Greenhouse gas credit market more country specific, report says

By Ann de Rouffignac
OGJ Online

HOUSTON, Aug. 2, 2001 – Natsource LLC, New York brokers for greenhouse gas emissions credits, said interest in this market is shifting toward trading in permits issued by individual countries.

The ability to hedge risk of these credits is viewed as superior to the first instrument traded on a global basis known as Verified Emissions Reductions (VERs). VERs carry the risk that individual countries might not recognize the credits in the future, once a specific regulatory framework is in place.

Natsource released its findings Thursday in a report commissioned by the World Bank on the status of the emerging greenhouse gas emissions market. The actual size of the market is unknown since companies are not required to report transactions.

But Natsource estimated there have been about 60 intercompany transactions involving 55 million tons of carbon dioxide-equivalent (CO2) emissions reductions. Most trades for the more risky VERs have been in industrialized countries of Western Europe and the US.

“Buyers are asking if you buy a credit today will it be applicable in the future?” said Evan Ard, spokesman for Natsource. Uncertainty over regulatory risk has kept prices down. The more guarantees a seller can tack onto the credit, the higher the price, he said.

Greater certainty accounts for the increased interest in so-called compliance instruments being issued by individual governments. Prices of these instruments, which are bought and sold among companies, are double to triple the prices of VERs.

Price variations
For example, in the Dutch market the price of an emissions reduction unit for CO2 compliance ranges from $4.40 to $7.99/ton. The VERs, on the other hand, trade in the range of 60- to $3.00/ton of CO2.

The prices of VERs vary according to the probability governments will certify the credits in the future. Another determinant of price is the creditworthiness of the seller. Sellers are obliged to provide some sort of future guarantee the VERs will be accepted by regulatory authorities.

Natsource concluded today’s buyers of greenhouse gas credits want to demonstrate leadership in addressing climate change before they are legally required to do so. They are anticipating prices will be substantially higher in the future when they may be required to buy the credits.

The report does not include intracompany trades taking place within BP PLC or in Royal Dutch/Shell Group. Such structured internal deals help the companies gain experience and practice in how a market may function in the future, explained Ard. They also help companies identify potential greenhouse problems and greenhouse assets.

So far, the emissions reduction units sold in the market relate to specific projects rather than company-wide actions. “Buyers prefer reductions generated by activities that they expect to be approved for certification in the future and where monitoring is straightforward,” according to the report.

The most popular types of activities that are used to generate the credits have been gas capture from landfills, fuel switching, and cogeneration. Renewable energy projects are also popular, Natsource said.


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