on track for its forest credits having issued some 57 million NZU to represent forest carbon sequestration. Australia, whose Kyoto cap is 1990 + 7% which was successfully argued on the basis of the then extensive deforestation, has since almost curtailed deforestation and hence benefits from that extra 7% per year.

 

Camels Sacrificed for Carbon Credits

 

Meantime it has been reported that a camel cull of wild camels in northern Australia has been put forward under the carbon farming initiative.

 

Shooting wild camels from helicopters using licensed sharpshooters will reduce methane emissions whilst supplying the pet food markets with camel meat.

Australia is a signatory party to the United Nations Convention on Biological Diversity (www.cbd.int). This was founded out of the same meeting the Kyoto Protocol came from; that is, the Rio Earth Summit in 1992.

 

Under its obligations to this agreement, Australia has committed to enacting the Convention. This includes the requirements of Article 8, In-situ Conservation, Paragraph (h) which states: “(…contracting parties are required to…) Prevent the introduction of, control or eradicate those alien species which threaten ecosystems, habitats or species”. Feral Camel meets the requirements for control as an alien species under the CBD. http://www.cbd.int/convention/articles/?a=cbd-08

 

Feral camels are having a massive impact on rare and endangered plants and animal species in the incredibly fragile Australian rangelands. Left unmanaged, the feral came populations will double, with a doubling of all impacts by 2020, including rate of loss of endangered desert species and greenhouse gas emissions. http://feralscan.org.au/camelscan/default.aspx

 

Apparently carbon credits will mean that using the camel meat becomes a more viable proposition for processing plants.

 

EU Moves to Close Registry Loopholes and Prevent Fraud

 

The EU Climate Change Committee backed proposals to enhance the integrity and the security of the EU ETS registry system submitted earlier by the European Commission. Support for the proposals is key to the security of the carbon market, which has become a priority as a result of the fraud with emission allowances and cyber attacks on registry accounts.

 

For a webinar on the subject go to www.environmental-finance.com/events

 

What is the Price of a Carbon Credit?

 

Several different markets exist: Kyoto Credits, Cap and Trade markets that are in come cases country implementations of the Kyoto Protocol that may permit Kyoto Credits as part of the compliance market, and Voluntary credits that generally are for marketing or ‘greening’ purposes by Corporations.

 

Prices and volumes vary based on the market and the markets are generally not linked and therefore it is difficult to see them as linked at all other than the Kyoto compliance markets.

 

 

 

Voluntary Markets

 

 

 

Kyoto Offset Credits

 

 

 

Full details are at http://www.co2offsetresearch.org/policy/ComparisonTableMarketSize.html