Carbon credits losing allure

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A fall in global prices for carbon credits has made it uneconomic for traders to buy into new projects to reduce emissions, experts say, threatening a number of high-profile green efforts in the UAE that counted on the sale of credits to defray their costs.

Firms in developing countries can be awarded credits for reducing emissions of carbon dioxide and other greenhouse gases through the UN-backed clean development mechanism (CDM). Those credits are then sold on an open market and bought by utilities and others in industrialised countries who need to offset their emissions.

In previous years, banks and other financial brokers initially bought the credits, called primary certified emissions reductions (CERs), before they were awarded and then sold them on international markets at a profit.

But a negative spread between the primary CERs and market prices meant investors now had no incentive to buy credits from new projects, said Will Greene, an analyst with Point Carbon, a carbon credit research firm.

“The price of guaranteed CERs [guaranteed project-based credits] is now lower than the unissued, high-risk primary credits,” Mr Greene said. “At current prices there is zero profitability for these new investors.”

The exit of investors could slow efforts by several entities, including the Abu Dhabi National Oil Company (ADNOC), Masdar, the government-backed renewable energy investment firm, the Ras al Khaimah Municipality and others to potentially receive millions of credits for emissions reductions achieved through installation of new technology and improvements in energy efficiency.

The Masdar chief executive, Sultan al Jaber, said yesterday that the company was focused on the long-term revenues associated with carbon credits and not “reacting to daily price fluctuations”.

Prices for CERs and EU allowances (EUAs), which are traded on the European market, have tumbled by more than two thirds since July to €7.80 (Dh36.10) per tonne for secondary CERs on Monday. Prices for primary CERs are between €2 and €5 higher than that, according to estimates by Point Carbon.

The negative price gap meant many planned efforts to collect credits would be postponed, Mr Greene said.

“A lot of the actual transactions themselves will be on hold… they will continue to be on hold until the EUAs and the secondary CERs pick up in value,” he said.

Souheil Abboud, the regional director for EcoSecurities, a carbon credit development firm, said the decline in carbon prices would prove a challenge for investors who had bet that high carbon prices would continue and support emissions-reductions projects.

“I envisage that CER issuance will be delayed,” he said.

ADNOC is pursuing five separate schemes in partnership with Masdar to reduce emissions and earn credits. In Ruwais, for instance, the Abu Dhabi Refining Company (Takreer), an ADNOC subsidiary, is implementing technology to recover flared gas, which previously added to the refinery’s emissions of carbon dioxide.

The Ras al Khaimah Municipality has teamed up with a British firm to seek credits for reducing methane emissions from landfill.

Masdar officials have said they planned to seek credits for many of their ambitious green projects, including the US$22 billion (Dh80.8bn) zero-carbon Masdar City being built at the edge of the capital.

“Pricing does not tend to be the only motivating factor for Masdar and we believe various project developers in the UAE and the Gulf share our long-term view,” Mr al Jaber said. “We don’t expect short-term market trends to significantly impact the ongoing development of CDM projects in this region.”

The sharp drop in carbon prices was due to “companies selling off [assets] to build their cash base during tough economic times”, he said, and prices would recover with the economy.

Mr Greene also said carbon prices were likely to recover soon. “The fundamentals in carbon still support €20 per tonne.”

The biggest losers in the present situation were the banks and other financial intermediaries which made up 50 per cent of the market and had bet prices would rise, Mr Greene said. “It’s only the speculators that are actually hurting at the moment.”