May 5, 2015 / 5:07 PM / 4 years ago

European companies close to exhausting cheap U.N. carbon credits

* Companies left with only 20 mln offsets a year to 2020

* Cost of compliance likely to increase

* High offset use hampers efforts to cut carbon market surplus

By Susanna Twidale

LONDON, May 5 (Reuters) - European companies have used almost all of their quotas of cheap U.N. carbon credits to reduce emissions costs under the EU Emissions Trading System (ETS), which is likely to push up their compliance costs in later years, analysts said on Tuesday.

The ETS is the bloc’s flagship policy to cut greenhouse gas emissions, regulating about half of Europe’s output of heat-trapping gases by forcing more than 12,000 power plants, factories and airlines to surrender an allowance for every tonne emitted.

Companies covered by the scheme can surrender a total of about 1.57 billion United Nations-backed carbon offsets against their greenhouse gas emissions to 2020, instead of more expensive EU Allowances (EUAs), the staple currency of the EU carbon market.

However, data published late on Monday by the European Commission showed that companies in the EU have already used about 1.446 billion U.N. offsets, leaving them a little more than 20 million a year to 2020, Thomson Reuters Point Carbon analyst Marcus Ferdinand said.

“We can assume that many companies have used most if not all their credit limit already ... the possibility to reduce their compliance costs by using cheap credits instead of EU Allowances is phasing out,” Point Carbon’s Ferdinand said.

U.N. offsets are generated by projects that reduce emissions in developing countries and countries with targets under the Kyoto Protcol.

The U.N.-backed offsets currently trade at around 0.50 euros a tonne, while benchmark EUAs cost about 15 times more at 7.50 euros.

Monday’s data showed companies used about 255 million U.N. offsets to comply with the ETS in 2014.

German utility RWE is Europe’s biggest corporate emitter of carbon dioxide and its annual results showed that it had to cover a shortage of 148 million carbon allowances last year.

Damien Morris, Head of Policy at lobby group Sandbag, said the high level of offset use severely reduced the impact of measures introduced by the European Commission last year to help stem oversupply in the EU carbon market caused by weak economic growth, low industrial production and energy demand.

“Analysis from Sandbag finds that, against expectations, the market surplus decreased by only 10 million last year, leaving the total at 2,088 million,” he said.

Last year the European Commission started to withhold 900 million permits from the carbon market from 2014-2016 under its backloading plan in an attempt to boost prices.

Carbon prices have tumbled by more than 70 percent from highs over 30 euros per tonne hit in 2006, leaving the market too weak to spur a switch to low-carbon technology.

Editing by David Goodman

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