MH-Carbon produces a range of informative literature on various topics relating to the carbon markets. You can access these by registering at or, if you have already done so, logging in at www.mhcarbon.com.
This literature covers the difference between the compliance and the voluntary markets and the types of carbon credits available. It is useful to have some idea of these concepts before reading this important story, so we provide a brief introduction.
Background to the carbon markets
The original 1997 Kyoto Conference resulted in a major agreement between industrial nations to restrict and reduce carbon emissions. Signatory countries have been legally obliged to meet certain emission targets. Offsetting – the buying of carbon credits sourced from an emission-reducing project elsewhere – is one tool to achieve this and the price paid helps support the source project. As governments and larger polluting companies buy these carbon credits to meet legal requirements, the market where these are traded is referred to as the Compliance Market and there are additional rigorous procedures beyond the assessment of the project and issue of the credits. As a result of this, CER prices have historically been higher than those credits, VERs, which are only eligible for voluntary market where, without any legal requirement whatsoever, governments, companies and even individuals buy them mainly to hold or to use to offset their own emissions. All carbon credits allow the emission of one tonne of CO2 or an amount of another greenhouse gas which causes the same damage. The differences between the various types mainly relate to eligibility.
Certified Emission Reductions (CERs)
These are carbon credit from a Clean Development Mechanism (CDM) project. Under this mechanism, emission reduction projects set up in developing countries generate carbon credits which, under certain conditions for compliance, can be used in the European Union Emissions Trading System, (EU ETS), which is part of the compliance system and the largest market . CER price depends, amongst other factors, on what kind of project it is, the risks associated with the project and its owner and how far along the pipeline the project has progressed.
Emission Reduction Units (ERUs) ERU stands for Emission Reduction Unit. ERUs are carbon credits from a Joint Implementation (JI) project. This means they are sourced from projects in Annex I countries. These are developed industrialised countries rather than developing. For various reasons, though they are similar types of credit , there are price differences between CERs and ERUs.
CER prices have continued to sink as traders offload their positions in favour of ERUs which can be purchased cheaper but still used for the EU ETS. The price is now almost down to 3 Euros, which is seen as a critical point. “The feeling is that with increased ERU supply coming into the market, there’s not much reason to hold onto CERs, particularly because of oversupply in the compliance carbon market as a whole,” said one trader.
A UN compliance committee recently lifted a ban on Romania’s ability to trade carbon units, which could significantly increase ERU supply by the end of the year. EU allowance prices fell to a three week low as natural gas prices dropped with increased supply. Cheaper gas prices make it easier for utilities to switch to natural gas – which is relatively clean – and therefore reduce demand for carbon permits.
Oversupply in the Compliance Market has been a major issue. In previous UPDATEs, we have had stories about governments setting up new carbon markets and the balancing of supply and demand has been a major concern. If there is oversupply, the prices are suppressed and it is easier for companies to afford excess pollution which, to a large extent, defeats the object.
In contrast to this, Voluntary Emission Reductions (VERs) have seen a surge in popularity recently as companies worldwide whose activities do not fall within specific mandatory emission control regimes,