Isramart : Hungary’s Sale of ‘Recycled’ Credits Weighs on Carbon Markets

Isramart news:
The spread between European Union emission allowances and comparable UN credits widened to the most in almost a month on concern that Hungary’s sale of recycled credits may undermine markets.

The difference between the two contracts for December delivery widened 6.9 percent to 1.55 euros a metric ton at 12:36 p.m. on the European Climate Exchange. That means Certified Emission Reductions from the United Nations sell for the biggest discount to EU permits since Feb. 17.

Hungary agreed to sell almost 2 million metric tons of UN credits to an unspecified broker for 4 billion forint ($21 million), Boglarka Olt, the Budapest-based Environment Ministry spokeswoman, said today by phone. The European Commission is “concerned” because the credits had already been turned over to comply in the EU system, the world’s biggest emission market. Environmental and investor groups also criticized “recycling” CERs from the UN’s Clean Development Mechanism, or CDM.

“If Hungary wants to crash the CDM, this is the way to do it,” Sanjeev Kumar, senior associate at Third Generation Environmentalism, said by telephone from Brussels today. “This would undermine the credibility of the market. It’s dangerous.”

The Carbon Markets & Investors Association, a lobby group for investors in emission projects, said any country that sells UN permits that were already been turned in for compliance in the EU’s cap-and-trade system is harming the market. It didn’t specify Hungary by name.

‘No Credible Claim’

“Any country engaging in this activity can have no credible claim to leadership in action on climate change,” said Miles Austin, the London-based director of the CMIA. “The environmental integrity of the EU ETS and member states’ compliance with the Kyoto Protocol is being put at risk.”

UniCredit SpA’s Carbon Solutions warned factories and power stations to check the serial numbers of the carbon credits to make sure they weren’t recycled.

“If these recycled CERs return back into the ETS system, they cannot be used for compliance on installation level anymore,” the bank said in an e-mailed statement.

Proceeds from Hungary’s sales will be spent on climate projects, including subsidies to upgrade housing, Olt said. The “final user” of the credits is Japan, the ministry said. Olt declined to disclose the selling price, though the terms indicate a price per ton of about $10.25 (7.50 euros).

Falling Prices

Emission credits issued under the UN program fell as much as 2 percent to 11.29 euros a metric ton, the lowest price in three weeks. UN credits can be used for compliance with carbon quotas in Europe, so the markets are linked.

EU carbon permits for December delivery fell as much as 1.5 percent to 12.79 euros a metric ton on the European Climate Exchange in London, the lowest intraday price since Feb. 24. The contract was at 12.89 euros as of 10:30 a.m. local time.

The European Commission said it’s concerned about the sale of UN credits that were already given up for EU compliance.

“I am concerned about the government sale of Certified Emission Reductions that have been previously surrendered by companies in the EU emissions trading system,” Jos Delbeke, director general of the commission’s climate unit, said in an e- mailed statement today. The EU wants to avoid the “double counting” of emission credits, he said.

Delbeke said Hungary’s permit sale was “possible” under Kyoto rules. The 1997 Kyoto Protocol set emissions caps for nations that signed up to it. The legislation spawned the Clean Development Mechanism, which creates carbon credits, or CERs, from projects that reduce emissions.

Not So Strange

The recycling of CERs is “not as strange as it sounds,” Nele Glienke, an analyst at UniCredit in Munich, wrote in an e- mail today. “As long as the CERs are backed by AAUs, the deal is okay,” she said.

AAUs, or assigned amounts units, issued to nations under the Kyoto Protocol, can be traded between countries. Eastern Europe has a surplus of AAUs because they were handed out before economies collapsed after the breakup of the Soviet Union.

Hungary had emissions of 75.9 million tons in 2007, compared with its goal of 108.5 million tons, UN data on Bloomberg show. Based on that year’s surplus of 32.5 million tons, the nation may have 162.5 million tons of spare AAUs by the end of the period in 2012.

The sale of recycled credits is possible due to the separation of the UN and EU cap and trade programs, Glienke said. If these states have enough Assigned Amount Units, they are free to recycle credits that haven’t been used in the Kyoto system, he said.

The Hungarian sale may complicate Britain plans to sell more than 4.5 million permits on March 18 via the U.K. Debt Management Office.