The reason why the actual Slipping Cost associated with Carbon Credits May be the best thing

A surplus of carbon offsets has caused a dip in certified emission reduction (CER) prices, reported Reuters last week. The news headlines agency further predicts that carbon credits are yet hitting rock bottom.

CERs are carbon credits issued underneath the Clean Development Mechanism (CDM) – certainly one of three flexibility mechanisms stipulated in the Kyoto protocol by the United Nations Framework Convention on Climate Change (UNFCCC). CDM allows industrialised countries to reach their emission reductions by purchasing offsets generated by projects in developing countries. The CDM Executive Board then evaluates the carbon reducing capacity of those offsets and issues carbon credits.

In today’s sluggish economic conditions, industry has seen a record amount of issued certified carbon credits, explained Reuters. So far this season, 254 million CERs have been certified. In contrast, the amount of CERs certified in 2010 was 132 million and in 2009– 123 million.

But are low carbon prices so bad after all? Nearly, if you ask Tim Worstall, fellow at the UK Adam Smith Institute. The dropping price of carbon credits, explained Worstall, means the system is, indeed, working, that will be “excellent news.” In a write-up for Forbes magazine, he writes: “A higher price would show that it is difficult to reduce [emissions]: people are willing to pay for the high price for the permit as opposed to stop emitting. Similarly, a low price tells us that people are finding it easy to reduce emissions.”

But beyond the environmental functionality of emission units, their lower costs may even bring some investment benefits. The timing is, perhaps, low energy blockchain ideal for investors to forward-buy carbon credits, considering that in 2013 the EU ETS will be entering its third phase. According to the Department of Energy and Climate Change, one of many main adjustments that will occur post 2013 is that allocation of emission certificates won’t be done via allowances, but via auctioning. This implies parties, which fall underneath the compliance program, must bid for CERs.

“At the least 50 per cent of allowances will be auctioned from 2013, compared to around 3 per cent in Phase II. This may improve the environmental effectiveness and economic efficiency of the EU ETS. In the UK, you will see 100 per cent auctioning to the ability sector. This will also be the case across a lot of the EU,” states the DECC website.

1. Limiting the amount of allowances and making polluters bid for his or her offsets after 2013 means that, in 2012, right before these changes take effect, more industries would desire to take advantage of pre-auction costs and stock through to credits for future use. Higher demand in 2012 could subsequently lead to raised charges for CERs.

2. Limited access to carbon credits produced not in the EU — in, say, China-means the price of CER production should go up. After all, developing offset projects in Europe typically costs significantly more than outsourcing them to China. Higher production costs will lead to raised prices after 2013. Again, polluters would desire to take advantage of pre-Phase III carbon credit prices, which could potentially drive up demand in 2012 and help carbon credit prices bounce back sooner as opposed to later.

Carbon credit costs are, obviously, influenced not only by the evolution of the EU ETS, but also by the overall state of the global economy. It will be unreasonable to look at them as commodity units, which exist in a vacuum. Therefore, we cannot exclude the chance that the overall decline in commodity prices and the financial market crunch can adversely affect carbon trade.

We also have to bear in mind that the Kyoto Protocol, the agreement under which these units are defined and exist, is because of expire in 2012. The compliance carbon market will more than likely see some changes depending which signatory countries re-commit to reducing carbon emissions and which, if any, pull away.

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