February 21st, 2010, by John Shideler

Prices for voluntary carbon offset credits issued in the United States have declined considerably since the beginning of 2010. Diminishing prospects for the passage of climate change legislation in the US Senate is most often cited as the major reason for the price of Climate Reserve Tonnes (CRTs) dropping to around $6 per ton from approximately $10 at the beginning of the year. CRTs are issued by the Climate Action Reserve for carbon offset projects undertaken mainly in the United States and are viewed as “compliance grade” offsets under a future US federal cap-and-trade program.

Meanwhile California and other states and Canadian provinces continue to plan for the introduction of a regional cap-and-trade system within their jurisdictions by the start of 2012—now less than two years away. And in the United States the Environmental Protection Agency continues to develop an approach to regulating greenhouse gas emissions under existing authority granted to it by the Clean Air Act.

The consensus view among many climate change experts is that it is only a matter of time before real constraints are placed upon the emission in the United States of carbon dioxide and other greenhouse gases, and that some form of market mechanism will be used to help ease the transition to a low-carbon future. The success of the 1990s Acid Rain program in reducing emissions of sulfur dioxide is too compelling, market advocates say, for significant reductions in greenhouse gas emissions to be achieved across broad segments of the economy without taking advantage of emissions trading. Trading, they contend, provides needed price signals concerning the value of future carbon emission reductions and helps companies implement the most efficient abatement strategies.

Six dollars per ton is cheap compared with the cost of driving down emissions in America’s power plants, factories, and transportation networks. This can only mean that the price reflects skepticism about the political will of leaders in either the nation’s capital or in state capitals to cap greenhouse gas emissions. However, few voices among the many speakers at the Electric Utility Environmental Conference (EUEC) held in Phoenix earlier this month thought that no action was likely, if for no other reason than the industries most affected by greenhouse gas regulation would prefer the more flexible cap-and-trade mechanism to the blunt instrument that a command-and-control approach would take under existing provisions of the Clean Air Act.

Many speakers at the EUEC speculated that a billion tons of carbon offset credits will be needed to make a cap-and-trade program work at the federal level in the United States. This amount of voluntary emission reductions is enormous compared to the Climate Action Reserve’s current output in millions. In the face of political uncertainty about the timing of climate change legislation, the price of CRTs appears to be supported at current low levels by electric utilities—and others—hedging future carbon risks by taking “pre-compliance” positions in CRTs. It is estimated that such buying may have motivated as much as three quarters of the market in 2009.

At present prices, CRTs are trading at approximately one third the cost of Certified Emission Reductions (CERs) issued by the Clean Development Mechanism (CDM) under the Kyoto Protocol. Companies whose greenhouse gas emissions are currently capped under the European Union Emissions Trading System (EU ETS) are able to use CERs interchangeably with Assigned Amount Units when meeting their compliance obligations. CRTs trade at a discount to CERs because CRTs are not currently priced for use under a mandatory cap-and-trade system, though it is virtually certain that they will play a role similar to CERs under the Western Climate Initiative’s cap-and-trade program that begins in 2012.

Now is the time for companies with exposure to climate change risks to consider adding voluntary emission reductions to their investment portfolios. Since not all voluntary emission reductions are created equal, the present time provides an excellent opportunity to learn how to perform due diligence when conducting trades or financing emission reduction projects. Carbon traders may well look back to 2010 as the time when forward-thinking companies got a head start on their competition by building positions when CRTs were cheap.

© 2010, Futurepast: Inc.

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