Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

The Anatomy of the CER Price Melt Down

The Anatomy of the CER Price Melt Down and its Effects on the NZETS

Some 6 weeks ago the price of a CER (certified emission reduction created from reducing greenhouse gas emissions in developing countries using the CDM or clean development mechanism of the kyoto protocol) was 13 Euro and the emissions markets were looking healthy.

Then a matter of couple of weeks later a CER was fetching 9 euro. Why the rapid and precipitous meltdown in prices?

Simply the market rapidly lost its liquidity after a series of events starting with renewed concern as to the sovereign debt of the so called PIGS Portugal, Ireland, Greece and Spain, and the likelihood of defaults. Soon after that the EC issued a directive on energy efficiency targets. Simple analysis of this meant that companies meeting these targets would not need as many CER to comply with the EUETS restrictions.

Combining this with the German markets being on summer holidays the market reacted negatively. Soon brokers stop loss triggers started to intervene and the market flooded with CER as speculators dumped CER in the face of large losses. This overreaction cascaded into a slump that went below 9 euro. Then the EC announced any energy efficiency targets would be designed not to damage the carbon markets and the market according to sources bottomed.

Since finding the bottom CER have traded in two tight ranges between 9-9.20 Euro and peaked at 10.50 Euro. Further announcements of substantial CER issuances coming to the market have dampened demand. December 2011 and December 2012 CER sit around 9.80 as of the 27th July 2011.

The effect on the NZETS has been swift. Coupled with a strengthening dollar the NZETS has seen NZU prices fall to the low $16 range before recovering. CER have become very attractive to buyers as they can be purchased as an option for delivery in March 2012 thereby reducing holding costs. The down side of course is an exchange rate risk but this can be managed. Foresters all expecting $20 or more are way out of the money. Should those post 1989 owners who sold for $22 be buying back and covering their risk?

How are buyers and sellers reacting? And how are projects being held up in the face of slumping prices?

Whilst China has a floor price at which CER are not to be sold the floor changes depending on the type of CDM project, for instance biomass CER floor price is 10.50 Euro. Whilst the lowest floor of 8.50 Euro was not breached it would not in our opinion have mattered as the trading was triggered by stop loss orders and not any real rational response.

Buyers that EITG and its consortium partners are working with continue to offer long term off take contracts. These contracts ameliorate risk by providing fixed floor prices of 7.50 and 8.50 euro with purchase at varying discounts to market in staged tranches. Project developers entering into these contracts can in effect fix their down side and keep the upside paying small premium to market.

Project developers are slow to take up such offers as they appear focused on maximising the CER income with no regard to risk. This of course tests the fundamental concept of whether their projects are actually additional? Would the project have happened without the carbon credit income? If the developers can take all the price risk of the CER price you have to ask the question in EITG opinion.

Realistically smart project developers, including those working with EITG are using our expertise in structuring and managing risk with our consortium partners are entering into these type of fixed off take contracts. In certain cases as a further inducement buyers are reimbursing project development costs when certain milestones are achieved. This further reduces project developer risk.

As a world leader in managing risk from plantation forestry carbon credits via its carbon pool system EITG has been extending this philosophy to its ever expanding CDM portfolio on 3 continents.

ENDS

© Scoop Media

 
 
 
Business Headlines | Sci-Tech Headlines

 

Income Equality: Time To Double-Down On Cutting CEO Salaries

With reports of a slow-down in CEO pay rises last year, it’s time for Kiwi corporates to double down on cutting excessive salaries to ensure this is a trend not an accident, said Peter Malcolm, spokesperson for the income equality project Closing the Gap. More>>

Manawatu-Whanganui Projects: PGF Top-Up To Rural Broadband Roll-Out

The government has effectively raided the $3 billion Provincial Growth Fund to top up the budget for the second phase of its rural broadband initiative, filling in mobile 'black spots' and ensuring broadband is available to marae that don't have access now. More>>

ALSO:

Other Windy Cities: Auckland-Chicago Named A Top 10 ‘Most Exciting’ New Route

The inclusion of Auckland-Chicago on Lonely Planet’s Where to fly in 2019? The 10 most exciting new flight routes list comes just two weeks before Air New Zealand prepares to celebrate its inaugural flight to Chicago’s O’Hare International Airport on 30 November. More>>

Deadly Strain: ESR Ups Its Reporting On Meningococcal Disease

The increasing number of cases of Group W Meningococcal disease (MenW) has prompted ESR to increase its reporting on the disease to the Ministry of Health. ESR has upped its reporting to weekly. More>>

ALSO: