Carbon offsets are the world's worst performing commodity

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In addition to being a scam that does nothing to reduce emissions, the do-called clean development mechanism is a disaster for investors who hoped to profit from climate change.

by Gerard Wynn and Nina Chestney
Planet Ark, August 8, 2011

Carbon offsets neared all-time lows Friday, confirming their status as the world’s worst performing commodity, as slumping demand meets rising supply of the U.N. instrument traded under the Kyoto Protocol.

A worsening global economic outlook has dented prices for emissions permits which depend on a robust economy belching greenhouse gases into the air, and has also impacted oil, grains, coal and natural gas.

Carbon offsets have fared uniquely badly because a U.N. climate panel continues to print new offsets, regardless of a widening glut in emissions permits in the main demand market, the European Union’s carbon market.

Countries and companies in the developed world can buy offsets as a way to meet emissions caps agreed under Kyoto, paying for cuts in developing country projects instead, but the financial crisis has left a global oversupply.

“If the European economy goes through a double dip (recession) it could be a lethal threat for the carbon market,” said Marius-Cristian Frunza, analyst at Schwarzthal Kapital.

The U.N. scheme for generating certified emissions reductions (CERs), called the clean development mechanism (CDM), faces additional problems besides the economy.

Failure by countries to agree a new round of carbon caps after 2012 under drifting U.N. climate talks, has further curbed prospective demand.

The financial crisis has blown off course talks to agree a global climate deal, which now seems years off. The CER market had a traded value of $18.3 billion last year, down from $26.3 billion in its peak year 2008.

Adding to CER woes, the EU has banned from 2013 imports of the most common type of offset, from refrigerant plants in China, prompting investors to dump these.

Benchmark CERs fell as low as 7.4 euros Friday, down more than 7 percent on the day, fractionally above an all-time low of 7.15 euros.

Prices are now at around cost price in developing countries, squeezing margins for project developers such as London-listed Camco, whose shares were down more than 10 percent at midday, and by nearly 40 percent over the past month.

Rival developer Trading Emissions PLC last week pulled a proposed sale of its assets because of falling carbon prices. Its average CER costs are 7.5 euros per tonne.

European carbon prices also continued falls on Friday, to as low as 10.65 euros or by 5 percent.