What Effect Does The Issuance Of A 2-For-1 Stock Why the Falling Price of Carbon Credits Might Be a Good Thing

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Why the Falling Price of Carbon Credits Might Be a Good Thing

A surplus of carbon offsets has caused prices for certified emission reductions (CERs) to fall, Reuters reported last week. The news agency further predicts that carbon credits have yet to bottom out.

On October 14, CER reached an all-time low of 7.13 euros per unit. Later in the day, their price recovered slightly to 7.28 euros per unit.

CERs are carbon credits issued under the Clean Development Mechanism (CDM), one of three flexibility mechanisms under the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC). The CDM allows industrialized countries to achieve emissions reductions by investing in offsets from projects in developing countries. The CDM Executive Board then assesses the ability of these offsets to reduce carbon and issues carbon credits.

A record number of certified carbon credits were issued in the current sluggish economic environment, Reuters explained. 254 million CERs were certified this year. For comparison, in 2010, the number of certified CERs was 132 million, and in 2009 – 123 million.

But are low carbon prices all that bad? Not really, if you ask Tim Worstall, a fellow at Britain’s Adam Smith Institute. The reduction in the price of carbon credits, Worstall explained, means the system is actually working, which is “great news”. In an article for Forbes magazine, he writes: “A high cost would indicate that it is difficult to reduce [emissions]: people are willing to pay a high price for permission rather than stop radiating. Similarly, the low price tells us that it is easy for people to reduce emissions.’

But apart from the environmental functionality of emission units, their lower cost may even bring some investment benefits. The timing is perhaps perfect for investors to buy forward carbon credits, given that the EU ETS will enter its third phase in 2013. According to the Department of Energy and Climate Change, one of the major adjustments that will take place after 2013 is that the allocation of emission certificates will be done through an auction rather than quotas. This means that parties subject to a compliance program will need to apply for an ESA.

“From 2013, at least 50 percent of allowances will be auctioned, compared to about 3 percent in Phase II. This will increase the environmental and economic efficiency of the EU ETS. In Great Britain, there will be a 100 percent auction of the energy sector. This will also be the case across most of the EU,” the DECC website said.

In addition, access to project credits under the Kyoto Protocol from outside the EU will be limited to no more than 50 percent of the reductions required in the EU ETS.

These changes will affect CER prices in two ways:

1. Limiting the number of permits and forcing polluters to bid for offsets after 2013 means that in 2012, just before these changes take effect, more industries will want to take advantage of pre-auction costs and accumulate credits for future use. Higher demand in 2012 may subsequently lead to an increase in prices for SWR.

2. Limited access to carbon credits produced outside the EU – say in China – means that the cost of producing CERs will rise. After all, it is usually more expensive to develop offset projects in Europe than to outsource them to China. Higher production costs will lead to higher prices after 2013. Again, polluters will want to take advantage of carbon credit pricing ahead of Phase III, which could potentially increase demand in 2012 and help carbon credit pricing recover sooner rather than later.

Of course, carbon credit prices are influenced not only by the development of the EU ETS, but also by the general state of the world economy. It would be unwise to view them as commodity units that exist in a vacuum. Therefore, we cannot rule out that the general fall in commodity prices and the crisis in financial markets could have a negative impact on carbon trading.

We must also bear in mind that the Kyoto Protocol, the very agreement under which these units are defined and exist, expires in 2012. The market for carbon storage is likely to see some changes depending on which signatory countries commit to reducing their carbon emissions and which, if any, withdraw.

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