Sceptre Group Limited – Enel Says EU Should Limit Scope, Delay Ban on Industrial Gas Offsets

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The European Union regulator should limit the scope and delay the start of a planned ban on carbon offsets in its emissions-trading system to avoid market distortions, according to Enel SpA, Italy’s biggest utility.

The European Commission, the 27-nation bloc’s regulatory arm, is considering a ban as of 2013 on the use of United Nations-sponsored credits related to industrial gases including hydrofluorocarbons and nitrous oxide. The EU wants to present its proposal to member states “as soon as possible,” Climate Commissioner Connie Hedegaard said today.

The EU is facing “relentless” lobbying by Enel, RWE AG and E.ON AG, the climate group CDM Watch said yesterday in a report. The future of the UN Clean Development Mechanism, the world’s second-biggest carbon market, and other tools to cut greenhouse gases linked to heat waves, floods and more-intense storms will be on the agenda when envoys worldwide meet Nov. 29 in Cancun Mexico to discuss a climate-protection framework for when the 1997 Kyoto Protocol expires at the end of 2012.

“If the commission pursues the idea of enforcing quality restrictions, it should bear in mind that operators took commitments in the CDM market with a long-term perspective, relying on the fact that the EU emissions trading system would last beyond the Kyoto compliance period,” Giuseppe Deodati, Enel’s head of carbon strategy, said by e-mail today.

Long-Term Commitments

While HFC-23 projects represent less than 1 percent of all registered CDM projects, their credits account for half of the 450 million offsets issued so far. The 19 projects cutting the gas under the UN program are located mainly in China and India.

HFC-23 is a by-product of HCFC-22, used in air-conditioning and refrigeration. The EU is concerned that projects generating offsets may be increasing HCFC-22 output simply to get credits for controlling HFC-23 discharges, creating windfall profits for investors and undermining the integrity of Europe’s carbon cap- and-trade program, the world’s largest.

Enel is involved in seven projects that cut HFC-23 emissions in China with companies including Deutsche Bank and Spain’s Endesa SA. According to Bloomberg data, the projects have issued 100.5 million credits, valued at 1.2 billion euros ($1.6 billion) at today’s prices. They are expected to cut HFC- 23 by a total of 239 million tons of CO2 equivalent by 2012.

“We believe the EU should limit the restrictions to new projects, and to already registered projects after expiry of the first crediting period, which for most industrial-gases projects expire by 2014 at the latest,” Deodati said.

Cheaper Alternative

EU allowances for December 2010 traded 0.4 percent down today at 14.88 euros a ton in London. UN offsets for delivery in the same month were 0.8 percent weaker at 12.22 euros a ton.

More than 11,000 facilities in the EU cap-and-trade program may now use UN credits, which are cheaper than EU allowances, for compliance with their pollution quota.

In the current five-year trading period through 2012, the installations in the EU cap-and-trade program can swap as many as 1.6 billion UN credits with EU permits on a one-for-one basis, according to the commission. The EU average annual emissions cap for that period is 2.04 billion tons of carbon dioxide. One permit represents one ton of CO2.

‘Unintended Consequences’

“If the commission pushes forward a proposal on qualitative restrictions, it must clarify the objectives and the principles driving the decision to ban certain project types,” Deodati said. “If these principles are not applied, the unintended consequences could be market distortions, fragmentation, credit supply gap in a moment when no other alternative mechanism is available, discouragement of future investments and severe undermining of trust in the international negotiation process.”

Carbon traders have said delays in issuing offsets and the possibility of new EU restrictions may leave them with credits that are ineligible for use in the third phase of the EU’s carbon program from 2013 and perhaps the current trading period. The European Federation of Energy Traders said in September that the “complete regulatory uncertainty” over the use of offsets in the EU was unsustainable.

UN offsets include two types of credits: Emission Reduction Units and Certified Emissions Reductions. The latter, generated under the UN Clean Development Mechanism and known as CERs, are are awarded to pollution-cutting projects in developing nations.

“Obviously, the restrictions should be based on when the emissions reductions are achieved, and not when the credits are issued, as operators should not be penalized for delays in CER issuance process,” Deodati said. “This would approximately halve — by 800 million tons — the credit pipeline from these projects to 2020, freeing up significant demand volumes.”

‘Windfall Profits’

Regulators of the CDM are also ramping up scrutiny after allegations that some developers are seeking excessive credits related to HFC-23, whose warming potential is 11,700 times more powerful than CO2. They are assessing whether the methodology for awarding those offsets should be changed.

“Regarding windfall profits it’s worth noting that CDM flows toward China are justified by the objective to curb global emissions where it is most effective, and to involve developing countries in mitigation actions,” Deodati said.

E.ON, Germany’s largest utility, said the EU should allow for an “appropriate transition period” before changing its rules on accepting offset credits. In a letter responding to CDM Watch, E.ON also said UN carbon regulators have a certification process that is “very robust.”


Sceptre Group Limited is a specialist investment firm focused in low carbon financial investments such as sustainable biofuel plantations, agricultural farmland and green technologies.  For more information on Biofuel Investments, please visit Sceptre Group’s website at

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