EU's carbon offset limits: a boon for brokers?

European climate commissioner Connie Hedegaard speaks at a news conference at the EC headquarters in Brussels May 26, 2010.

LONDON (Reuters) - New European Union proposals to limit the use of industrial gas carbon offsets in its emissions trading scheme from 2013 could be a boon for reeling carbon brokers as exchanges wait for clarity before they alter their offerings.

EU climate chief Connie Hedegaard said on Wednesday she is considering post-2012 limits for the use of offsets, called Certified Emissions Reductions (CERs), in the wake of concerns over the environmental integrity of a United Nations carbon finance scheme.

Until the proposals are finalised, Europe's main emissions bourses said they have no plans to let their members buy specific types of UN-approved offsets, meaning brokers could reign in the over-the-counter market.

"This could segment the market, and that's good news for brokers," said Emmanuel Fages, an carbon market analyst at Societe Generale/orbeo.

Uncertainty surrounding rules is being embraced by brokers, who have been plagued this year by layoffs and lost business to bourses in the wake of the European recession.

"A lack of regulatory clarity means clients benefit from our more bespoke services," said Harry Beamish of brokers CarbonDesk CO2P.PZ.

Hedegaard said the quality restrictions would affect CER use in the scheme's third phase (2013-2020).

Exchanges currently offer trading in CER futures for delivery up to December 2012, but their rules are rigid and the contracts don't allow members to see what types they are buying.

The broker-led OTC market, on the other hand, is more flexible and lets buyers specify exactly what they are in the market for and when they want delivery.

"We'll likely see lower prices for exchange-traded CERs but higher OTC prices for non-industrial gas CERs," Fages added.

Experts said a fragmented CER market has its pros and cons.

Beamish said it could help buyers looking to act before any limits are brought in by letting them snap up industrial gas CERs for compliance use in the scheme's phase 2 (2008-2012).

But segmentation could adversely affect liquidity, splitting volumes and distorting prices between exchanges and brokers, said a source at a European carbon bourse, requesting anonymity.

It could also push the CER market towards resembling that for voluntary carbon credits, which features a plethora of different prices based on combinations of the genre of CO2-cutting project, its country of origin and its vintage year.

Regardless, some brokers said they were already seeing increased business on the back of Hedegaard's announcement.

"I've since had clients call about buying non-industrial gas CERs, something you can't do over exchanges," said one broker who also asked not to be named.

EU-imposed post-2012 CER limits will be announced after the bloc's commission completes an impact assessment, expected before UN-sponsored climate talks in Mexico later this year.

NO CLARITY, NO PLANS

Under the Kyoto Protocol's Clean Development Mechanism, heavy industry participating in the EU's trading scheme can buy CERs from UN-approved carbon-cutting projects in emerging economies and use them towards emissions goals.

Although Hedegaard did not specify which industrial gas CDM projects could be affected by her proposals, analysts said those that destroy a potent gas called HFC-23 are likely targets.

Some lucrative projects mainly in China and India that cheaply incinerate HFC-23 have been accused by green groups of exploiting the system by intentionally boosting production in order to claim more CERs.

A UN panel has now frozen CER issuances to a number of HFC-23 projects pending an investigation into the allegations.

While the UN's probe continues and the EU's CER rules are being ironed out, exchanges like the European Climate Exchange (ECX.L) and NASDAQ-OMX-owned Nord Pool said they will not segment their CER trade offerings to allow clients to buy non-HFC CERs.

"We do not have any specific plans to segment our existing CER offering," said a NASDAQ OMX (NDAQ.O) spokeswoman.

"ICE-ECX would need a lot more certainty over the post-2012 CDM market before offering any additional or amended CER products," said Sam Johnson-Hill of the ECX, which is owned by U.S.-based market operators InterContinental Exchange (ICE.N).

Rules for post-2012 CER use in the EU have been the subject of speculation for years, distressing investors seeking clarity and preventing exchanges from launching trade in 2013 futures.

The OTC market, on the other hand, has already seen several small CER trades for delivery after 2012, while this lack of clarity has also led to a slight price differential between CER types.

"We often see a green premium on some higher quality CERs, for example from renewable energy projects, and a discount associated with others," said CarbonDesk's Beamish.

(Editing by Keiron Henderson)