Carbon Credit Watch

N2O offset claim unlikely to impact CO2 market: analysts

(October 19, 2010) An environmental group’s claim that U.N. carbon offsets awarded to clean energy projects which destroy nitrous oxide (N2O) have led to “phantom” emissions cuts is unlikely to impact carbon permit prices, analysts said.

“For now, the N2O issue should not have an impact on the market,” Deutsche Bank analyst Isabelle Curien told Reuters.

“I’m not sure (a U.N. panel) will launch an inquiry as I’m not sure there are grounds,” she added.

CDM Watch said on Monday that credits from projects to eliminate the pollutant N20, a by-product from adipic acid production, represent “phantom emissions reductions” and should be excluded from the EU’s Emissions Trading Scheme (EU ETS).

A study commissioned by the group said incentives from the U.N.’s Clean Development Mechanism (CDM) have shifted production of adipic acid in developed nations to China and South Korea, resulting in an increase in emissions.

Barclays Capital analysts said N2O CERs account for around 24 percent of total issued CERs. CDM Watch argues that 13.5 million CERs to N2O projects have been over-issued, or 12 percent of total N20 issuance.

The CDM’s Executive Board is probing projects to destroy the greenhouse gas hydrofluorocarbon-23 (HFC-23) after CDM Watch accused them of gaming the system.

“This time, the claim seems much less grounded. To substantiate it you need the economics of the plants and the local market figures on demand and how it has been affected,” said Emmanuel Fages, analyst at Societe Generale/orbeo.

The $2.7 billion CDM allows developing countries to claim carbon offsets, called certified emissions reductions (CERs), for emissions cuts and sell these to polluting companies in the developed world.

The EU ETS allows emitters to use a certain amount of CERs to cover their emissions.


CERs for December delivery fell 2.5 percent on Tuesday to 13.07 euros ($18.17) a tonne.

“If there was any impact, it should be the opposite of what we are witnessing. Since yesterday CERs are lower and the EUA-CER spread has been widening which is a sure sign the market does not think it is important,” said Fages.

When the HFC-23 probe was launched, CER prices soared to a four-month high due to supply concerns.

CDM Watch said it could not rely on the CDM’s EB to revise the crediting methodology for N2O projects and called on the EU Commission to address the issue.

The Commission said on Tuesday it will set out plans to limit the number of offsets from industrial gas projects which can be used in the EU ETS from 2013-2020 within six weeks, but declined to specify if N2O projects faced limits.

“CDM Watch is targeting the demand side, not the supply side as it is trying to provoke a decision from the EU Parliament,” Fages said.

If the U.N.’s EB decided to probe N2O credits, it is unlikely to do so before its next meeting on November 22-26, and even then it is likely to have a full agenda due to its continuing HFC-23 probe, analysts said.

“The board is certainly aware of all sorts of information but I cannot say at this point what action it could take. The agenda has not yet been made for its next meeting,” said David Abbass, the CDM’s public information officer.

Barclays Capital said even if a probe was launched, there should be little impact on the Dec-10 CER contract.

“The March 2011 contract would be most affected and the whole process does have the potential to provide some short-term CER price support,” the analysts said.

Nina Chestney, Reuters, October 19, 2010

Categories: Carbon Credit Watch

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