By Gerard Wynn
LONDON (Reuters) - Companies which cut greenhouse gas emissions in developing countries to sell carbon offsets in rich nations are hoping hedge contracts and staff cuts will protect them against record low carbon prices.
Carbon project developers sell carbon offsets in the developed world, especially Europe and Japan, to companies and countries struggling to meet official carbon caps or to people voluntarily seeking to cut their contribution to climate change.
They had appeared to be sitting on big profits after several years of buying or generating offsets in China, India and Brazil at less than half the sale price in Europe, the biggest demand market.
Now European carbon prices are near record lows, similar to purchase prices in China, the biggest supply market.
That means developers are depending on cash reserves and forward sales, made last year, to sustain them until carbon prices recover.
"We have hedged enough to survive for the next several years," said Niels von Zweigbergk, chief executive of one of the world's biggest offset developers Tricorona, which has four offices and employs 60 people worldwide.
The company has sold forward 7 million tons of an expected pipeline of 64.2 million metric tons of avoided carbon dioxide.
One analyst estimated the sale price of one tranche of forward sales at 16 euros versus an average cost of 8.9 euros.
Carbon offsets called certified emissions reductions (CERs) traded on the European Climate Exchange at 9.7 euros on Friday, too low for an adequate margin for most project developers, who are now sitting on their holdings as a result.
Carbon prices rallied this week but are expected to test recent record lows. [ID:nLK286856] Prices should recover in 2010 and 2011, many analysts say. The price collapse follows a recession which has cut industrial output and carbon emissions, and therefore demand for offsets.
SURVIVAL
Project developer Trading Emissions PLC has sold forward or hedged about 9 million tons of an expected 50 million tons offset pipeline, at an average price above 20 euros compared with average costs of 7.5 euros.
"We don't expect prices to recover dramatically in the very short-term but in the medium-term we're still very comfortable," said adviser Des Godson.
EcoSecurities expects to generate 118 million tons of offsets and has sold forward some 42.5 million tons at an average price of 13.7 euros, according to the company's results as of mid-2008.
EcoSecurities' average purchase price is also 7.5 euros.
"We've got the forward sales locked in," said chief financial officer James Thompson.
The company would not rule out cutting its project origination team, who scour the world for new projects. The head of another project developer confirmed, on condition of anonymity, that his company would sack project originators.
Another developer, Camco, has sold forward some 5.8 million tons at an average price above 15 euros, compared with an average purchase price across its pipeline of 8.1 euros. The company estimates its own portfolio at 30.7 million metric tons.
"It'll probably see us through until the end of next year, we're in a pretty good position," said chief financial officer Scott McGregor of the company's cash position and revenues.
Lucrative forward contracts may not be a guarantee of safety, however. Buyers in these deals, including project developers themselves, may have to break contracts if they can't afford them following the carbon price collapse.
"People are more nervous in general, and looking with a lot more scrutiny at their contractual rights," said Martijn Wilder, head of environmental markets at law firm Baker & McKenzie.
"We are already seeing some parties no longer have the financial resources to complete transactions."
(Additional reporting by David Fogarty in Singapore)
