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Carbon Credits: Quality and Price
With CDM activities growing and GHG emission reductions increasingly being traded, the question arises whether these credits can be considered equal products or have different qualifications. In other words, does the saying “A gold is a gold is a gold” also hold for carbon credits?
Actually, some investor country governments offer different prices for specific projects; e.g. the Dutch CERUPT programme and others have expressed a willingness to pay a higher price for CDM credits according to their contribution to sustainable development (SD). Apparently, although CDM credits are traded as one-tonne certified emission reductions, there seems to be a willingness to pay a premium on top of the credit price.1, 2
Study design
In order to explore this willingness among (potential) CDM market players, we have carried out a market survey among Japanese, European and US entities (international organisations, government institutes and companies, including traders and consultants). In January 2004, we sent questionnaires to 170 Japanese companies, from which 61 responses were received (60 entities). Interviews were conducted with 22 organisations in Europe and the USA.
Size of the quality premium
In exploring the willingness to pay an extra premium, the following four categories were identified:
1. Risks
2. Contribution to SD
3. Types of technology
4. Baseline/Additionality
82% of the Japanese respondents believed that differences in the quality of CERs would result in price differences. The respondents stated that, on average, they would be willing to pay €0.276/tCO2-eq. extra for solar/wind power generation projects, €0.117/tCO2-eq. for biomass power generation, and €0.04/tCO2-eq. for energy conservation. They indicated that they would pay €0.080 per tonne less when a project aims at fuel switching. Co-benefits generated by CDM projects, such as improvement of the local environment in the host countries, could be rewarded by, on average, €0.254/tCO2-eq.
The outcomes of the European and US questionnaires are presented in Table 1. Of the risk categories, the respondents turned out to be most concerned about the risk that the credits would eventually not be acceptable under the CDM (i.e. during the certification). Contract risks, such as seller’s credibility and risk sharing by the seller also showed a high premium. On the other hand, country risk was generally considered less important as for this item the premiums were the lowest. Also, the willingness to pay extra for the “contribution to sustainable development” was relatively low.
Generally, the premium for CDM credits traded on the spot market, i.e. after CER certification, was much higher than the premium for forward trading of CDM credits (i.e. agree on delivery and price of CERs during the project’s design phase, which has thus far been the bulk of CDM contracts). The largest premium respondents said they were willing to pay for spot market CERs was for credits with a higher general acceptability: €0.25 /tCO2.
Comparison among countries
Both sets of questionnaires (Japan and EU/USA) showed three major tendencies:
1. Differences in qualities of CDM credits would be reflected in prices (over 80% of the Japanese respondents, and about 90% of European and US respondents).
2. Quality of CDM is determined by three aspects, i.e. 1) risks, 2) technologies, and 3) contribution to SD.
3. There is a price difference between forward contract CERs and spot market CERs. The Japanese respondents predicted that the difference between the two prices could amount to €1.65-2.47 per tCO2-eq. The European and American respondents on average estimated a price difference of €1.425/tCO2-eq.
The respondents differed on the perception of the risk factors. The European and American respondents placed greater importance on the eventual acceptability of credits, followed by contract and projects’ risks. Country risks were deemed less important. The Japanese respondents on the other hand, emphasised the role of project risks such as the contents of a project, followed by country risks. Furthermore, there were differences between the regions in terms of their interests in technologies. While European and American respondents focussed more on the aspects of quality risks, and found technologies less important, Japanese respondents (80% of them) demonstrated a stronger interest in technologies.
Discussion Platform in JIQ Issue July 2005
Mr John O. Niles on the CCB Standards
Discussion Platform in JIQ Issue April 2005
Mr Jason Anderson on Efficiency Standards
Discussion Platform in JIQ Issue December 2004
Mr Wytze van der Gaast and Mr Joris Laseur on Unilateral CDM
Discussion Platform in JIQ Issue October 2004
Mr Donald Goldberg and Mr Kevin Baumert on Action Targets
Mr Andreas Oberheitmann and Mr Manuel Frondel on CDM in China
Discussion Platform in previous JIQ Issues
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