Certified Emission Reductions
Certified Emission Reductions (CERS) are instruments issued under the United Nations Clean Development Mechanism for approved and verified emission reduction and sequestration projects undertaken in developing countries for greenhouse gases. The Kyoto Protocol allows national and corporate reduction goals for greenhouse gases to be met through the use of CERs. These instruments are fast emerging as the international currency in the global markets for reducing emissions of greenhouse gases.
CER prices are derived from the evaluation by both buyer and seller, of the various risk factors involved in a project and prevailing market forces. A CER seller willing and financially able to take on project risk is likely to reap the benefits of an enhanced CER price, whereas a CER buyer willing to invest in a riskier project will benefit from lower prices. Not all risks may be managed by the either buyer or seller, such as Sovereign Risk. It is important to have a good feel of the market in order to maximize value from a CER contract.
- Fixed price involves an agreed price per CERs which will not change if the European Union Allowances market moves against the seller. This structure is often preferred by those requiring more certainty of the revenue stream for future budgeting plans, rather than being exposed to market fluctuations. A fixed price may also be preferable to lock-in current market conditions if perceived to be advantageous to both parties. Usually a fixed price will be lower than the equivalent floating price, because the buyer is taking all market risk.
- Floating price involves a percentage of the average European Union Allowances price over an agreed number of days. A floating price allows sellers exposure to potential gains in the European Union Allowances market, but also to potential loses should the market fall. This structure generally only works for European buyers who have an exposure to the European Union Allowances market – Japanese buyers who are not involved in the European Union Emission Trading Scheme tend not to link CER prices to the European Union Allowances market.
- In a combination of fixed and floating buyers and sellers may choose to specify a price based on fixed and floating components, in order to reduce exposure to either structure. For example, 50% of the agreed CERs may be at a fixed price, while the other 50% may be at a floating price. Or, a fixed minimum price may be agreed, with an additional floating payment.
Futures on CERS
Chicago Climate Futures Exchange a wholly-owned subsidiary of Chicago Climate Exchange Inc. on Aug. 24, 2007 launched a futures contract on Certified Emission Reductions. The launch of CCFE CER futures contracts marked the first time that hedging tools for CERs were offered on an exchange-traded platform in North America.On Oct. 19, 2007 the exchange said it would change the existing cash-settled CCFE Certified Emission Reduction futures contract to a physically delivered futures contract once the is functional and the United Kingdom’s Department for Environment Food and Rural Affairs emissions registry becomes eligible to execute international CER transfers.
- Press Release. CCFE.
- CER Pricing and Project Financing. TFS Green.
- Chicago Climate Futures Exchange to Launch Certified Emission Reductions. Treehugger.
- Press Release. CCFE.