01 February 2009

China plans weigh on record low Kyoto offset price

By Michael Szabo, Reuters, Fri Jan 30, 2009 8:58am EST

LONDON - A suspension of the Chinese government's price floor for Kyoto carbon offset sales, expected in March, could weigh on this already battered market, analysts IDEAcarbon said on Friday.

"To encourage investment, the Chinese government is expected to unofficially release its 8 euro price floor in early March and look the other way as deals are transacted in the 6-7 euro price range," IDEAcarbon's Tenke Zoltani told Reuters.

U.N.-approved Certified Emission Reduction offsets (CERs) issued to clean energy projects in the primary tranche of the $32 billion CER market, averaged 8.87 euros ($11.40) per tonne of carbon dioxide this week, IDEAcarbon said. This level was down from a high of 13.60 euros last July and was slightly above China's current floor.

Under the Kyoto Protocol's Clean Development Mechanism, companies can fund emissions cuts in countries like China, India and Brazil, and in return receive primary CERs (pCERs) which can be used toward emissions reduction targets or sold for profit.

European Union industry can import a set quota of CERs for use under the bloc's emissions trading scheme, though the global recession and muted EU industrial forecasts have driven carbon prices to record lows.

China raised its pCER price floor to 8 euros from 6 last year. But with market-traded CERs trading just above 10 euros a tonne this week, there has been little financial incentive for project developers to buy from Chinese projects lately, especially once overhead costs are factored in.

One Chinese project developer told Reuters that the number of buyers competing in China has halved in the past year.

A removal of the price floor would attract buyers back to China, though it would not be bullish for prices, Zoltani said.

"Primary market prices were supported by a Chinese floor price, which previously deterred (deals) from being contracted at lower prices, but recently respondents have reported a willingness to transact below 8 (euros) provided the projects are feasible financially," she said.


This week pCERs averaged between 7.25 euros and 10.50 euros a tonne, depending on how much risk is taken on by the seller, IDEAcarbon said.

Although an average pCER could be purchased for 8.87 euros this week, it could be sold for only 10.30 euros on the secondary market on Friday for delivery in December.

This is 60 percent below an all-time high of 24.38 euros for secondary CERs hit last July. The spread between the lowest-risk pCERs (where the seller takes on the full risk) and secondary CERs has completely evaporated in the last two months after peaking at over 6 euros.

This prompted IDEAcarbon to ask in its weekly pCER report: "Why buy in the risky primary market when secondary risk-free CERs can be procured at the same prices?"

*For two related analysis pieces on falling CER prices, click on [ID:nLS218311] and [ID:nLE104574]
To purchase IDEAcarbon's pCER Index Survey results, go to here

(Editing by Anthony Barker)
© Thomson Reuters 2009 All rights reserved

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