CDM will grow beyond 2012 with 3.6bn CERs issued by 2020

Some 3.6 billion certified emissions reductions (CERs) will be issued by the UN by 2020, eight times the amount of CERs currently available, and almost four times as many as will be available by the end of 2012, according to Point Carbon.

However, new EU rules on environmental integrity may exclude an estimated 530 million credits from use within the EU’s emissions trading scheme (EU ETS), and may mean there is insufficient supply to fill the EU ETS’ import limit.

Currently, some 450 million CERs have been issued, of which the major project types are industrial, mainly HFC-23 projects (219 million issued) and N2O-adipic projects (97 million issued), renewables projects (63 million issued) and energy efficiency projects (28 million issued). By the end of 2012, this will increase to 980 million CERs, reaching 3.6 billion by 2020, of which around 1.3 billion CERs will come from industrial projects, while another 1.3 billion will come from renewables projects. HFC-23 projects and N2O-adipic projects have attracted controversy of late due to claims that some developers are gaming the system by manufacturing and then destroying the by-products solely to earn CERs.

According to Arne Eik, Manager of CDM analysis at Point Carbon Trading Analytics and Research and author of the analysis, “The estimates show that the Clean Development Mechanism (CDM) will continue to grow beyond 2012, with renewable energy projects becoming the dominant project type. We expect that projects will move significantly faster through the project cycle than today due to simplified approval procedures and increased capacity among Designated Operational Entities (DOEs) and the CDM’s Executive Board (EB). However, the revision of methodologies for HFC-23 and N2O-adipic acid projects will lead to reduced volumes from these project types”.

Indeed, a draft proposal on quality restrictions from CDM projects will likely be presented by the European Commission in mid- to late November. Point Carbon expects the Commission to exclude HFC-23 and N2O-adipic acid projects for reasons of environmental integrity, thereby removing some 530 Mt of CERs from being eligible for use by operators in phase 3 of the EU’s Emissions Trading Scheme (ETS).

In the event that these projects are excluded from the EU ETS, combined with the fact that legislation passed in 2008 bans companies from using credits from offset projects registered after 2012 unless they are generated in the world’s poorest countries, the 3.6 billion carbon credits issued by the UN by 2020 will be reduced to some 2.2 billion credits that will be accepted for compliance within the EU ETS.

“This is still above the credit import limit for EU ETS companies which we expect to be around 1.8 billion. However, the private sector in Europe will be competing with companies in Japan as well as with governments in Europe and elsewhere in order to get the eligible credits, so we cannot assume that there will be sufficient supply to fill the EU ETS import limit,” said Stig Schjølset, Senior Analyst at Point Carbon and co-author of the analysis.

Eik explains that “clearly there is uncertainty associated with our current CER supply estimates, relating to the fact that around half of the predicted volume of CERs is estimated to come from projects that are not yet registered and to projected price forecasts. In addition, we have assumed that major CDM countries will reach their renewable target and that 80% of the renewable projects will go through the CDM, however countries may reduce their renewable targets or possibly fail to meet them. It is also unclear whether project developers, in the case of low CER prices and inefficiency within the CDM project cycle, will choose to run their renewable projects through the CDM”.

“We also still don’t know at this stage to what extent the CDM will become more efficient, allowing higher CER volume through the project cycle. Given the limited progress in international negotiations, it is unclear what demand there may be for CERs from Europe and Japan. If this demand is lower than our estimates, investors and developers may reduce their price expectations and change their investment decisions accordingly”.

Eik believes that the key unknown is “what will happen to the eligibility methodology for HFC-23 and N20-adipic acid projects”. Point Carbon believes it likely that both the methodology for HFC-23 and for adipic acid projects will be revised, although the UNFCCC has not yet initiated a revision on the latter. Accordingly, Point Carbon has reduced the predicted CER volume from HFC-23 projects by 2020 by around 70%, compared to a continuation of today’s practice.

The Commission’s proposal on quality restrictions is likely to be finalised by the end of November and the EU Member States will probably vote on the proposal early next year. Point Carbon expects the restrictions to apply from May 2013.

The quality restrictions will probably only apply to companies within the EU ETS. However, even though the forthcoming restrictions might be legally binding only for the private companies, Point Carbon expects any limitations to be politically binding for most European governments.

“Under current legislation governments are expected to use only credits that are allowed in the EU ETS in order to meet their national reduction targets for 2020. The EU governments will be the ones to decide the new quality restrictions for the private sector, based on certain environmental criteria. It would thus be somewhat paradoxical if the same governments should choose to use the excluded credits to meet their national reduction targets”, said Schjølset, who added that the available supply eligible credits will also depend on post-2012 demand from other regions.

Ends –

Point Carbon is aThomson Reuters company and the leading provider of market intelligence, news, analysis, forecasting and advisory services for the energy and environmental markets.

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