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The End of Cheap and Easy Carbon Credits

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The days of cheap and easy carbon credit projects are over, according to a new report from energy research firm New Carbon Finance. Specifically, abatement projects for two very potent greenhouse gases — HFC-23 and N2O — have been almost entirely tapped out because offsetting these gases yields large returns on the credits generated. Because of this New Carbon Finance expects to see more money go into renewable energy and energy efficiency, to the tune of €9 billion ($14 billion) by 2012, if the Kyoto Protocol targets are to be met.

HFC-23 and N2O are found in industrial flue gas and are thousands of times more potent greenhouse gases than carbon dioxide. Fortunately, cleaning them up isn’t hard and investment in reducing those emissions costs about €1 per ton of CO2 equivalent, which yields a tidy profit as the going rate for carbon credits is about €20 per ton. In China, where the bulk of the world’s HFC-23 and N2O are emitted, all of the major sources of HFC-23 and 80 percent of N2O reducible through carbon offsets are already either receiving credits or are under development, according to New Carbon Finance. While this is ultimately good for the environment, it does mean that going forward, abatement of greenhouse gases will cost more.

HFC-23 and N2O offset projects comprise 72 percent of all credits issued by the UN under the Kyoto Protocol, down only slightly from 75 percent in January 2007. Because few new projects can be developed, New Carbon Finance expects that number to drop to 30 percent by 2010 and to 24 percent by 2012, when the Kyoto Protocol expires.

This will hopefully encourage more investment in renewable energy and energy efficiency projects. They’re just not aren’t nearly as lucrative. The report says credits generated from these sorts of projects cost about €5 and €15 per ton of CO2, severely cutting into the return on investment. But even so, New Carbon Finance director Guy Turner said in a statement: “The price of credits we are seeing today of around €20/ton should be sufficient to stimulate the necessary capital flows to these high-quality projects.” However, it will likely take a big increase in the value of carbon credits to encourage offsetters to go after CO2 and other greenhouse gases like they went after HFC-23 and N2O.

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