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Sellers wait, driving up nearby UN carbon offsets

Source: Reuters - Fri 7th Aug 2009

A shortage in supply is pushing up the price of near-term contracts for Kyoto Protocol carbon offsets and may be partly due to sellers sitting on inventory as they await an uplift in demand, analysts and traders said.

Under Kyoto's Clean Development Mechanism CDM.L, companies in the developed world can invest in clean energy projects in emerging nations like China and India and in return receive carbon offsets as a cheap way to meet their climate change targets.

Prices for offsets called Certified Emission Reductions (CERs) for delivery in December 2009 rose above December 2010 prices on June 9, inverting the front of the futures curve, the Reuters CER Index shows.

A December 2009 premium of up to 30 cents may show that project developers, the intermediaries who establish projects and sell offsets to buyers, are waiting for a rise in carbon prices and saving money on the bureaucratic cost of verifying their emissions cuts.

"They're managing supply for better times" said Emmanuel Fages, a carbon analyst at Societe Generale/orbeo.

"If they estimate that CER prices will increase and if they're not pressed for cash they prefer waiting to avoid the cost of verification associated with issuing the CER."

Project developers steer projects such as wind farms from inception through to producing emissions cuts, when a U.N. panel called the executive board issues them CERs.

Developers in the past have often complained about the cost and slow pace of offset project approvals by the U.N. panel. 

"Sellers, which often say that there's a squeeze due to the slow issuance pace by the CDM's executive board, could now themselves to some extent be restricting the supply."

December 2009 CERs were trading at 12.5 euros (10.6 pounds) at 1000 GMT on Monday, up 18 percent from a two-month low of 10.61 euros on June 15.

Fages estimated they would trade near 13 euros by year's end, rising to 14 euros by next summer and to 15 by the end of 2010.

"These held-back volumes will be sold when sellers are satisfied with the market price, probably before the end of the year. If this analysis is right, we should see a quite backloaded issuance in 2009, with H2 volumes being significantly higher than H1 ones" he said.


One carbon trader who requested anonymity said an absence of sellers could explain a drop in volume and the backwardation in the curve.

"Backwardation" is the situation where a commodity costs more today than in the future, hinting at a shortage of supply. Normally prices rise into the future in a so-called contango.

The rest of the CER curve is in contango, with Dec-12 CERs trading some 30 cents above the Dec-10s.

The volume of issued CERs is rising, suggesting the backwardation was more attributed to the selling behaviour of project developers than a bureaucratic backlog, the trader said. 

"There have been more CERs issued this year than last, and less used for 2008 compliance than expected, so supply should not be an issue."

The U.N. panel issued nearly 40 million CERs in the first six months of 2009, 15 percent up from the second half of 2008 and 44 percent higher than the same period last year.

The biggest project developers are not under pressure to sell offsets to raise funds because of strong cash balances and profit margins as a result of past hedging policy.

For example, EcoSecurities, the world's largest developer, said in May it had an average forward sales price of 13.60 euros versus an average cost of 8.12 euros on its pre-2012 CER portfolio, as well as a cash balance of 53 million euros.

Dec-09 CER volumes traded on the European Climate Exchange have dropped over the past few months, falling from a daily average of 1.76 million tonnes in April to 0.7 million in July.

The fall reflects an economic downturn whereby demand for emissions permits has fallen alongside manufacturing output.

Companies participating in the European Union's Emissions Trading Scheme used 81.7 million CERs to help them comply with carbon emissions limits last year, well below the average annual allowed quota of around 130 million from 2008-2020.

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