| Updated at: 1802 PST, Thursday, November 25, 2010|
BRUSSELS: The European Union's executive Commission has proposed banning from 2013 the most common types of carbon offsets, mostly from India and China, in order to boost money flowing to offset projects in the poorest countries.
The Commission proposed that from Jan. 1, 2013 the EU should exclude from its Emissions Trading Scheme offset credits from HFC 23 and nitrous oxide credits from adipic acid production, it said in a statement on Thursday.
The market is watching the development closely, but is likely to have partly factored the move into carbon prices since it was reported in details decision on Nov. 3.
Europe's Emissions Trading Scheme (ETS) caps planet-warming gases emitted by industry but allows companies to offset emissions by paying for carbon cuts in developing countries, as a cheaper alternative to cutting their own.
The Commission said there would still be sufficient credits flowing from the 2,300 other carbon offset projects to ensure that ETS carbon prices would be "relatively unaffected". Trevor Sikorski, a carbon analyst at Barclays Capital, said in a research note this week: "Even applying an outright ban on HFC 23 does leave something like 3 giga tonnes of total supply in the period 2008-2020."
Several members of a U.N. panel that oversees the international offsetting scheme also said on Wednesday that the HFC 23 scheme should be revised.
The Commission said that HFC credits from industrial projects were overvalued in Europe by a factor of 78,discouraging the flow of money to more credible projects in the least developed countries. "The rates of return of these projects are excessive," it said in a statement.
"The EU considers that cheap emission reductions, such as those from industrial gas projects, should not be done through the carbon market, but instead should be the responsibility of developing countries as part of their appropriate own action to keep global warming below 2 degrees Celsius." Moreover, the EU's top climate official has said that some companies have been "gaming the system" by increasing the production of industrial gases to maximize their credits.
EU benchmark carbon prices touched a five-week high early on Thursday ahead of the EU announcement. Traders said the restriction on offsets will be slightly bullish for the EU permits and U.N.-backed offsets.
Sikorski said in his research note that such a move would drive the price of eligible offset credits to around 20 euros per tonne in 2012.