Responsible Investor

a shortage of around 1bn tonnes over Phase 2 of the scheme. Opinion on pricing is also bullish. Point Carbon suggests a figure of around €30 per tonne for 2008/9. This fits within our own house view that the politically acceptable band of pricing sits between €10 and €40 per tonne. Below €10 there is no incentive for change and the scheme’s credibility is doubtful; above €40 possible damage to corporate competitiveness (assuming no global equivalent scheme exists) will demand intervention of some sort.
With the possibility of 2.5bn carbon credits in existence by 2012 according to the UN, the race is on to invest in early stage projects that stand a strong chance of meeting United Nations Framework Convention on Climate Change (UNCCC) approval. The current slowness of the approval process, caused by a shortage of qualified assessors, is adding to short-term price pressure.
Another important factor influencing price is the growing demand for UN approved credits from those outside the compliance market who wish to offset their emissions voluntarily. Media focus on poor practice and ‘carbon cowboys’ has created a flight to quality, with corporates and individuals viewing the transparency and clear methodology of the Clean Development Mechanism as well worth the price premium over Verified Emission Reductions (VERs), a term for voluntary offsets. The added benefit of tightening the compliance market also adds to the appeal of UN Certified Emission Reductions (CERs). Given that voluntary offsetting is largely a PR exercise, this is hardly surprising.

There is another positive side-effect to the voluntary market choosing CDM credits. To a compliance buyer, a CER is a CER; however, those in the voluntary category are extremely choosy. In working with a major UK banking group to offset its emissions, we provided CERs to very strict criteria regarding project type and geography; for example, no HFC-related credits or large hydro-electric projects.

“Point Carbon, the research company, estimates the potential market size could be $565bn.”

Those favoured were wind-based and included projects such as methane capture in Brazilian farming communities, which provide heat and power for remote communities, as well as additional income. The social aspect of the latter type of project is particularly attractive to non-compliance buyers.
What we see as a result of this move by the non-compliance market is a two-tier pricing model, where credits from the highest (perceived) quality projects command substantial premia of up to €2 per tonne. It is also possible that over time credits from less desirable projects may become more difficult to sell. This will influence future capital flows into preferred types of CDM project. In that regard, the non-compliance market is keeping Kyoto ‘honest’. Increasing emission-trading volumes also reflect a more pro-active approach to allocation management by corporates, many of whom sat on long Phase 1 positions while the price moved from

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