UN Carbon Credits Seen Trading at Higher Prices Vs Voluntary Market (4)

By Mathew Carr

Nov. 25-27, 2021 — LONDON: United Nation carbon credits (UNCCs) are seen trading for a higher price than voluntary emission contracts produced in other ways, now that the Paris rule book has been agreed, according to an extended survey of market participants.

The transition from the Clean Development Mechanism under the Kyoto Protocol is now assured and the new global market for 6.4ERs (I’ll call them UN carbon credits) under the newly agreed Paris rulebook is set to boom, though perhaps not as soon as 2022.

See this and remember this important bit from the Glasgow texts:

UN envoys at the COP26 talks in Glasgow decided:

…”that requests for registration, renewal of crediting period and issuance of certified emission reductions for project activities, as well as the equivalent submissions for programmes of activities, relating to emission reductions occurring after 31 December 2020 may not be submitted under the clean development mechanism, acknowledging that such requests and submissions may be made under the mechanism established by Article 6, paragraph 4, of the Paris Agreement (hereinafter referred to as the Article 6.4 mechanism), approval of which is subject to the compliance with its rules, modalities and procedures and any other requirements determined by the Conference of the Parties serving as the meeting
of the Parties to the Paris Agreement or the body that supervises the Article 6.4 mechanism
as designated by decision -/CMA.35 (hereinafter referred to as the Supervisory Body);

Following this, some emission-reduction developers in big emerging countries are seeking to hold their CER (Certified Emissions Reduction) credits produced under Kyoto and put them into the 6.4 system, said one person familiar with the situation.

Only projects registered after 2012 are eligible for transfer to under Paris.

Some emerging-market developers of emission-cutting projects are expecting more than triple the 2.50 euros you can now get for pre-2013 CERs, said the person. And even these pre-2013 CERs have surged in value during the past few months — to that level from about 30 euro cents a ton three months ago, he said.

Post-2012 CERs are not trading, he said. Others see the price of these still around the 2 euro level.

So, the fact that some developers are expecting prices of $10 a ton or more under Paris is important, because the price in the global airline offset market is about $8.90 a ton, according to broker Evolution Markets.

And that’s a massive discount to EU carbon allowances, which are changing hands today for a record 74 euros a ton on ICE exchange.

The supply underpinnings for the market under article 6.4 of Paris are there.

UN carbon credits may be popular because there are built-in protections. There’s 5% share of proceeds for developing countries and at least 2% to help guarantee overall mitigation on a global basis.

While these extras will make the new UN carbon credits expensive, there are massive demand underpinnings that make up for that.

Demand could be strong because there’s a desire for UN-stamped carbon assets from corporations seeking to show their customers they are serious about helping to saving the climate.

Some billionaires and others are already mopping up cheap carbon credits in a deliberate bid to protect the climate and create scarcity. It’s not entirely clear to me whether this mopping up is permanent, ie are the buyers also cancelling the credits so they can’t re-enter the market. Or might these credits turn up for sale again in the future.

The huge corporations don’t need to get involved in corresponding adjustments if they don’t transfer UN emissions credits after they are issued, according to some people.

They can voluntarily cancel them, taking them out of the system and creating scarcity. See section K, p11, note 3, below. There is still some debate in the market about this. See this debate from this Gold Standard LinkedIn post.

See also this snip about the letters of approval (LOA) that were difficult to get under the Clean Development Mechanism (CDM) and how difficult it will be to get CAs (corresponding adjustments) from countries under the Paris agreement — where a country selling credits will need to tighten its Paris target (its nationally dertermined contribution) by the same volume as the credits’ contribution to the buying country’s target (contribution):

LinkedIn – Nicola Steen

Crucially, this system provides for a mechanism for developing countries to seek finance direct from the private sector for clean projects that will allow them to leapfrog rich countries, which have a dirty fossil-fuel basis, people said.

This new system therefore provides global emissions cutting that’s outside of the nationally determined contributions. It will probably create a race for climate finance among all nations.

It’s somewhat of a leap of faith that the system will work well, said one important emerging-nation negotiator.

From my survey, the UN decisions under Article 6.4 have the voluntary carbon-market frameworks scrambling to try to protect their turf.

The market under Article 6.2 of Paris, on the other hand, might take many years to evolve because Paris compliance targets set by nations are rarely for years prior to 2030.

Yet, 6.2 could still become the most-used system if the UN envoys fail to set up 6.4 with speed and efficiency. And voluntary markets already exist and in theory can play in either 6.2 or 6.4.

There’s still plenty of work to do on the transition from Kyoto to Paris, by the way…for instance see this:

The envoys at Glasgow also decided to conclude “consideration of the following matters related to the clean development mechanism, which have been referred to the subsidiary bodies:
(a) Review of the modalities and procedures for the clean development mechanism, referred to the Subsidiary Body for Implementation;
(b) Procedures, mechanisms and institutional arrangements for appeals against decisions of the Executive Board of the clean development mechanism, referred to the Subsidiary Body for Implementation;
(c) Land use, land-use change and forestry under Article 3, paragraphs 3−4, of the
Kyoto Protocol and the clean development mechanism, referred to the Subsidiary Body for
Scientific and Technological Advice;
(d) Implications of the inclusion of reforestation of lands with forest in exhaustion as afforestation and reforestation clean development mechanism project activities, referred
to the Subsidiary Body for Scientific and Technological Advice;

Comments my way to mathew@carrzee.net … please.

(Adds prices and comments, link below on Verra’s view, more to come)

NOTES

NOTE 1: Also see this: https://carrzee.org/2021/11/21/muted-market-moves-underplays-importance-of-glasgow-cop26-talks/

NOTE 2: And this from voluntary framework Verra, etc: https://carrzee.org/2021/11/19/countries-seen-adopting-voluntary-carbon-markets-as-wto-official-says-multilateralism-is-the-only-real-way/

NOTE 3: Article 6.4, Glasgow 8am Nov. 13

NOTE 4: Article 6.2, 8am Nov. 13

UN market underpinned. Photo by Tomu00e1u0161 Malu00edk on Pexels.com

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