The surging world oil price may boost demand for CER carbon credits, according to analysis by Deutsche Bank.

A surge in emission permit prices in the EU carbon market in the wake of spiralling oil, gas and coal prices may force a rethink of the rules to prevent carbon compliance getting too expensive, Deutsche analyst Mark Lewis says.

This would most likely mean a relaxing of the restrictions on the use of Kyoto offset credits, particularly Certified Emissions Reductions (CERs) generated under the Clean Development Mechanism (CDM).

CERs are can be used in place of the EUA permits handed out to European emitters and are cheaper. But the EU Commission currently proposes there be no new allocation for such substitution after 2013 beyond the limits already in place from 2008.

The proposal saw CER prices recede after it was announced earlier this year.
Although CER prices have recovered in the meantime, current record prices over €20 on the European-dominated secondary market for the credits are still well below EUA prices.

And with EUAs rising sharply and likely to trend higher, the easiest way for regulators to ease the resulting cost burden would be reverse the current proposal and allow greater use of the cheaper credits across Europe. Such a change would boost demand for CERs significantly and would likely lead to higher prices.

“A more generous quota may have to be allowed … to cushion against the risk of an excessive price spike,'' Bloomberg reports Lewis saying. Lewis forecasts benchmark EUA prices to rise from their current €27 to €40 in 2008. Each EUA gives the holder the right to emit one tonne of CO2.

Just such a move has been proposed by EU Parliament member Avril Doyle. Doyle says the current limit of 1.4 billion CERs over the next 13 years should be increased to 1.7 billion, a call that has won the support of industry lobby group International Carbon Investors & Services.

Lewis says the technicalities of the Doyle proposal may mean it is not enough to lower prices significantly but the use of UN credits is likely to be expanded in some way to cut costs and to demonstrate to the rest of the world that emissions caps and trading is a viable way to tackle climate change.

Bloomberg 20/6/08

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