Carbon traders voice fears over recycled carbon credits

Resale of surrendered Certified Emission Reduction credits by Hungarian government prompts warning that "double counting" could damage the integrity of the EU emissions trading scheme. From BusinessGreen, part of the Guardian Environment Network

James Murray for BusinessGreen, part of the Guardian Environment Network
guardian.co.uk, Thursday 18 March 2010 09.46 GMT
The integrity of the EU's emissions trading scheme could be badly undermined unless governments resist the temptation to sell on "recycled" certified emission reduction (CERs) credits that have already been surrendered by businesses.
That is the stark warning from the International Emissions Trading Association (IETA), after the Hungarian government last week agreed to sell on two million "recycled" CERs to an undisclosed intermediary.
Government officials confirmed the CERs had been provided by Hungarian companies that had surrendered the UN-approved carbon offset credits to help them comply with the emission caps imposed on them through the EU emissions trading scheme (ETS).
The government subsequently swapped the CERs with Assigned Amount Units, cheaper carbon credits traded between governments and used to demonstrate their compliance with Kyoto targets. It then signed a deal to sell the CERs on to an undisclosed trading firm, which is expected to sell them on to businesses in Japan.
IETA president Henry Derwent said the arrangement set a potentially dangerous precedent. "If Member States 'recycle' credits, they will place companies and other organisations at risk of purchasing CERs… on the international carbon market that have been already submitted to compliance authorities," he said. " This apparent double-counting could damage the reputation of the EU-ETS."
The practice means that firms outside the EU could use the CERs to demonstrate that they have offset their carbon emissions, despite the fact that Hungarian companies have already used them once to demonstrate that they have funded emission reductions.
Moreover, the CERs could even be sold back into the EU where firms purchasing them would discover that they cannot be submitted to EU authorities for a second time to help count towards their emission reduction targets.
Derwent said that if the EU is to retain confidence in the CER market it is essential for any government considering recycling surrendered credits to attach a "due diligence" letter that explains their status to the buyer and which contractually obliges the buyer to pass the letter on in the case of further resales.
He added that the EU was working on legislative measures designed to close the loophole that allows double counting.
But Stig Scholset, senior analyst at research firm Point Carbon, told BusinessGreen.com that it could take years for the loophole to be completely closed. "New legislation that is expected to come into effect in August will make it impossible for any surrendered CER to be held by a European account," he said. "But there is nothing to stop surrendered CERs being traded outside the EU, and if the EU does want to close the loophole completely it will have to start over with the development of new rules."
He added that only a relatively small number of surrendered CERs were likely to be traded, with just a handful of eastern European government expressing interest in the practice. But he agreed that if CER recycling continues unchecked it could undermine confidence in the integrity of emission trading and curb demand for new CERs from emission reduction project developers.