Secondary CERs

In the second phase of the EU ETS, CERs (Certified Emission Reductions) will become important compliance tools alongside EUAs.

Especially small and medium sized compliance companies have not yet looked into the possibilities and limitations of CERs.
New Values has developed a new service which makes it possible to buy and trade CERs easily, without all the risks normally related to CERs; so-called secondary CERs.

Hereby some explanations and background information!

CERs are Certified Emission Reductions which come from Cleaner Development Mechanism (CDM) Projects in Asia, Africa and Latin America (non-Annex I countries). These CDM projects reduce the amount of CO2 emissions in the air through different methodologies and techniques and the CO2 reductions can be sold as CERs to Annex I countries.
It is possible to buy CERs directly from such a project, which are then called ‘Primary CERs’. With a Primary CER you also share the risks related to a project (project risk, credit risk, technology risk, delivery risk, market risk, etc.).

Primary CER Market Trading =
The purchase or sale on based on forward CERs to be generated from a CDM project overt the Kyoto Compliance Period.

Next to Primary CERs we recently have also seen development towards Secondary CERs. Companies who have bought larger quantities of Primary CERs are selling part of their own CER portfolio onto third parties, which are then called secondary CERs.

New Values has developed a service which makes it possible also for smaller and medium sized compliance companies to have access to CERs, by providing the opportunity to buy Secondary CERs over the Climex platform. All you need to do is become a member, which is free of charge and without any obligations.

The New Values Secondary CER:
- Has a guaranteed delivery
- Comes without the risks a primary CER has
- Comes from a creditworthy and trustworthy company
- Helps to determine prices more easily, because the secondary market standardises the risk and
damages can be compensated against ‘ market prices’
- Delivery at the UK or the Dutch registry to minimise the eligibility risk
- Is delivered free of project risks and full market based damages apply for non delivery (as per EUAs),
except:
- If the ITL is unavailable to transfer CERs to the registry account, the delivery date will be delayed until
the 1st date upon which the transfer can take place via the ITL;
- If the Eligibility Criteria prevent transfer of CERs then delivery may be delayed or made out into another
(eligible) country’s registry.

With this opportunity to trade Secondary CERs over the Climex platform the risk related to Secondary CERs is limited to elements beyond our influence:
- Availability of the ITL (International Transaction Log)
- The extent to which countries fulfil the Eligibility Criteria
- NAP caps on CERs
(most countries have limited the influx of CERs in the compliance scheme. This is for example 10% for Poland and the Netherlands, 8% for the UK and 20% for Germany).

With the possibility to trade Secondary CERs on the Climex Platform, New Values has created a lot of opportunities.
For example a company in Germany with an allocation of 1 Mt of EUAs can buy 1 million Secondary CERs and sell 1 million phase 2 EUAs. Every € 1 price spread between EUAs and CERs equates to 1 million Euros of low risk profit over phase 2.
Another advantage to CERs is that they will probably also be valuable after 2012.

Experts at Carbon Expo agreed that price developments during the second phase of the EU carbon trading scheme will mainly be triggered by the actual amount of imported CERs.
The CER import limits are the crucial figures in the price equation for the second emission trading phase. The European Commission has set the import limits for CERs slightly higher than the demand within the EU-ETS, thus overcompensating the shortage of allowances in the second phase allocation plans. Due to the swap of CERs into the EU-ETS, the European carbon market could become oversupplied. However, the experts are also doubting a market-rational behaviour within the industry. The assumption is that the industry will not fully exploit the potential to swap CERs against EUAs.
Phase 1 has shown a lot of decision makers within the industry who do not fully exploit the trading opportunities which are available. It is likely they will not fully make use of the EC’s import limits for CER imports and this makes the overall long position in the second phase of the EU ETS unpredictable.

Sascha Bloemhoff
Sales Manager