Point Carbon’s primary CER price assessment provides detailed insight for CDM investors

Oslo (20 November 2008)

Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets, has launched a new monthly price assessment for primary Certified Emission Reductions (CERs), generated from Clean Development Mechanism (CDM) projects.

The assessment allows users to gain insights into the price of primary CERs (pCERs), providing a detailed picture of the variation in revenue generated by different CDM projects according to their geographic location, project type and maturity and allowing investors in CDM projects to get a clearer picture of where to invest and in what project type.

For instance, last month, the price of pre-registered CERs from Chinese wind projects remained stable within the €12-14 range and the price for pCERs from Chinese hydro projects traded much lower, at between €8.5-9.5 indicating that investors see Chinese wind projects as a better investment than Chinese hydro projects, which have, in the past, been criticised for having a negative influence on the environment and have sparked controversy regarding migration issues following the construction of large project sites. Indeed, Point Carbon analysis shows that the probability that a project which has reached validation will also be registered by the CDM Executive Board is 64 percent for wind but just 44 percent for hydro.

The assessment also provides a picture of the price spread between primary and secondary CERs and shows that currently this price spread has narrowed considerably, a situation especially acute in the case of Chinese wind and hydro projects.

Investors can choose to invest in either primary or secondary CERs when building their CDM portfolios. Primary CERs have a delivery risk while secondary CERs are already generated and issued by the CDM Executive Board and are hence risk free. Yesterday (November 19), sCERs closed at €14.65.

Recently we have seen that the spread between pCERs and sCERs in some cases is close to zero. Taking China, the most important CDM country in terms of project numbers, this narrowing may result in a slowdown in the CDM pipeline as investors decide the risk inherent in buying pCERs is not reflected in the difference between the pCER and the sCER price, the latter carrying almost no investment risk.

According to Arne Eik Manager of CDM/JI at Point Carbon “if the CDM activity slows down as a result of the narrowing of the spread between pCER and sCER prices then the Chinese government may want to act by further changing the minimum price it requires for primary CERs”.

Last week it was reported that the Chinese government had indeed lowered its price floor from €12.50 to €12 for wind and €8.50 to €8 for hydro, but, according to Arne Eik, “this will probably not be sufficient”.

“If the Chinese government does not further reduce its price floor then some investors may start to look elsewhere and CDM portfolios may diversify further as a result, to other countries and other projects types”, Eik concluded.

China is home to around 70% of CDM projects. Uniquely among CDM nations, its government sets a minimum price, known as a 'price floor' for its CERs. Because China dominates the CDM market in terms of project development this price floor effectively sets the market price for CDM projects so Chinese policies regarding their CDM have a global impact.

CDM project aggregators have already felt the effects of the global economic downturn as project finance becomes harder to secure. The narrowing of the price spread between pCERs and sCERs, and consequently a reduced demand for pCERs, may be an additional indication that CDM developers will face an increased squeeze in their profit margins at least in the short-term.

Note to editors 

The Kyoto Protocol on Climate Change, which entered into force in February 2005, resulted in the launch of The EU’s  Emissions Trading Scheme (ETS). The world’s first international emissions trading scheme, it works on a cap - and - trade basis, forcing companies to emit less carbon dioxide than their Kyoto target allows or buy carbon permits from elsewhere (CERs and ERUs). The second phase of the scheme runs from 2008-12 and coincides with the Kyoto Protocol commitment period. No timetable has currently been established for the post-2012 regime. 

Certified Emissions Reductions (CERs) from Clean Development Mechanism (CDM) projects, are project credits flowing into the global compliance market generated through emission reductions. EUAs (EU Allowances) are the tradable unit under the EU ETS. 

A number of countries and companies will make use of project credits from CDM to be in compliance with their Kyoto targets. Reducing emissions outside one’s own site or country (“external abatement”) can be a cost effective alternative to internal abatement. 

The supply of CERs are important indicators of world emission reductions, and therefore supply, as CERs effectively work as the currency of the international carbon markets. 

When there are fewer CERs available on international carbon markets, the price of EU Allowances (EUAs), the tradable unit under the EU ETS, can go up as companies which had intended to use project credits from CDM to be in compliance with their Kyoto targets instead have to buy and sell EUAs to comply. 

For comments or further more information, please contact: 

Candida Jones
PR Manager, Point Carbon
Mob: +44 (0) 777 5754 763
E-mail: cjo@pointcarbon.com  

Arne Eik
Manager of CDM/JI
Mob: +47 91796009
E-mail: ae@pointcarbon.com  

For US press enquiries, please contact:

Jenna Agins
Intermarket Communications
Tel: +1 212 754 5613
E-mail: jagins@intermarket.com  

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