EU, US seek to contain emission-trading costs

The European Commission, the regulator of the world's biggest emissions programme, wants the US to buy greenhouse-gas credits from developing nations such as China, as surging oil and coal prices boost the cost of carbon trading.

The European Union is urging US lawmakers to reject price caps in proposed emission-trading programmes and instead allow the country's factories and power stations to buy cheaper credits, known as offsets, from projects in developing nations, said Peter Zapfel, the commission's emissions-trading coordinator.

Price caps aren't a good "design feature'' to curb costs because they stop the market working efficiently, Zapfel said on February 29 in an interview at the New Energy Finance Summit in London.

"There are benefits in allowing your companies to tap into the wider international market and that is something we stress,'' as EU officials talk with US legislators.

Emissions trading encourages greenhouse-gas reductions, where they are cheapest. Projects that cut emissions for a lower cost make more profit. Building wind farms probably costs less in China, where new power capacity is being built anyway, than in the US, where developers take on the extra expense of replacing coal-fired stations.

Costs of offsets are rising as higher energy prices make it more difficult to demonstrate that the credits are needed to justify renewable-energy projects, for instance.

A rule of emissions trading under the 1997 Kyoto Protocol is that factories and power stations shouldn't get credits for projects that would be viable without those allowances. The so-called additionality rule means projects eligible for credits must be supplementary to business as usual.

Finance costs
"Additionality is going to keep on changing,'' potentially boosting costs, Seb Walhain, the Amsterdam-based head of environmental markets at Fortis, said by telephone. "Projects need more and more finance.'' Crude oil climbed to a record $105.97 a barrel in New York yesterday. Natural-gas prices are linked to oil-product costs, for instance in European gas sales contracts.

Coal for delivery in northwest Europe next year rose to a record $136.50 a tonne on February 29 and was at $134 a tonne today, according to data from broker ICAP.

German power for next year has jumped 92 per cent to ¤64.15 ($98.83) a megawatt- hour since the start of compulsory emissions trading in Europe in 2005, according to broker GFI Group Inc.

The EU carbon dioxide programme, the world's biggest emissions trading market, allows factories and power stations to use credits from the United Nations system governed by the rules of the Kyoto Protocol.

Price discount
EU carbon dioxide permits were at ¤21.26 a tonne Yesterday on the European Climate Exchange in London. That's 36 percent more than UN certified emission reduction credits, which are at ¤15.60 on the Nord Pool exchange in Lysaker, Norway.

Camco International, the St Helier, Jersey-based manager of projects that curb greenhouse gases, said yesterday it had bought 37.3 million credits over several years for an average ¤7.25 a tonne.

"The US has missed out on the cheap industrial gas credits,'' said Fortis's Walhain.

The UN emissions trading programmes have created an incentive for investors to curb greenhouse gases blamed for climate change in developing nations around the world, said James Cameron, executive vice-chairman of Climate Change Capital, a London bank with more than $1 billion to invest in greenhouse gas credits.

"I think we greatly exaggerated the faults and insufficiently celebrated the successes of the clean development mechanism,'' the main UN emissions trading program, Cameron said.