The global economic downturn and a growing trade in sovereign emissions rights are combining to create a “perfect storm” that threatens to derail already sluggish efforts to cut greenhouse gases in poor countries.
Severe recession clouding most of the developed world carries a silver lining in the form of lower industrial emissions, but also means governments are buying fewer offsets from U.N.-approved clean energy projects in developing nations.
“The downturn has led to lower overall emissions and an easier path to Kyoto Protocol compliance for (countries),” the World Bank said in a report published on Wednesday.
Through the Kyoto climate pact companies and governments can invest in emissions cuts made by projects in developing nations, and in return receive offset credits, called Certified Emissions Reductions (CERs), which can be used to meet Kyoto targets or sold for profit.
But muted emissions in rich nations meant less demand for CERs, as the primary market fell by 30 per cent to 389 million tonnes of avoided greenhouse gas emissions in 2008, worth $6.5 billion, the World Bank said.
Severe administrative bottlenecks in the U.N.’s project registration process and a lack of regulatory clarity following Kyoto’s expiry in 2012 are discouraging new carbon-cutting projects and keeping many potential CER buyers on the sidelines.
“To complete the perfect storm, the first set of significant (sovereign emissions) transactions has occurred, further eroding any residual 2012 CER demand,” the World Bank said.
Through another Kyoto trading scheme, nations comfortably below their emissions targets can sell excess rights, called Assigned Amount Units (AAUs), to other governments that are emitting above their targets.
Governments have traded some 93 million tonnes of AAUs in the past two years. Ukraine, owners of the second largest AAU supply, said this week it wanted to sell at least 150 million more.
The World Bank estimates over 1 billion could be sold by 2012, especially if number one supplier Russia sells its glut. Former communist nations have surpluses because of a collapse of heavy industry in the 1990s, making their Kyoto targets easier.
“It’s not good news since deals like this crowd out CER demand,” said Emmanuel Fages, carbon analyst at France’s Societe Generale/orbeo, on the sidelines of the Carbon Expo conference in Barcelona.
“But AAU deals seem simpler since they don’t have to go through the U.N.’s registration process.”
Project developers have complained that it can take two years for a project to be registered and receive its first CERs, representing a growing risk for investors at a time when capital is tight and the future of offsets under Kyoto’s Clean Development Mechanism (CDM) is unclear.
“Not only are CDM projects finding it more challenging to receive financing, but banks and financial players are also less likely to engage in meaningful levels of project origination,” the World Bank said.
AAUs also cost less, with an average price below 10 euros ($14) per tonne seen in the deals done to date. This compares to volatile CER prices which have seen a high of 24 euros and a low of 7 euros in the past 12 months.
But critics have called AAUs “hot air”, arguing that most were generated through restructuring in eastern Europe in the 1990s, when polluting industries in ex-communist countries were shutting anyway, rather than by new investment in clean energy.
Because of this, many buyers insist that AAU deals are “greened”, meaning proceeds are transparently invested in clean energy projects, under so-called Green Investment Schemes (GIS).
“We’re trying to make GIS work, since it’s clear the CDM is not working,” said Laurent Segalen, a managing director at Japan’s Nomura bank.
Nomura, representing a consortium of investors, is in advanced talks with the Ukrainian government to buy 100-300 million AAUs, Segalen told Reuters.
Every AAU deal signed means less CER demand, and with World Bank estimates of 1.64 billion tonnes demanded and 2.66 billion in supply, CDM project developers are concerned.
“There is no doubt there is an overhang of AAUs in the market,” said Marc Stuart of developers EcoSecurities.
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