Funding for new projects to supply carbon offsets under the present cycle of the Kyoto Protocol will dry up over the next two years, underlining uncertainty about the pact’s future, a project developer said.
Kyoto allows rich countries to meet greenhouse gas emissions targets between 2008 and 2012 by buying carbon offsets from developing and former communist nations, funding projects there for example to install renewable energy.
But present Kyoto emissions targets expire in 2012, and because projects take up to two years to develop they will soon only generate offsets for sale after then, when there’s much less certainty about a market.
“That’s probably it for pre-2012,” said Jack MacDonald, chief financial officer of project developer London-listed EcoSecurities (ECO.L: Quote, Profile, Research), referring to an end-2009 cut-off.
“We’re not going to stop project origination. We are already buying post-2012 volume.”
World leaders agreed in June in Germany to try and clinch a new deal to fight global warming by 2009, with serious negotiations expected to kick off in Indonesia in December.
EcoSecurities is one of the world’s biggest project developers with a pipeline to deliver 163 million tonnes of carbon offsets, mostly to 2012. Each tonne implies 1 tonne of avoided carbon dioxide emissions.
Some projects perform closer to forecast delivery than others, and MacDonald said applying a 25 to 30 percent discount to EcoSecurities was “probably right”.
That implies an actual pipeline of 114 million to 122 million tonnes of offsets, or around 23 million tonnes per year, equivalent to the annual emissions of Lithuania.
The big question for a growing army of participants in global carbon markets, including many of the world’s biggest investment banks, is how offset supply and demand balance during the Kyoto target period from 2008 to 2012.
A glut of offsets from developing countries, also called certified emission reductions (CERs), could trigger a price collapse. CERs for guaranteed delivery are currently trading at around 17 euros per tonne, valuing EcoSecurities’ forecast portfolio at 2.8 billion euros.
Countries which face emissions limits under Kyoto, and so are potential customers for offsets, include the 27-nation European Union – which has passed on some effort to industry – plus Japan. Canada has said it can’t meet its target.
The United States and Australia didn’t ratify the pact.
MacDonald put carbon offset demand through 2012 from EU companies and Japan at some 1.7 billion tonnes, and total global demand near 3 billion tonnes.
“I think if we get 1.5 billion tonnes supply that would be fantastic. There’s still some serious (demand-supply) gap.”
By Gerard Wynn
25 October 2007
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