Carbon undervalued, says IDEAcarbon
London, 14 August: The market is currently undervaluing carbon allowances, according to a report by ratings and analysis firm IDEAcarbon.

In the latest edition of its Global Carbon Report, the London-based company suggests that changing market fundamentals point towards higher prices than at present.

IDEAcarbon forecasts that EU allowances (EUAs) will see an average price of €29/tonne ($43.20/t) of carbon dioxide equivalent over 2008-12, and certified emission reductions (CERs), from Clean Development Mechanism (CDM) projects in the developing world, of €24. The December 2008 vintages settled at €23.67/t and €19.85, respectively, on the European Climate Exchange last night.

While the firm reports little change to supply, the “demand dynamics for the EU Emissions Trading Scheme [ETS] are changing”, as a result of a review of the scheme by the European Commission.

In the current (2008-12) phase of the scheme, emitters are allowed to cover a limited amount of their emissions targets using imported carbon credits – from CDM projects, primarily. The Commission is proposing, for the third phase (2013-20), to allow emitters to only use imported credits up to any unused portion of their Phase II quota. (This applies if there is no international agreement to succeed the Kyoto Protocol – if an international deal is struck, this restriction would be lifted to an extent.)

This would mean that the 1.4 billion project-based credits initially expected to be used during Phase II of the EU ETS are now, effectively, for use over a 13-year period, from 2008-20.

Recent debate in the European Parliament suggests that this number could be lifted to 1.7 billion, says IDEAcarbon; however, qualitative restrictions on the types of credits that could be used would be applied, and there would also be a limit on the carrying forward of unused quotas from Phase II.

The proposal now is that if installations use project-based credits for less than 6.5% of their emissions, measured against 2005 levels, and don’t bank the surplus, they will receive a ‘top-up’ quota of 5%, measured against a future emissions level, in Phase III, explained Sam Fankhauser, managing director of the strategic advice division at IDEAcarbon.

“What this does is move a lot of CER demand into Phase II rather than saving [the credits] for Phase III,” he said, adding that some participants may use up all their CER quota in Phase II and save EUAs – which can be carried over into Phase III without restriction.