Global downturn hits carbon credits

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Carbon credit markets are experiencing mixed fortunes following the global financial crisis with the voluntary offset market for VERs holding up better than the UN mandatory market for CER credits. And it now appears the heavy falls in CER prices may significantly hamper the UN CDM’s contribution to emissions reduction and clean technology transfer in the developing world over the next year or two.

VER prices have slipped over the past two months but are still higher than mid 2008, market analysis shows, mainly due to increased demand in the US following the election of climate-friendly Barack Obama as the next President.

Meanwhile, CER prices have continued to fall away, taking their lead from falling prices of European carbon permits as energy prices fall and recession sets in. The fall in CERs on secondary markets to below the €12 mark sees prices for issued credits close to levels project developers has been securing for primary, yet-to-be-generated, CERs up until a few months ago.

Market analyst New Carbon Finance’s Voluntary Carbon Index for Nov-Dec 2008 has the average VER price at $7.50, down 15 per cent from $8.70 in the previous two months but still up nearly 20 per cent on July-Aug prices. The maintenance of relatively strong prices is largely due to increased “pre-compliance” activity according to NCF. That is, US buyers weighing into the voluntary market, taking early action and preparing for a mandatory market looming under the Obama administration.

While prices on the main US voluntary exchange, the Chicago Climate Exchange (CCX), have fallen sharply in recent months to just $1 to $2, over-the-counter, bilateral trades of CCX credits were holding up at an average $4.20, NCF notes.

It’s a different story in the CER market, however. Benchmark Dec 09 CERs closed at new lows at €11.75 ($15.50) on the European Climate Exchange on January 15. After a renewed slide in the past week, they’re now down 42 per cent over the last three months.

As has been feared for some months, the low prices for issued credits are filtering down to the primary market and putting pressure on project developers generating new credits. At the lower prices demanded by buyers for these unissued credits, many new emissions reduction projects under the CDM are not viable.

Reuters reports one Chinese project developer saying the number of developers looking to secure forward credit sales in the primary market has halved from a year ago. But many established project developers with projects underway have already locked in prices at levels above €10, Camco International told Reuters. And developers that can do so are holding off selling their credits, hoping they can wait long enough to see prices rise and return to truer values.