New auction scheme to tackle carbon credit "gazumping"

One of the key barriers to buying UN approved carbon credits looks set to be removed with the launch of a new internet based auction service designed to stop agreements between credit purchasers and suppliers falling through at the last minute.

The new auction platform has been developed by carbon trading specialist CantorCO2e and will allow carbon reduction projects approved under the UN's Clean Development Mechanism (CDM) to sign a binding contract to sell a set number of Certified Emission Reduction (CERs) credits at auction.

"At the moment companies have to buy primary CERs direct from the project developer and that is extremely complicated as there are no standardized contracts," explained Steve Drummond, chief executive of CantorCO2e. "These deals fall through all the time as the legal processes involved mean that between the time of the deal being agreed and the contract being signed the price of CERs will typically change, leaving one side with an incentive to back out."

An auction-based approach will tackle this problem, according to Drummond, as the seller will have to commit to deliver the CERs in advance and the buyer must put up security with CantorCO2e ahead of the auction to esnure that it pays.

"It means that neither party can get gazumped or gazundered, and also means that a real market price for primary CERs can finally be established," said Drummond. "It really adds to the credibility and stability of the market."

He added that the new platform should also help "democratise" the market for CERs making it far easier for companies without large trading teams to buy CERs direct from carbon reduction project developers.

"Currently, the CER market is dominated by specialist banks as buying credits is a complicated process that requires firms to assess and understand project risks," he explained. "This way you don't need as much of that expertise, so the market should open up to smaller banks, hedge funds and emitters who need to buy credits for compliance purposes."

CantorCO2 said its first auction will be held on October 2nd and will see 260,000 CERs generated from three biomass projects owned by Latin American forestry firm Arauco put up for sale. Companies will be able to bid for the CERs through the on line auction and successful bidders will have their CERs delivered via the Swiss national emission registry.