LONDON (Commodity Online) With used carbon credits finding a way back to the market, UN backed carbon credits grounded to a halt on Tuesday with exchange prices plummeting to EUR 1.00/tonne of CO2. Meanwhile, European Climate Exchange (ECX) is putting in place new rules to block recycled certified emission reductions (CERs) from trading on the Lodon-based platform.

ICIS Heren, an information provider on energy and coal market intelligence said that confidence in the carbon market has been blasted by news that EU countries can re-sell these credits in the international market and make a profit. Prices of this kind of UN-backed carbon credit - certified emission reductions (CERs) - are now falling, while trading volumes have almost dried up.
The price of UN carbon credits dropped to EUR11.60/tonne of CO2 in the traded over-the-counter market on Tuesday afternoon, compared with prices above EUR12.00/tonne of CO2 last week.

As per the new regulations put in place by ECX, recycled CERs will now be added to ECX's list of ineligible credits, joining those from large hydro, nuclear and forestry projects, also rejected by the EU.This protects buyers from the risk of ending up with a CER that cannot be submitted for compliance. This risk has unnerved the market since Hungary sold a batch of already-surrendered CERs last week.

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ECX's clearing members and clearing house will be in charge of crosschecking all CERs sold on the exchange against a list of already-submitted international credits, published by the European Commission.

For companies that are obliged by EU law to buy carbon credits to comply with emissions targets, government-led carbon credit recycling means they risk buying a worthless asset.The reason is that the EU only allows CERs to be submitted once, to avoid double-counting of emission reductions.

If the CERs that national governments have sold on the international market return to an EU buyer - through normal re-trading - this buyer will not be able to use the credits for compliance under the EU emissions trading scheme.

The new EU rules are expected to come into force shortly. The EU list is only updated on a weekly basis, which could affect spot CER trading - a relatively small part of the market. The Commission has told exchanges that this should be frequent enough at present, as sovereign sales of carbon credits - assigned amount units (AAUs) or CERs - normally take longer than that to complete.

Towards the end of the EU Emission Trading System (ETS) compliance year, in April, the list could be updated more frequently, however. This is when companies usually file CERs to comply with the previous year. Other exchanges, ICE and France's BlueNext are contemplating rule changes, analysts said.

CER liquidity on exchanges will now depend on confidence in the market that recycled CERs will really be filtered away. Some traders consulted by ICIS Heren were still wary. "Some CERs could easily slip through - this is what we saw with carbon fraud," one source said.

Trevor Sikorski, analyst with Barclays Capital, said that a potential consequence could be that trade shifts back into the bilateral markets, where individual participants can manage this risk with their own documentation: "This should not be seen as the end of the secondary CER market, but rather the start of the fragmentation of the market."

The EU is yet to officila announce attempts to close loopholes that allow countries to surrendered CER's.The International Emissions Trading Association (IETA) said in a circular that the Commission had proposed to change its registry regulations to make it easier for everyday traders to tell the difference between a recycled and a compliance-grade CER. (PRNewswire)