Price difference between EU and UN carbon credits offers ‘huge’ profit opportunity

By | July 25, 2007

Factories and power stations in Europe need a permit for each metric ton of carbon dioxide they emit, under the EU's carbon-emissions trading system, the world's largest. They can also use credits from United Nations-approved projects that curb emissions in developing nations.

The difference in price between the two is significant. Today, EU carbon dioxide permits for 2008 are trading at €21.45, or $29.22, a ton. That is 47 percent more than the price of €14.54 for 2008 UN credits, called certified emission reductions, according to the latest prices from the European Climate Exchange in Amsterdam and Nord Pool exchange in Lysaker, Norway.

Factories in Europe generally will get enough permits, which are allocated by the governments of EU countries, to satisfy their needs in the next phase of the trading system, from 2008 though 2012. They would profit from selling to power plants their capacity to import cheaper UN credits, Kris Voorspools, an analyst at Fortis in Brussels, said Monday.

"At the moment there's a huge opportunity and few people are doing that," Voorspools said.

The EU cap and trade program provides incentives, through permit trading, for companies to reduce carbon dioxide, the main greenhouse gas blamed for global warming. Heavy polluters have to buy more emission permits when they exceed their cap or face fines. Cleaner companies profit by selling the permits they do not need.

Industrial emitters – steel mills and cement plants, oil wells and refineries, and various factories – will probably get about 810 million tons of EU permits a year starting in 2008, enough to meet their needs, Voorspools said. Power plants, by contrast, will probably get about 1.14 billion tons a year, 19 percent fewer than the 1.41 billion they are likely to need.

Governments are less generous to utilities, because they pass on emission-permit costs to consumers.

A spread of €7 between permits and credits would offer a potential profit of as much as €760 million, equivalent to roughly $1 billion, Fortis said. Once factories start demanding UN credits, the spread would probably contract.