EU, Kyoto carbon trading link 'up and running'

Carbon emissions trading schemes in the EU and under the Kyoto Protocol were connected yesterday morning, the European Commission said after months of technical delays.

"It's up and running," a press officer for the EU Environment Commissioner said. "Transactions are taking place and everything seems to be fine."

The linked schemes allow European industry participating in the EU's Emissions Trading Scheme (EU ETS) to import cheaper offsets generated by clean energy projects, in countries such as China and India, registered in a voluntary emissions trading program under Kyoto.

These offsets, known as Certified Emissions Reductions (CERs), can be used by companies to meet a portion of their compulsory emissions targets under the EU scheme.

Until now the two schemes, the chief existing mechanisms for trading carbon emissions as a means to fight climate change, could not be linked because of delays in developing the necessary technology.

Market participants have been nervous that the absence of a functional link would cause CER sellers to default on their December delivery futures contracts.

"In some ways it's a collective sigh of relief," said Trevor Sikorski of Barclays Capital.

The connection was expected to be completed late last year, so sellers have been eagerly awaiting it for almost a year.

"The link should push (emissions) prices down in the near term as I would expect it will bring more sellers to market than buyers," Mr Sikorski added.

Analysts expect the spot spread between CERs and EU ETS Allowances to increase initially, as CER sellers rush to market to raise much-needed cash.

"My dominant view is the EUA-CER spread should widen temporarily as sellers beat buyers to the market," Emmanuel Fages, an analyst at Societe Generale, told Reuters.

Analysts added spot EUA prices may hold in the near term, since supply remains limited. EU governments have been reluctant to distribute EUAs to industry ahead of the connection. As a result, only around a quarter of the 2.08 billion permits expected in the market this year have been issued.

"The EUA-CER spread should shrink to between €1.50 and €2 through next year, as it looks like there will be a shortage of CERs," Mr Fages added.

Due to administrative bottlenecks, the UN climate change secretariat has issued only 196.8 million CERs since 2005, while analysts forecast global demand of around 2.4 billion by the end of 2012.

The long-awaited connection also allows project developers to deliver CERs to clients in EU member states, though it may not have an immediate impact on revenues.

"It provides a lot more clarity in terms of transferring CERs around, making delivery a lot easier (but) it's not necessarily going to have a huge impact on the business," said Lisa Ashford, project developers EcoSecurities' head of commercialisation in Europe.