CER market struggles under depressed prices

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The prices of Certified Emissions Reductions (CERs) remain depressed below €10, although having lifted above their record lows for now. The price of benchmark Dec 09 CERs in secondary-market exchange trading ended February at €8.81 on the ECX, up €1.50 off its record low two weeks earlier. The Dec 09-Dec 12 strip was around the €9.60 according to Reuters.

CERs are the carbon offset credits generated under the UN Clean Development Mechanism (CDM) for emissions reduction investment in developing countries. CERs are bought by developed countries and their firms to count towards their own domestic emissions targets.

The modest lift in CER prices tracked a similar recovery in the EUA market, driven largely by higher energy commodity prices. There has been no change in the dismal fundamental outlook for carbon offset and allowance demand in the current recessionary conditions. Societe Generale predicts CER prices are likely to again test their €7 lows in coming weeks. The spread between CERs and EUAs on the European carbon market is currently back over €1 after narrowing to just 70-80 cents at the market low-point.

The low prices for issued CERs on the secondary market are having a critical impact on the primary market. Forward prices from projects under development are now too low in many cases to make many emission-cutting projects profitable. IDEAcarbon’s latest primary CER (pCER) index indicates a range of around €6 to €8 in late February (the lower end of the range reflecting greatest risk of non-delivery of the future CERs).

Projects that had already locked in higher prices are continuing, and there are hundreds in the pipeline, but there appears to be few new ones getting off the ground. A 45 per cent drop in the volume of primary CERs generated in the CDM in 2009 compared to last year was forecast by analysts Point Carbon last week. It predicted a similar fall in ERU volume from Joint Implementation (JI) projects, mainly undertaken in eastern Europe.

There are hopes that the big project market in China will receive a boost by the government moving to lower its €8 floor price for primary CERs, allowing more projects at the cheaper end of the market to go ahead. The floor price has been adjusted before in response to changing market conditions - a €6 minimum price was in place until 2006.

A Reuters market survey of the big project developers found they would be relying this year on the 10 to 30 per cent of their project pipeline that has CERs forward sold at a healthy margin over cost. The likes of Camco, Tricorona and Ecosecurities would try and see out 2009 on these revenues in the hope of price recovery in 2010 and beyond. But it remains to be seen whether buyers will stick to their emissions purchase agreements or try and get out of the contract if prices remain too low for too long.