Kyoto ban could leave Romania with 537 million unsold AAUs

Romania has got lost in the clouds of pollution, failing to benefit from the carbon emission trading scheme. Legislation that was thrown together in a hurry, reckless political negotiations and the institutional lack of experience in dealing with AAUs could see Romania end up with 537 million tons of carbon surplus by 2012, with no benefit in the form of the green infrastructure that the country needs.

Ovidiu Posirca

A UN panel suspended Romania’s right to trade its surplus carbon emissions late last month after it breached rules on emissions reporting. The targets set by Kyoto for Annex B countries, including Romania, are expressed as levels of allowed emissions over the 2008-2012 commitment period, denominated in AAUs, each one being equal to one metric ton of CO2 equivalent.

The UNFCCC compliance committee found irregularities in Romania’s 2010 greenhouse gas emissions inventory. Prime Minister Emil Boc urged the head of the environment agency responsible for the inventory to resign and called for measures to reinstall trading eligibility in up to six months. As a result, Iosif Nagy, who led the agency responsible for preparing the papers to allow Romania to trade the permits, known as Assigned Amount Units, resigned last week. The new head of the Romanian Environment Protection Agency is Abos Gabor.

Romania was deemed not in compliance with the 1997 Kyoto Protocol after an August 27 decision by the Enforcement Branch of the United Nations Framework Convention on Climate Change in Bonn. On 25 August, Ukraine also had its carbon credit trading rights suspended after the UNFCCC found that it had under-reported its greenhouse gas emissions.

In December 2010, Laszlo Borbeley said that Romania hoped to earn EUR 1.5 billion by selling 300 million carbon credits to two Japanese companies. In view of the recent trading suspension, Borbeley said the Environment Ministry had already begun developing an improved emissions monitoring system so that it could re-enter on the carbon market in the near future. Romania will seek to sell some of its 300 million spare AAUs, each representing a metric ton of carbon dioxide, depending on market conditions, once trading rights are restored.
According to Ideacarbon, a carbon ratings and research agency, Russia and Ukraine easily have the biggest forecasted surpluses, representing over 75 percent of the global excess.

The Romanian Environment Ministry says that the AAUs will lose value, as the market is saturated. Industrial activity has been affected by the current economic crisis and some of the traditional industry-based countries, buyers of these certificates, who failed to meet the Kyoto standards, will no longer make major purchases. The industrial powerhouses include Japan, which suffered serious disruption in its manufacturing and distribution chains due to the recent tsunami which hit economic activity, along with Spain and Portugal, both struggling with mounting debt, necessitating austerity measures that will also reduce industrial output.

Romania has 300 million AAUs for sale, while the current global demand is for approximately 200 million. Ideacarbon forecasts that Romania will have a surplus of 537 million AAUs by 2012, when the trading program will end, due to the contraction of the economy. Meanwhile, Canada seems to be in better economic shape and will need 1 billion AAUs by 2012. Romania’s transactions involving emission units have totaled 30 million since 2008.

Romania, which only brought in legislation to sell the credits last year, missed its chance to sell its surpluses of 200 million rights at a 2008 market peak of EUR 10 per credit because it did not have green investment schemes in place.
Since then, the price of the credits has approximately halved.

According to government sources quoted by Mediafax newswire, the Romanian state is expecting to receive EUR 3.5 per credit at the end of this year, when the trading ban is set to be removed. Government members may further lower their expectations to EUR 2.5 per AAU.

The sums raised from trading can be used for the modernization and repair of power and heat producers and distributors within the centralized system, bolstering energy output from green sources, reducing carbon emissions in agricultural activities, improving waste management, the induction of hybrid vehicles and forestation programs.

The Romanian authorities have failed to benefit from the trading of surplus carbon emission credits, due to political bickering between the Ministry of Environment and the Ministry of Economy, regarding the use of the resulting sums. These ministries were tasked with creating the legal framework required to use the surplus certificates. Only one year ago was appropriate legislation put in place. This summer, the Romanian government decided to modify the legislation in order to introduce more flexibility in the negotiation and trading process. Government representatives blamed the legal mess on a lack of experience in trading these certificates, with respect to the procedures at a local and international level.

President Traian Basescu said during an official visit to Rosia Montana that Romania had lost EUR 1.2 billion owing to the devaluation of AAUs, having held certificates worth EUR 3 billion at 2008 peak prices, when the supply was scarce. Basescu blamed reckless politicians for the ban and warned that the mining project in Rosia Montana may follow the same path, if a political compromise is not reached. The deadline for the certificate trading is 2012.

The carbon trading scheme was adopted under the Kyoto Protocol, which sets binding targets for 38 industrialized countries for reducing greenhouse gas emissions by five percent between 2008 and 2012 compared to their 1990 level.
The scheme allows around 12,000 companies including huge multinationals to buy and sell rights to pump industrial gases into the atmosphere.

ovidiu.posirca@business-review.ro