Kate Mackenzie Hungary’s used carbon offset sale accelerates market fragmentation

As if additionality and verification weren’t difficult enough, the recycling of carbon offsets looks like it will further shake up the market for secondary carbon offsets.

When Hungary announced on Friday it had sold UN-approved carbon offsets that had already been counted in the EU emissions trading system, it insisted they had been sold to a party not covered by the EU ETS, and pointed out that it would be illegal for the offsets to be re-submitted under the EU’s system.

However some of those certified emissions reductions (CERs) did find their way onto secondary markets over the Bluenext exchange, which prompted Bluenext and other exchanges to suspend spot and futures trades of the credits.

It’s all likely to emphasise a preference for over-the-counter trades in CERs.

Andreas Arvanitakis, senior analyst at Point Carbon, said some companies already avoid the secondary CER market and prefer to buy them in over-the-counter transactions; often because they don’t want to buy CERs originated from particular sorts of projects.

“This has really brought to a head a problem we’re finding with our clients that companies are not happy with just getting CERs in the secondary market; they still want to have some control or be able to check where they’re coming from.

“Many companies don’t mind as long as they’re usable for compliance, but there are many companies who would like to use secondary CERs, but don’t want to touch some, or certain projects in particular, and because the delivery is automated and anonymous, they can’t.

Those companies, he said, are willing to pay an OTC premium in order to specify the kinds of CERs they are buying.

What was most surprising, he said, was that Hungary would risk undermining the secondary CER market for a relatively small sale.

Hungary has pointed out that it’s done nothing wrong – indeed, its transaction appears to be legitimate under the existing EU ETS rules. From Reuters:

Hungary said on Wednesday the Hungarian trading house which had bought the CERs sold them on to a London-based buyer, informing the buyer that the CERs could not be re-used in Europe. The unnamed London firm told the ministry it also informed its own buyer. The uncertainty arises from how that end-buyer used the CERs.

Hungary wants to trace the movements of the CERs.

“We are waiting for the London-based firm to get the declaration from its buyer,” Hungary environment ministry chief Jozsef Molnar told Reuters.

The loophole exists between the EU ETS and the UN rules under which other Kyoto protocol signatories operate. Neither framework prevents used offsets from being re-submitted under the other.

Notably, EU allowance haven’t been hurt. Arvanitakis says the Hungary sale, rather than being a price problem, highlights problems with the market itself – which is already becoming ever more fragmented due to the difference between the EU system and the wider UN system; plus concerns about specific offset projects. And this will only continue when other countries implement carbon trading schemes:

The problem is if the US emissions trading scheme, there’ll be a further subset with CERs that are eligible for one scheme and not the other.

The one clear signal you get from Copenhagen is that we’re not really towards a global carbon market.

Related links:
The latest carbon offset problems: recycled CERs and Chinese wind (FT Energy Source)
Calming the recycled carbon offset mini-storm (FT Energy Source)