Weekly CDM and VER market summary 5-12 October 2009

Signs of a bounce in VER demand are appearing with Chinese and Indian quality wind VCUs being sought by Buyers. Recent-vintage, pre-CDM VCUs Chinese credits are transacting at $2.75-$3.50, with Indian offsets commanding $1/$1.50 premiums.

Competitive pricing has led to a temporary change of focus with participants looking to bolster portfolios at bargain levels, potentially calling the bottom of the recent dip in prices. Uncertainty over forestry projects is promoting a cautious approach from buyers on both sides of the Atlantic. "Exotic" credit prices are diverging with some developers raising prices to $5.50 levels, citing high development costs for in demand smaller sized VCU projects.

CRTs are still the most desirable US voluntary credit type as Buyers are confident of their acceptance into a future federal mandatory carbon scheme. Spot CRTs are $7/8 bid/offered while Sellers of forward strips are increasingly looking for up-front payments. New methodologies such as ODS are offered forward at $5-6.

Interest in US VCUs is growing as speculators, in particular, weigh-up the cost benefits of trading these over the more expensive CRTs. A recent flow of reports from the US has encouraged many bidders that VCUs will also be fungible in a future US cap-and-trade market. However, a lack of supply is curtailing wider trading activity so far. Prices have increased and are $4/$5.50 bid/offered.

Demand for Gold Standard VERs is focusing on credits from "Least Developed Countries". African forward GS VERs of all methodologies are €9/€11 even at quite early project stages. Non-LDC issued GS VERs are around €7/€8 bid/offered, with forward credits transacting at €5-€6.

On the CCX, CFI prices stabilised after the previous week's legislative uncertainty and related sell-off, with the 2009 contract closing up 5c at $0.15. Total volume exchanged was 66,300 tonnes (663 CFI contracts), 1.5 million tonnes less than the previous weeks totals; 2008-09 were the most popular vintages.

Privately negotiated transactions totaled 37,600 tonnes (376 CFI contracts), with US LFG at $0.90 comprising 97% of that bilateral market.

The Dec 09 secondary CER contract closed the week up €0.70 at around €12.45. Carbon fluctuated midweek following a lower than expected EUA auction prompting a narrowing of the EUA-CER spread. Improving energy and power levels led to firming pricing at the close Friday.

IEA cuts emission predictions

The International Energy Agency (IEA) dropped its estimate of GHG emissions in the year 2020 by five per cent in a report released last week, due largely to slower economic growth. Subsequently global CO2 emissions are expected to drop three per cent in 2009, the steepest drop in the 45 years the agency has compiled statistics. That compares with an average growth of three per cent a year over the last decade.

The report emphasized that rapid investment in clean technology and significant reductions in carbon emissions must be addressed in order to avoid the worst consequences of climate change.

One of the IEA reports main findings was that China's recent energy policies could achieve much bigger cuts than expected, and will put them at the forefront of addressing and combating climate change. This is due to China's investment in wind, nuclear and energy efficiency projects.

Boxer-Kerry secures key supporter

In the US, the Boxer-Kerry draft bill moved a step closer to fruition last week when key Republican Senator for South Carolina, Lindsay Graham backed climate legislation.

In an opinion piece in the New York Times, Democrat and co-author of the bill, Senator John Kerry and Republican Senator Graham wrote that the United States can deliver the principles that "lead to both a climate change solution and energy independence" but would require "honest give and take and genuine bipartisanship" to find consensus.

Republican Graham is one of several senators from both sides of the floor undecided on climate legislation that both Kerry and Boxer have been trying to convince, in an attempt to garner the 60 vote majority required to pass the bill in the Senate.

Concessions are required from Democrats on the expansion of nuclear power energy while many Republicans fear legislation would hurt coal-producing regions and weaken energy intensive industries impacting the US economy. The current bill sets an $11 price floor and $28 ceiling.

UN to tighten CDM rules

The UN CDM executive board is tightening regulations for hydro projects that earn more credits than expected. The board wants evidence that accurate reduction estimates were submitted. This is largely due to 12 projects in the pipeline generating in excess of 20 per cent more credits than originally estimated in the PDD. Only eight per cent of 120 hydro projects have been labeled as "overperforming". At the 48th EB meeting, a Brazilian small hydro project had 32,000 credits for 2008 rejected as the developer could not justify the increase. The reduction in estimated revenues lowers IRR (internal rate of return) levels putting figures below the additionality benchmark.

Aviation confirms carbon targets

IATA (International Air Transport Association), which represents 230 of the world’s airlines, stated that members had pledged to improve fuel efficiency by 1.5 per cent per annum until 2020. The association set a goal of carbon neutral growth by 2020 and a 50 per cent net reduction of CO2 emissions by 2050 compared to 2005 levels.

Australia to launch CER trading

The Australian Securities Exchange will launch CER trading in Q1 2010 after receiving regulatory clearance to offer futures and options contracts for UN backed carbon credits. Under CPRS, provisionally scheduled to start in July 2011, Australian businesses have unlimited use of CERs for domestic compliance purposes.

VER Statistics
APX GS Registry: 123 (+1) Projects Listed
APX VCS: 72 (+2) Projects with Issued VCUs
Markit VCS Registry: 57 VCS (+1) Public View Projects
CCX CFI weekly volume: 66.3kt (-1,592.8kt)
CAR: 70 (+0) Projects Listed; 1.65Mt CRT issued

Source: APX; CCX; CAR; Markit

CDM Statistics

Total Issued CERs: 334.3Mt Issuances: 1,293
Total CERs Requested: 3.45Mt Host countries: 58
Registered Projects: 1,843 (+7) Requests: 81

Source: UNFCCC

This report was provided by MF Global, a leading broker in exchange-traded futures and options

For more details on the company's carbon market activities contact Gareth Turner at gturner@mfglobal.com

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