Hungary's sale of 'used' carbon credits - or 'hot air' as environmentalists call them - had harmed the reputation of cap and trade, an industry lobby said on Friday (20 March), but analysts expected little price impact.

Budapest last week carried out the first sale of certified emissions reductions (CERs) which Hungarian companies had already used to offset against their emissions in the European Union's emissions trading scheme.

Such used CERs are invalid as carbon offsets in Europe and the European Commission on Thursday (19 March) amended trading rules to stop them from re-entering the EU carbon market.

But European governments have about 100 million used carbon offsets, equivalent to the national greenhouse gas emissions of Austria, which they can in theory re-sell to non-EU buyers.

Under the Kyoto Protocol, rich countries can buy carbon offsets to help them meet emissions caps, paying for carbon cuts in developing countries.

Japan has been the biggest buyer of offsets outside Europe, and if it bought used CERs that would effectively increase the global supply and dampen prices. Tokyo said on Friday that it would not block Japanese companies from buying recycled credits.

"It's not a problem for companies to use them here to meet their voluntary emissions targets," said Eisaku Toda, head of the environment ministry's office of market mechanisms.

Japanese traders doubted high demand. "In Japan, the buyers are all volunteers with high morals," said one, pointing out that Japanese companies face voluntary emissions caps, unlike binding targets in Europe.

'Hot air' in Eastern Europe

International trade in recycled credits is legal, and exploits the fact that the greenhouse gas emissions of some former communist countries are far below their Kyoto targets, leaving them with surplus emissions rights called assigned amount units (AAUs).

Hungary last week sold some 800,000 tonnes of used CERs, saying it would put aside the equivalent number of AAUs.

That deal allowed Budapest to benefit from a higher price for CERs compared with AAUs, whose trade is also much less liquid and disparaged by some environmentalists as "hot air".

The International Emissions Trading Association lobby group said Hungary had damaged the integrity of the European and Kyoto carbon markets, however, and asked for EU member states to set up "retirement accounts" for CERs submitted by companies, so that these could not be re-sold.

Japanese companies have bought about 300 million tonnes of carbon offsets under the Kyoto Protocol for delivery between 2008 and 2012, almost all of which are thought to be CERs.

The companies will eventually submit these to Toyko to count against their voluntary targets, but in the meantime could sell them and buy cheaper, recycled credits, raising CER supply.

"From a market impact perspective, we could see more CERs come back onto the market and it could soften prices a bit and make the market less tight, but actually the impact would be quite small," said Barclays Capital's Trevor Sikorski.

He estimated that East European countries had no more than 11.5 million CERs which they could recycle in this way.

The Hungarian deal drew criticism especially after the used CERs were traded on the Paris-based BlueNext exchange, meaning EU companies could unwittingly buy invalid offsets.

That publicity could limit further trades, said Deutsche Bank's Mark Lewis. "Given the fuss this has caused I would be very surprised if we saw many more deals of this kind," he said.

(EurActiv with Reuters.)