VERIFICATION SLOWS EMISSIONS MARKET

This is at least the 3rd important revelation about cap-and-trade systems by the EU marketplace. Initial price volatility in Certified Emissions Reduction (CER) credits was created because when the EU freely assigned all CERs instead of holding and auctioning a portion, the price quickly dropped. Next there were and continue to be legal battles over CER allocations to new EU members who, like developing nations, need to emit for their economies to grow. Now this, which reveals that a streamlined, workable verification process is vital to efficient market function.

When the US finally institutes its own cap-and-trade system, it ought to pay royalties to the EU for writing the original.

EcoSecurities warning hints at carbon bottleneck
Graham Davies, 6 November 2007 (Investors Chronicle)

WHO
Carbon credit traders EcoSecurities, Camco International and Trading Emissions

Verification is a multitiered process. (click to enlarge)

WHAT
- Under the United Nations Clean Development Mechanism (UNCDM), CERs can only be traded after they have been rigorously verified. The verification process is becoming complicated and slowing activity in the trading market. That means a loss of revenues for traders and a drop in valuation for the trading companies.

WHEN
- February to May 2007: 88% of project applications verified.
- June to October 2007: 48% of project applications verified.

WHERE
- Projects that reduce emissions or create emission-free energy are eligible to sell CERs to businesses or industries that produce more emissions than they are allotted by Kyoto Protocol capping.
- Typically, the selling entity is in the developing world and the buying entity is in Japan or the European Union.

WHY
- The UN CDM process is rigorous because it was designed to make certain CERs were allotted only to projects that would reduce world emissions.
- EcoSecurities has revised its expected gross volume of CERs from 185 million to 142 million. This is primarily due to a lower volume of CERs available to sell because projects with applications remain unverified.

The market has smoothed out noticeably in recent months after early volatility. Will this slowdown create trouble? (click to enlarge)

QUOTES
Andrew Shepherd-Barron, analyst, KBC Peel Hunt: "There is no question there are problems in the CDM. The executive board wants to maintain project quality, but it is losing a lot of staff and also facing a tidal wave of projects…"