Michael Szabo, Reuters 6 Apr 09;
LONDON (Reuters) - Clean energy project developers may lose carbon offset buyers as a result of the global economic downturn combined with increased transparency in a government-level emissions trading scheme under the Kyoto Protocol, French bank Societe Generale said on Monday.
Under the Kyoto climate change pact, nations that have seen their greenhouse gas emissions rise above target levels can buy offsets, called Certified Emissions Reductions (CERs), from clean energy projects in developing countries like China.
Project owners rejoiced last July when CER prices spiked to over 24 euros ($32.48) per metric ton of avoided carbon dioxide, prompting several buyer nations to seek cheaper ways of complying with Kyoto targets.
Through another more opaque Kyoto trading scheme, nations comfortably below their targets can sell excess emissions rights to other countries in the form of credits called Assigned Amount Units (AAUs).
Critics call these credits "hot air", arguing most were generated through economic restructuring in eastern Europe in the 1990s when polluting industries in ex-communist nations were closing, rather than by new investment in clean energy.
To improve this government-to-government market's image, AAU sellers offered to "green" deal proceeds by earmarking them for investment in renewable energy or energy efficiency, under so-called Green Investment Schemes (GIS).
"Despite the initial reluctance of short Kyoto countries to buy 'hot air', the high price of CERs combined with the actualization of Green Investment Schemes have made AAUs a more attractive compliance instrument in recent months," SocGen said in a research note.
The economic recession has also led to significant falls in actual and projected emissions in both developed and developing countries, it added.
"Our updated Kyoto balances show that emissions will be lower by 400 million tons (metric) per year over 2008-12 than previously thought, directly translating into less of a shortfall for short countries and a higher excess for long countries."
JAPAN AND RUSSIA
Six deals done in the past year have seen a total of 91 million metric tons of AAUs change hands so far, with deals for another 35-50 million expected later this year, SocGen said.
The bank forecast around 500 million AAUs will be traded in 2012, when Kyoto's first commitment period expires, and an annual average of 260 million traded until then.
Japan, the most active AAU buyer to date, said in March it is buying 70 million from Ukraine and the Czech Republic. This compares with 2 million CERs it bought in fiscal 2008, down from 23 million bought in the two years prior.
Having now procured over 95 million tons of the 100 million it set out to buy, Japan may pull back from the offset market, meaning one less potential CER buyer for project owners.
"CER stakeholders should not worry too much at the present stage since there is still some breathing space and the observed transactions were expected," SocGen said. "However, any larger volumes ... would start hitting CER demand."
Russia is a major unknown, with a potential inventory of over 800 million tons of AAUs that it may try to bank past Kyoto's expiry in 2012.
"The debate concerning banking of AAUs...becomes crucial," SocGen said. "Should countries like Russia be given clear signals that they will not be able to use their AAUs for future commitment periods, it could trigger a pre-2012 AAU price war that would have a large impact on the CER market."
For now, Russia remains on the sidelines after it was suspended from Kyoto emissions trading for failing to pay 2008 fees of $121,455, a U.N. spokeswoman told Reuters on Monday.
(Editing by Sue Thomas)
