LONDON (Reuters) - Investors in a World Bank-backed carbon offset project in China may make a small loss in 2013, after a European Union ban, but could still net more than $800 million over the seven-year life of the project.
The project was launched in the mid-2000s in the heyday of emissions trading, which has in recent years suffered scandals including fraud and cyber theft, while carbon prices have slumped lately on gloomy world economic prospects.
Under the Kyoto Protocol, rich countries can meet carbon emissions caps by funding cuts in developing countries, earning carbon offsets in return.
The Chinese project destroys a powerful hydrofluorocarbon (HFC) greenhouse gas, and sells the resulting carbon offsets at a large profit to investors and companies, who in turn have made fat margins on sales into the EU's carbon market.
The EU earlier this year decided to ban imports of HFC credits from May 2013 into its emissions trading scheme (EU ETS), preferring to support renewable energy, but the World Bank-backed fund runs for a further five months beyond that.
That means investors will have to continue to buy carbon offsets even after the world's biggest market has banned them.
"(We're bound) on behalf of the participants in the first tranche of the Facility, including the purchase of and payment for emission reductions up to the end of the life of the (purchase agreement)," the spokeswoman told Reuters by email.
The World Bank-backed fund paid 6 euros per tonne for the offsets called certified emissions reductions (CERs), say sources, while the project generates more than 800,000 tonnes CERs per month, U.N. data show, implying a loss of up to 26 million euros ($36.9 million) over the extra five months.
Participants in the fund include Deutsche Bank, Endesa, RWE AG, Tokyo Electric Power Co and Trading Emissions PLC, according to the World Bank website.
Trading Emissions PLC said in March it would seek alternative HFC markets outside the EU, but deadlock at U.N. climate talks means a new round of carbon caps looks years off.
The World Bank-backed project is one of the most lucrative ever in the carbon market, cutting some 10.4 million tonnes of greenhouse gases annually since its launch in 2006.
That's equivalent to the annual greenhouse gases of the east European country of Latvia, in equivalent carbon dioxide emissions. HFC greenhouse gases have a far greater warming impact than CO2, earning more carbon offsets per tonne of cuts.
Investors in the World Bank's Umbrella Carbon Facility have sold the CERs at a large profit in the EU ETS, where the average price in the past two years was 14.6 euros.
If that were the average EUA price through 2012 -- although prices have far exceeded that in recent years -- it would imply total net profits over its seven years of 600 million euros ($851 million).
The EU ETS caps the emissions of some 12,000 factories and power plants, meaning they have to buy EU allowances (EUAs) or CERs if they pass a certain limit. ($1 = 0.705 Euros)
Reporting by Gerard Wynn; Editing by Anthony Barker