March 27 (Bloomberg) -- The European Union, frustrated that its 11,000 factories and power plants are failing to adequately reduce greenhouse-gas pollution, will seek tighter emission rules that may raise the price of burning fossil fuels.
The 27-nation bloc wants to curb access to a program run by the United Nations that rewards companies more for funding emission-reduction projects in China and India than for decreasing their own gas output in Europe. New limits are needed to force extra pollution cuts at home, the EU said in proposals for climate talks starting in two days in Bonn.
“I’m somewhat worried” about future projects, said Michael Fuebi, vice president of climate protection at RWE AG, which invested in 120 such ventures in Asia and South America.
The German power company, Europe’s biggest greenhouse-gas producer, had planned to earn “credits” from the investments abroad that will offset 11 percent of RWE’s total emissions in 2015. While the utility’s existing projects appear safe, new deals are now in jeopardy, Fuebi said.
Shrinking the supply of UN carbon offsets will force Europe’s coal-burning power plants, steelmakers and cement factories to buy more expensive EU pollution permits or install emission-control equipment at home. And opportunities will be crimped for project investors such as Morgan Stanley, Paris- based Electricite de France SA and Mitsubishi Corp. of Tokyo.
Carbon Offsets
The UN program, which co-financed $45.9 billion in carbon- offset ventures in 2007, is being studied in the U.S. for adoption in proposed cap-and-trade carbon-reduction programs.
UN carbon offsets should be phased out in “advanced developing countries,” such as China, the EU’s executive arm said in a January outline for talks among 192 nations in Bonn.
The shift already has undercut investor interest in funding new deals to trim carbon emissions in developing nations, UN data on Bloomberg show.
New projects proposed to the UN in the past three months are designed to cut 91 million tons of emissions over their lifespan, down from 153 million tons of gases in deals proposed a year earlier in the same period, according to Bloomberg data.
Under UN Clean Development Mechanism rules, companies in industrialized nations are invited to finance deals in poorer nations, from windmills and solar plants to devices that trap carbon dioxide, the main gas blamed for global warming. In return, they can receive credits for each ton of avoided air pollution. The credits can be traded or used in place of buying more-expensive pollution permits needed in the EU, operator of the world’s largest emissions-trading market.
Methane Waste
RWE, for example, paid for equipment to burn methane waste at a South Korean coal mine so the resulting gas traps less heat when entering the sky. The Essen-based utility also has projects in China and Chile that offset pollution from its 60 European power plants that burn coal.
The cost for RWE to avoid a ton of emissions was as little as 5 euros ($6.77) and averaged about 11 euros, data on its Web site show. Without UN credits, in the future RWE may be forced to make more expensive carbon cuts in Europe or buy EU permits, whose price averaged 13.10 euros a ton over the past two years.
Prices for EU permits and the interchangeable UN offset credits may climb on higher demand from polluters in Europe, analysts have said. UN credits will more than double through 2011 to 15 euros as supply shrinks amid more oversight and the recession, Trevor Sikorski, an analyst in London at Barclays Plc’s investment bank, forecast on March 6.
‘Easy’ Credits?
Europe, while promoting its carbon market at this month’s climate talks as an alternative to a straight tax, is retrenching in the face of criticism for fostering “easy” credits from the UN-supervised projects. Critics have said many ventures such as hydroelectric dams or factory upgrades should have been disqualified because they would have been built even without carbon finance.
“Only credits that are real, measurable and additional should be allowed into the market,” the European Commission said in an e-mail response to Bloomberg. No credits should come from deals that fail those criteria after 2012, the EU said.
“There seems to be an opinion among policy makers that carbon finance is easy money, that the market came from nothing and can adapt to anything,” Henry Derwent, president of the Geneva-based International Emissions Trading Association, said on March 5. “If hopes are dashed too many times, no one will put their money into carbon,” Derwent said by telephone.
Indian steelmaker JSW Steel Ltd., which uses factory waste gas to make power and reduce greenhouse gases, is one of several project owners that has drawn criticism for earning money from the carbon credits it generates.
‘Hugely Profitable’
“They were hugely profitable without carbon finance,” said Axel Michaelowa, who helps advise the UN on emissions trading and is a senior founding partner of Hamburg-based carbon consultants Perspectives GmbH.
JSW Steel Finance Director Seshagiri Rao defended the waste-gas project. He said UN approvals and “lots of scrutiny” by the public proved that “additional” cuts were made that wouldn’t have come without carbon finance. “It amazes me now if someone comes and says there is no ‘additionality,’” Rao said in an interview.
Closing the door part-way on future projects will reduce financing and trading opportunities for banks, such as Morgan Stanley and Goldman Sachs Group Inc. in the U.S., to the power company Electricite de France and trading house Mitsubishi.
A lobby group for investors in the UN carbon market, including Morgan Stanley and Royal Dutch Shell Plc, complained this month that EU plans to “phase out” some projects.
Payback Periods
Some clean-power projects require a 15- to 20-year payback period and so longer-dated regulation is needed, said Imtiaz Ahmad, an executive director for fixed income at Morgan Stanley in London and an emissions trader.
The UN-led offset system has been a success in reducing CO2 output in Asia, Latin America, the Middle East and Africa. Some 1.5 billion tons of CO2 emissions will be avoided through 2012 by registered projects, the UN says.
ThyssenKrupp, Germany’s biggest steelmaker, plans no new investment because of economic woes and uncertainty about whether a new UN treaty will carry the UN program forward, spokesman Alexander Wilke said. The company has three CO2- reduction projects in Brazil.
Recession Effect
“It will be very difficult to contract new projects,” because of the lack of certainty, said Niels von Zweigbergk, chief executive officer of Stockholm-based Tricorona AB, the second-biggest developer of emission projects, including in India and China. And EcoSecurities Group Plc of Dublin, the biggest promoter, is trimming back proposals, Chief Financial Officer James Thompson said in an interview.
Also undercutting the appeal to build new projects is lower demand for offsets during a global slowdown that has slashed output and emissions at factories.
A prolonged investor pullback would undermine the very CO2 reductions scientists say are needed to help prevent the average world temperature from warming 2 degrees Celsius (3.6 degrees Fahrenheit) to avoid the worst effects of climate change. “Going beyond 2 degrees will mean increasing food and water scarcity and severe weather events,” the EU said in January.
James Cameron, executive vice chairman of Climate Change Capital, a London fund manager with more than $1 billion to invest in reducing CO2, doesn’t like the developments.
“What we don’t want to have happen is for investors to lose confidence in the carbon market,” Cameron said.
http://www.bloomberg.com/apps/news?pid=20601085&sid=a5lSDVnwdi7k&refer=europe
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