Isra-Mart srl: Potential new carbon credits still lack buyers

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Developing countries are starting to set up market mechanisms to combat climate change − but investors say tradable credits might take a decade to arrive and could lack potential buyers.

China, India, Mexico, Thailand and Indonesia are among the developing states that have started planning climate market mechanisms, such as capping and trading emissions or rewarding energy efficiency with tradable certificates.

No buyers

But no clear international buyers for these credits have emerged.

"The EU Emissions Trading System [ETS] is a potential offtaker − but will we see that happen? At the moment, I don't see the European Commission signalling very actively [that it] would be interested in buying these credits," said Matthias Krey from consultancy Perspectives.

EU climate negotiator Jozsef Feiler said this week at UN-led talks in Bonn, Germany, that more progress was needed to create new market-based mechanisms. The EU has long been a champion of sectoral carbon credits.

But sources have said privately that the EU has been influenced by the US, and is moving its policy away from importing international carbon credits (see EDCM 7 June 2011).

NAMAs

Most climate-change negotiators hope that these regional credits would be swept into a new global climate-change system under the so-called Nationally Appropriate Mitigation Actions (NAMAs).

So far, NAMAs are loose political concepts, created under the Bali Action Plan at a UN-led summit in December 2007.

One type of NAMA would generate credits that could be sold on the international carbon market and pay for the mitigation actions. This could link the credits from different regional schemes and create a global market - on top of investors' wish lists. But this will take time, analysts warn. "Crediting NAMAs will be theory only for a long time to come," Krey from Perspectives said.

Long delays

And tradable credits might not arrive before Phase III of the EU ETS ends in 2020, according to Christiaan Vrolijk, emissions specialist with trading house Carbon Resource Management, owned by Vitol.

"It would take 10 years ore more to get to meaningful levels [of credits]," he said. "There might be potential buyers in Phase III, if the credits arrive on time - which, of course, they won't."

Additionally, it would be expensive to do business in a fragmented market, meaning that the biggest scheme most likely in China could absorb all demand.

"Fragmentation increases transaction costs. We would need to work in 200 different markets, and that makes the transaction costs prohibitive. If that happens, where would the private sector go? It would go to China," Vrolijk said. IS