Falling prices and uncertainty have characterised the CER market in January on the back of global financial market volatility and the release of European proposals for the next stage of the Emissions Trading Scheme (EU ETS).

In the secondary market (trade in issued CERs), prices have dropped ？3 since mid-January as most financial markets dropped on fears of a US recession. Prices were further hit on news that Phase III of the EU ETS might not add any new capacity for use of Kyoto carbon credits beyond that of Phase II, despite a toughening of targets.

On February 1, the benchmark December 2008 contract closed at ？14.40 on the Nord Pool Exchange in Europe. Prices for longer dated contracts through to 2012 are also at ？14.40. The spread between EUAs and CERs has narrowed, however, currently in the ？4.50-？5.50 range compared to ？5.50-？6.50 over the previous month. In the US market, Dec 08s last traded at $22.41 (？15.13) on January 24. Sales have since dried up amid the uncertain conditions.

The prices of carbon allowances and credits are normally heavily influenced by energy markets, particularly the relative prices of gas and coal and price of electricity. Since the market shake-out in mid-January, the carbon market has followed the price of oil more closely. Oil has been acting as a proxy for the global economic outlook amid the threat of worldwide downturn. Such a slowdown in economic activity would mean reduced oil demand. It would also mean fewer carbon emissions resulting in less demand for emission allowances and credits. So when oil goes up or down, carbon prices have followed but the link can be expected to weaken as markets settle.

Vertis Environmental Finance claimed the first ‘spot’ trade in CERs (that is, for immediate delivery) through an exchange in mid-January. They sold at ？16.50 compared to a benchmark Dec 08 forward delivery price in Europe of ？17.20 at the time. The trade on the Climex exchange was made through Switzerland, its emission registry being one of the few yet connected to the UN’s International Transaction Log (ITL) through which Kyoto carbon credits must go to trade internationally.

In the primary market, the falls in EUA and secondary CER prices, along with general concern over the world economic growth, can be expected to put pressure on prices struck in emission reduction purchase agreements (ERPAs). ERPAs govern the prices of CERs not yet issued from projects in development.

The primary market won’t see the same volatility but there may be some lowering of prices over time - depending on how deep any world economic slowdown is and how long it continues. The higher prices demanded in CDM project host countries like India are more likely to come under pressure than the lower, more fixed, prices found in China and Vietnam.

ERPA prices continue to cover a wide range depending on stage of development, approval hurdles (validation, registration) reached and host country. Indian project developers continue to ask the most expensive prices, up to ？25 a tonne, according to Asia Carbon Group. This compares to the fixed-price approach of China where ERPAs are more consistently struck around ？9 to ？10. The market in Vietnam is evolving along the lines of the Chinese model at the same prices.