Carbon Analysis: Market moves challenge pricing decisions

Quite unexpectedly, the iron rules that used to drive the pricing of primary CERs (pCERs) not so long ago seem to be cracking one after the other, much to the dismay of credit buyers.
For the record, the primary price is not quoted on a market, but the price is based on the range of bids and offers reported from the primary market. This pricing is usually driven by certain rules, case in point, pCERs’ price is driven by secondary CERs’ (sCERs) market price evolution with the delivery risk explaining the discount. This delivery risk can vary from one project to another, but most of the time it is correlated with the host country or project’s technology. This risk delivery is explained by the failure of a project to get financed, registered, or by uncertainties regarding project performance (see chart).

Project risk by technology - Original graphic by analyst Alexis Poullain

Recently, the “classic” pricing structure has been challenged. Usually, the price of pCER evolves in a channel defined by an upper limit (the ceiling price) and a lower limit, that most analysts used to bind to a theoretical bottom price of a project’s cost level of an average 8 EUR/t (a red line crossed for several months now, due to secondary market’s crash).
The diving prices also triggered other uncommon moves, such as seeing credit buyers looking for slower project registration or credit issuance events. Indeed, CER buyers are prompted to renegotiate or cancel their purchasing agreement given the current price level, this can be up to 10 EUR below their current emission reduction purchase agreement (ERPA). This whole situation is explained by a lack of future visibility. And the only way back to equilibrium shall be brought by a clarification of the rules of the playground for the coming period.

Alexis Poullain is a carbon market analyst at eCO2market. This article originally appeared in the 11 January, 2012 edition of eCO2abacus, our free weekly carbon market newsletter. Sign up to receive it by email each week or view old editions.

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