HFC23 emissions worries could push trade off exchange
London, 16 June (Argus) — The European Commission's proposal to introduce a multiplication factor for HFC23 offsets could prompt a move away from exchange-traded secondary certified emission reduction (CER) credits to bilateral deals.
The commission is considering the idea of introducing a mechanism in phase 3 of the EU emissions trading scheme (ETS) whereby compliance firms would need two secondary CER units from industrial gas projects to cover every tonne of CO2 emitted.
Firms are looking to avoid buying secondary credits generated from HFC23 projects, and bilateral deals provide the only safeguard against this. Environmental exchanges like the European Climate Exchange (ECX) do not provide a facility to buy non-HFC23 CERs, meaning that until exchanges opt to change the way in which they list CERs, firms could choose to migrate to the bilateral market to trade secondary CERs.
The ECX has not yet made any decisions on how it will address the issue. Like everyone else in the market, we follow the developments on CERs with much interest, but until we have more clarity from the commission on which CER types will be eligible for phase 3 EU ETS compliance and the possible multiplier, it would be premature to take any decision with regards to existing/future CER contracts on ECX/ICE, the exchange said today.
The commission's CER multiplier proposal has potentially affected the spread across the CER curve, some traders said today. The December 2012 CER contract finished at a discount of €0.26/t CO2e to the December 2010 contract yesterday, compared with a discount of €0.49/t CO2e at the start of June. The curve is moving further towards contango as some firms may be looking to buy more December 2012 CERs to bank forward into phase 3, since they are concerned that they will have insufficient credits to comply with the commission's proposals.
If you think CERs are going to be scarcer as a result of these restrictions, you are better off buying December 2012 and banking them, as December 2013 is not trading at the moment, one UK-based trader said. Firms that have already bought HFC23 credits will undoubtedly be concerned about the commission's proposals since they will need more of these credits than they previously thought.
But it is unclear whether the proposals will cause firms to avoid buying CERs altogether — choosing EU allowances instead — or simply prompt a move towards non-HFC23 credits. You would not really buy more anyway would you? Surely if you are worried about it, you would be swapping out of x and into y, another UK-based trader said, suggesting that some firms would be keen to buy allowances instead.
But the spread between the December 2012 allowance and CER contracts has narrowed significantly in recent sessions, as firms appear keen to buy December 2012 CERs. The December 2012 CER contract stood at a discount of €3.71/t CO2e towards the end of the session today, compared with a discount of €4.19/t CO2e earlier in the month.
A further factor driving the gains at the back end of the CER curve could be NGO CDM Watch's push for the UN to suspend its HFC23 methodology. The NGO claims that plants are manipulating their production of HFC23 in line with CER profitability margins. It is calling for the UN to address this issue in a move that could reduce CER yields by up to 90pc after 2012.
CDM Watch is proposing a methodology revision for HFC23 destruction. People think that if they [CDM Watch] can prove that the system is being gamed, then the UN's clean development mechanism executive board may have to adopt the proposal for existing and future projects, one trader said today.
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