Proposed sanctions against DOEs could lead to bullish market
Oslo (1 September 2010)
The upcoming Clean Development Mechanism (CDM) Executive Board (EB) meeting agenda contains a proposal which, if adopted, could have serious financial implications for designated operational entities (DOEs) and for the supply of Certified Emission Reductions (CERs). The proposal, to place liability for the issuance of excess CERs firmly in the hands of DOEs, could result in constrained supply and increased demand for CERs, providing a strong bullish signal for the market, according to analysis by Point Carbon, a Thomson Reuters company and the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.
It could also mean that the DOE responsible for the validation, verification, or certification report of excess CERs would be liable and could be obliged to replenish these excess CERs with other CERs, or other carbon commodities, at considerable cost.
“This draft procedure, proposing the correction of significant deficiencies and the excess issuance of CERs, would be a very tough provision indeed, if adopted, as it not only targets situations where the DOE has wilfully caused the issuance of excess CERs or has caused it through gross negligence, but also less serious examples of negligence. It also appears that the procedures would be retroactive in the sense that a DOE could be forced to replenish CERs the EB decides it has incorrectly issued in the past”, says Kjetil Røine, Manager at Point Carbon and author of the analysis, who added, however, that the onus would be on the EB to prove that the DOEs’ work has “significant deficiencies” rather than the other way round.
The consequences for DOEs and for supply could be substantial if the procedures are approved. For example, so far, about 218 million CERs have been issued to HFC-23 projects, currently the projects attracting most controversy and subjected to the longest delays as they are scrutinised by the EB (see notes for editors). Should 10% (or about 22 million) of already issued HFC-23 CERs be deemed as inappropriately issued, it would cost the DOEs in question up to €150 million to replace these CERs at current sCER prices. In comparison, the operating profit in 2009 for DNV, one of the largest DOEs, was just short of €150 million. DOEs need to have proper insurance in order to be accredited to validate or verify CDM projects.
If the EB agrees the proposals then it would form part of its recommendations to the COP/MOP in Cancun leaving it up to the COP to make a decision. If, then, the investigation of possible “significant deficiencies” is initiated and sanctions are indeed imposed on DOEs, this would likely exacerbate delays in both validation and verification in general because DOEs would become even more careful in their assessments. Some might even withdraw from the business altogether, perceiving the risks as higher than the rewards.
If a quantity of HFC-23 CERs is deemed excess CERs and must be replaced by other CERs, there would be the double effect of increasing supply constraints and increasing demand, at the same time. “In sum, the draft procedures for how to deal with excess CERs signal a strong EB resolve on such problems, which could put several DOEs in very serious financial trouble if implemented and could lead to both increased demand for CERs and constrained supply”, concludes Røine.
Note to editors
• The Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in February 2005, resulted in the launch of the EU’s Emissions Trading Scheme (ETS). The EU ETS is the world’s largest international greenhouse gas emissions trading scheme. It works on a cap - and - trade basis, where the total allocation is set at the start of a trading period. EU Allowances (EUAs) are the tradable units under the EU ETS.
• The CDM allows private and public entities to invest in emission-reduction projects in developing countries and receive related emission reduction credits that are tradable and can be bought by emitters to offset their own emissions.
• Certified Emissions Reductions (CERs) are project credits generated from CDM projects in developing countries.
• To date, seven issuance requests from six HFC 23 destruction projects totalling 10.1 million CERs are being further scrutinised by the CDM Executive Board while the board investigates claims that some developers are gaming the system. There are concerns that some manufacturers of the refrigerant HCFC-22, who earn CERs by destroying the greenhouse gas by-product HFC-23, have been increasing production solely to obtain CERs.
• Point Carbon has reduced its forecast for 2010 CER supply by 25% due to delays with HFC 23 issuance. Point Carbon estimates that 107 million CERs will be issued this year, compared to a forecast of 142 million CERs made last month.
To arrange interviews with one of the authors of the analysis, or to see a copy of the analysis, please contact:
Candida Jones
PR Manager, Point Carbon
Mob: +44 (0) 777 5754 763
E-mail: cjo@pointcarbon.com
Kjetil Røine
Manager, Point Carbon
Mob: +47 95 20 13 55
E-mail: kr@pointcarbon.com
For US press enquiries, please contact:
Adam Williams
Marketing Coordinator, North America
Mob: +1 240 330 3956
E-mail: aw@pointcarbon.com
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