Kyoto carbon offset profit margins evaporate

LONDON Feb 13 (Reuters) - Profit margins for sellers of carbon offsets under the Kyoto Protocol have collapsed to zero as emissions prices tumble, analysts IDEAcarbon said, adding that new pricing trends may worsen things. In its weekly price survey dated Thursday, IDEAcarbon said average prices for U.N.-approved Certified Emissions Reductions (CERs) quoted by clean energy project owners have fallen below the market price at which project developers can sell them.

"This puts project developers in jeopardy because buyers can now purchase cheaper, risk-free CERs directly from the market," said IDEAcarbon's Tenke Zoltani, adding that the average cost of CERs to developers has risen above their market value.

Under Kyoto's $32 billion Clean Development Mechanism (CDM) scheme, firms such as EcoSecurities ECO.L can fund emissions cuts in countries like China, and receive primary CERs (pCERs) which can be sold for profit in the secondary market.

Heavy industry in the European Union can import a set quota of secondary CERs (sCERs) for use under the bloc's emissions trading scheme, though the economic slowdown and muted EU industrial output forecasts have severely dented carbon prices.

EU carbon permits for delivery in 2009 CFI2Z9, which heavily influence CER prices, hit an all-time low of 8.05 euros ($10.40) on Thursday, down nearly 50 percent so far this year.

IDEAcarbon said the average pCER price this week was 7.59 euros, 2 cents below the 2009-2012 Reuters CER Index price of 7.61 euros <CER/RTR>. This spread averaged 6.68 euros in 2008, peaking at over 10 euros last July.

pCERs that carry the least risk were priced at 8.72 euros, more than 1 euro above the market re-sell rate, IDEAcarbon said.

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A move away from fixed price contracts between project owner and developers is another trend that may affect profitability.

"Fixed prices are becoming a thing of the past, so the immediate outlook for developers is more bearish than previously thought," Zoltani said.

Floating prices, or pCERs priced as a percentage of sCER market rates, mean developers could see limited profits if sCER prices recover as pCER prices would rise alongside them.

These factors mean companies are no longer aggressively originating projects. One developer told Reuters that the number of buyers competing in China has halved in the past year.

IDEAcarbon said CER prices may remain depressed, citing diminishing demand for CERs, a lack of project finance and an expected release in China's pCER floor price.

China imposed a pCER price floor of 6 euros in 2007 to guarantee a minimum level of revenues, which it taxes heavily.

That floor was raised to around 8 euros last summer when CERs hit record prices above 20 euros a tonne.

Zoltani said China is expected to unofficially release the price floor in March to encourage investment and "look the other way as deals are transacted in the 6-7 euro price range".

Some question the effectiveness of easing the price floor.

"It remains to be seen if a potential reduction of the floor price will bring back life into the Chinese CDM market or if it rather initiates another sell-off in (EU permits) which again would render it uneconomical to invest in pCERs," said Alex Winzer of Austria-based Climate Corporation.

To purchase IDEAcarbon's pCER Index Survey results or for additional news and analysis on the carbon markets, go to here (Reporting by Michael Szabo; Editing by Keiron Henderson)