Published: 29 Mar 2010 15:27 CET Last updated: 29 Mar 2010 16:38 CET
The delay in CER issuance has prompted traders to pay a premium for credits for nearby delivery.
The price of certified emission reductions (CERs) for delivery over the next 21 months is now more expensive than in 2012, as traders seek to buy back credits they had previously sold for 2010 and 2011 delivery.
By midday, traders were prepared to pay €11.71 for CERs for delivery this week compared to €11.41 for credits in December 2010, €11.16 in December 2011 and just €11.13 in December 2012.
While the UN-backed offsets for delivery in 2010 have typically fetched a premium over those for delivery later in the Kyoto period, many traders have revised down their projections for issuance.
This prompted all contracts for the Kyoto cycle to slip into backwardation on Friday.
“This is symptomatic of a lack of issuance at the UN level. Last year we saw fewer carbon credits get issued year-on-year and not many people forecasted that,” said Trevor Sikorski, an analyst at UK investment bank Barclays Capital.
Weak issuance
The UN issued 123 million carbon credits in 2009, 14 million fewer than the year before, and issuance for the first three months of this year is only marginally higher than in 2009, he said.
In total, almost 400 million UN offsets have been issued so far, compared to analyst projections in 2007 that over 700 million would be issued by now.
“There are not physically enough CERs available to arbitrage the cost of carry across the curve, as you need to sell the front contract and buy-back the CERs at the back-end,” Sikorski said.
“The curve as a whole is weak, except for the prompt and the prompt is driven by shorts on issuance. Were issuance going at the rate that everyone expected, you wouldn’t see such an odd-shaped curve,” said Geoff Sinclair, head of carbon finance and trading at Standard Bank.
Buying back
Traders are buying back against positions they have already hedged in 2010, according to Remco Faas, an analyst at Dutch utility Eneco.
He reckoned that the UN’s suspension of auditors last year was a major reason for the delayed issuance.
DNV and SGS were both barred from validating clean development mechanism (CDM) projects and verifying emission reductions for several weeks in 2009.
This caused a headache for project developers who were forced to wait longer to get credits issued.
Last week the UN suspended another two auditors, potentially creating a similar bottleneck in getting the offsets issued this year.
CDM doubts
Other sources agreed that a shortage of credits was causing the unnatural curve in the market, but added that prices were already weak.
“The uncertainty surrounding the CDM post-2012 continues to push the curve into backwardation,” said Andrew Ager, head of carbon and emissions at Bache Commodities.
Sinclair agreed, saying the outcome of December’s UN climate talks in Copenhagen, where leaders failed to gain a legally-binding global agreement to cut emissions, had depressed the market.
Both the Australian and US governments are struggling to pass legislation that would cap emissions, meaning demand for credits that could be used for compliance in those markets has disappeared, he said.
“A lack of confidence, market uncertainty and the revision of the proposed US carbon bill have all had an impact,” Bache’s Ager added.
By Andrew Allan – aal@pointcarbon.com
London
