Kyoto CO2 offset issuances grind to crawl in June

LONDON (Reuters) - June has been the worst month in over a year for the issuance of UN-backed carbon offsets, data compiled by Reuters showed, as auditor suspensions, bottlenecks and possible rule changes hinder requests from projects.

Only 3.4 million offsets have been issued by the U.N.'s climate change secretariat this month, the lowest level since May 2009, when 2.3 million were handed to clean energy projects registered under the Clean Development Mechanism. In the 12 months before June, the monthly average was 10.8 million.

The April-June quarter also has been the poorest in 10 quarters with 23.9 million CERs issued since March, the data showed.

Under the Kyoto Protocol CDM scheme, firms can invest in greenhouse gas cuts in emerging countries such as China or India and in return get offsets called Certified Emissions Reductions (CERs), which can be used toward emissions targets or sold for profit.

Four firms that had verified the emissions cuts of three quarters of the projects registered under the CDM so far have been temporarily suspended in the past two years, including two in March, for breaching rules.

This has meant that backlogs of approved projects requesting CERs and new projects seeking approval have built up, leading to fewer CERs coming to market and fuelling a near complete backwardation in the CER futures price curve.

"June has been abnormally low ... the auditor suspensions are definitely weighing," said Emmanuel Fages, an analyst at France's Societe Generale/orbeo.

Spot CERs on BlueNext were trading at 13.15 euros a metric ton on Wednesday afternoon, some 10 cents higher than the Dec-10 futures on the European Climate Exchange.

The ECX's Dec-11 and Dec-12 futures were trading at 12.75 and 12.85 euros respectively.

BOTTLENECK

"There's also a bottleneck at the completeness check level," Fages said, referring to a stage in the CER issuance process.

The U.N.'s website showed a queue of over 240 projects, the oldest submission dating back to late March, which were waiting to start a process the site says is meant to take seven days.

After the completeness check, projects are sent for additional information checks, which are meant to take a further 23 days before being moved to the four-week 'request for issuance' process.

"The request for issuance pipeline now holds just three requests, meaning only around 228,000 CERs can be issued from this process over the next four weeks," said Alessandro Vitelli, a director at market analysts IDEAcarbon, adding that only 142,000 CERs have been issued in the past two weeks.

Fages said he expects CER issuances to increase in July, while Vitelli disagreed, saying it will be "another dead month."

"Some sizable projects have postponed their requests for issuance," Fages said, referring to large, lucrative industrial gas projects that inexpensively destroy potent greenhouse gases such as hydrofluorocarbon-23 (HFC) and nitrous oxide (N2O).

HFC projects make up around 52 percent and N2O projects around 22 percent of the 421 million CERs issued to date.

HFC projects have been accused by green groups of abusing the CDM scheme by claiming excessive emissions cuts.

Some of the largest HFC and N2O projects have not yet requested CERs this year, the data showed.

Although the U.N.'s website shows that seven industrial gas projects have started or have finished the completeness check and awaiting the other checks, issuances to HFC and N2O projects are in decline.

Only 2.2 million CERs were issued to these projects in June compared with a 7.6 million monthly average over the past year.

This drop could be because the fate of industrial gas CERs is largely unknown, analysts said.

The European Union is now weighing options that could introduce qualitative or quantitative restrictions on the use of these types of CERs in its $100 billion emissions trading scheme.

A UN panel will publish findings from a recent meeting this week, which will list recommendations on how HFC projects should be treated, a UN spokesman said.

This could lead the CDM's executive board at its late-July meeting to seek adjustments to the number of CERs issued to HFC projects, the board's chair said last week.

Fages said some project owners may also be delaying requesting CERs until prices recover, adding that he expects CERs to trade up to between 15 and 17 euros by the end of the year, depending on the fate of HFC projects.

(Editing by Jane Baird)