Investment in UN's carbon scheme to 'dry up' as prices plunge

UN carbon credits could be worth just 50 euro cents by the end of the decade due to a huge oversupply of allowances, hitting investment in its Clean Development Mechanism (CDM), analysts Thomson Reuters Point Carbon warned yesterday.

The current surplus of Certified Emission Reduction (CER) credits generated in the UN's CDM and Joint Implementation (JI) schemes, and used by companies to offset their emissions, could be as large as 1.43 billion for the period up to 2020, the company said.

The projected surplus is almost one-and-a-half times the previous estimate of 900 million CERs, and is expected to apply serious downward pressure to carbon prices.

The glut of credits, and worries over the credibility of the carbon-cutting projects generating them, has already sent CER prices spiralling to less than €2 a tonne and seen the use of CERs limited in both the EU emissions trading scheme (EU ETS) and Australia's forthcoming carbon market.

Point Carbon said some project owners may put credit issuance on hold in the hope prices will improve, but warned that while this will limit credits in the system, prices are unlikely to rise given the "latent" supply that could come onto market when projects release them.

The analyst firm predicted CER prices will average €1.6 a tonne, less than half its previous forecast, during phase III of the EU ETS, which runs from 2013 to 2020.

It added that, through to 2014, CER prices will average €2.5/tonne, falling to €1/tonne in 2018 and 2019, and just 50 cents in 2020. Analysts estimate a price of between €40/tonne and €50/tonne is needed to drive large-scale low-carbon investment.

The low price for CERs may mean that investment in emission-reduction projects under the CDM will dry up over the coming years, Point Carbon said.

While the EU is discussing whether to withhold credits from auction to prop up the price of emissions allowances in its own carbon market, Point Carbon said the only hope for recovery in the CDM rests on widespread adoption of tougher emissions-reduction targets.

"In order to ensure the survival of the CDM as a mechanism to reduce carbon emissions, many countries will have to take on much more ambitious reduction targets for 2020 and beyond," said Anne Katrin Brevik, a senior market analyst at Point Carbon, in a statement.

"In addition, the countries must be willing to use emission reductions achieved through the CDM to meet these targets. None of these conditions seems likely to be met."

In related news, Ukraine and Kazakhstan are the latest nations to consider the introduction of domestic emissions trading schemes in 2015 and 2013 respectively.

The two countries, which together emit close to two per cent of global greenhouse gas emissions, about the same as the UK, are said to be considering linking their proposed domestic schemes with EU ETS.

Brussels is looking for partners to boost EU ETS, and earlier this year agreed to partner the scheme with Australia's carbon market from 2018.