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Oversupply in Carbon Credit Market could hit 1,400 million credits by 2020

Certified Emission Reduction (CER) prices to drop from €2 to 50 cents by 2020

Oslo (10 October 2012)

The current oversupply of carbon credits, generated by the Clean Development Mechanism (CDM) and Joint Implementation (JI) and eligible within the EU’s emissions trading scheme (ETS), could potentially be around 1,400 million for the period up to 2020, up from the previous estimate of 900 million, according to analysis by Thomson Reuters Point Carbon, the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets. This oversupply, combined with low CER prices, is likely to hit investment in the CDM, the analysis shows.

“The potential supply has now reached a size where we believe that not all emission reductions will be issued as some projects owners put their issuance on hold, waiting for higher prices before retrospectively issuing the ‘on hold’ volume”, said Frank Melum, a senior analyst at Thomson Reuters Point Carbon. He adds; “It means there will be significantly fewer credits than the projects could potentially otherwise have generated to the market. This creates a large ‘latent’ supply that could come to market if credit prices increase, causing credit prices to drop.”

According to Melum, “Over the summer a significant market development materialized; namely that project owners have begun to take into account low sCER (secondary Certified Emission Reduction) prices when deciding whether the credit price level would cover their issuance costs”.

Anne Katrin Brevik, a senior market analyst in Thomson Reuters Point Carbon, adds that the historic link between CERs and the EU allowance price now seems to be broken. “While sCER prices in recent years have been traded at a discount in the order of 20-30% compared to the EUA price, this link is now less relevant due to the huge oversupply of CDM credits. Going forward, we expect CER prices to be set by monitoring, verification and issuance costs rather than by price movements in the EU carbon market”. She adds that “even if the process of back-loading carbon allowances is successful and EUA prices increase over the next few years, we do not expect this to have a significant impact on CER prices”.

Thomson Reuters Point Carbon predicts sCER prices will average €1.6/t during phase 3 of the EU ETS, less than half its previous forecast. To 2014, Thomson Reuters Point Carbon predicts sCER prices will average €2.5/t, falling to €1/t in 2018 and 2019, and to 50 cents in 2020 due to the oversupply. The low price for sCERs may mean that investment in emission reduction projects under the CDM will dry up over the coming years. 

“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. In addition, the countries must be willing to use emission reductions achieved through the CDM to meet these targets. None of these conditions seem likely to be met”, Brevik concluded. 

Thomson Reuters Point Carbon estimates that overall offset demand from the EU, Japan and carbon markets in Australia and New Zealand will total 2.675 billion units by 2020, resulting in a potential credit overhang of between 825 million and 1.43 billion. 

Note to editors

• Back-loading is the temporary withholding of emission allowances by the regulator between 2013-2015 through an amendment of the auctioning regulation.
• 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 first 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.
• Certified Emissions Reductions (CERs) are credits generated from emission reduction projects in developing countries.
• Emission Reduction Units (ERUs) are credits generated from emission reduction projects in industrialised countries.
• The second phase of the EU ETS runs from 2008-12 and the third phase will run from 2013-20 when the fourth phase begins.

To arrange an interview with an analyst, or if you have any questions, please contact:

Candida Jones
PR Manager, Thomson Reuters Point Carbon
Mob: +44 (0) 777 5754 763
E-mail: candida.jones@thomsonreuters.com

Anne Katrin Brevik
Senior Market Analyst
Mob : +47 97756553
E-mail : annekatrin.brevik@thomsonreuters.com

Frank Melum
Senior Analyst
Mob: +47 41670202
E-mail: frank.melum@thomsonreuters.com