June 23 (Bloomberg) -- The gap between carbon permits in the European Union and United Nations markets reached the narrowest in three months on speculation that the world organization will restrict credits for hydrofluorocarbons.

A UN panel meets this week in Bonn to consider limits on how many credits are provided to investors who pay to reduce so- called HFCs, which can trap about 12,000 times more heat per molecule than carbon dioxide, after allegations of misuse.

EU carbon permits for 2012 have advanced 17 percent this year as the economic recovery leads to greater demand for power from utilities and factories, which must simultaneously curb greenhouse gas emissions. The cheaper UN credits have risen at a faster pace since the end of May, narrowing the gap between the two to 3.05 euros a metric ton today on London’s European Climate Exchange. The spread tightened 27 percent from this year’s high of 4.20 euros on May 13.

“HFC credits account for a big part of UN issuance,” said Niels von Zweigbergk, chief executive officer at Tricorona AB, a Stockholm-based investor that has registered 114 projects to reduce emissions so far in countries including China and India. “The supply concern is impacting their price.”

While EU carbon permits for delivery in 2012 are up 1.1 percent this month to 16.25 euros in London, UN credits have risen eight times as much, gaining 9.4 percent to 13.17 euros.

The European cap-and-trade program requires about 12,000 factories and utilities to curb emissions and allows trading of permits between those emitting more or less than their quotas. UN credits can also be used to comply with EU rules.

Changing Methods

The regulator of the UN Clean Development Mechanism is considering changes in the way it calculates the number of credits that projects deserve for reducing emissions from hydrofluorocarbon-23 combustion plants. The review may finish in August, CDM board chairman Clifford Mahlung said yesterday.

Mahlung, speaking in an interview at the Carbon Markets Asia conference in Singapore, declined to say if the changes reflect allegations that developers are misusing HFC-23 projects to secure credits. The Bonn-based environmental group CDM Watch said in a June 14 statement that operators of HFC plants are manipulating emissions to win “bogus credits.”

The EU said in a May 26 report that HFC-based projects may create “significant windfall profits” for carbon developers. It may limit or ban some UN credits in the EU program after 2012, Yvon Slingenberg, head of the emissions-unit for the European Commission, said in a May 27 interview.

‘Perverse Incentives’

There are safeguards to “prevent perverse incentives” from HFC projects to cause more pollution, UN spokesman David Abbass in Bonn said in a June 14 e-mail. “The question now is whether the safeguards need to be adjusted or added to.”

Investors and CO2-trading funds are purchasing UN credits for 2012 because HFC-based offsets may be jeopardized, Emmanuel Fages, a Paris-based analyst with Orbeo, said yesterday in an e- mail. Orbeo is the carbon-trading venture of Societe Generale SA and Rhodia SA.

The EU-UN spread is narrowest for 2012, the last year in the current five-year phase of Europe’s cap-and-trade program, meaning emitters have fewer options than in other years to meet their CO2 quotas.

“If the methodologies panel decides to push it ahead and recommend changes this week, the spread could tighten further to around 2.5 euros in the short term,” Fages said. “If they drop the case, it may widen back to around 3.7 euros.”

HFCs, emitted in the production of chemicals for air conditioning and refrigeration, gained favor in the 1970s as an alternative to chlorofluorocarbons, which scientists linked to depletion of the ozone layer. While HFCs don’t interfere as much with the earth’s shield against damaging sunrays, they trap heat and contribute to global warming.

Retroactive?

“Until 2012 the impact on the carbon market will be minor provided the CDM Executive Board sticks to its fundamental principle that methodologies should not be changed retroactively for projects which have already been registered,” said Urs Brodmann, board member at First Climate, a carbon asset management company. “A retroactive change could have a material impact and greatly undermine the confidence in the market.”

The value of global carbon market expanded 6 percent last year to $144 billion, according to a World Bank report. The value of transactions in the EU program rose to $118 billion, while the CDM contracted 59 percent to $2.7 billion, mainly because of complex regulations and administrative bottlenecks.

Immediate changes in the HFC rules may curtail the global supply of UN carbon credits by as much as 662 million units, or 24 percent of the amount that Barclays Capital forecast would be available through 2020, according to a June 21 report from Trevor Sikorski, a London-based analyst at the firm.

In other markets, proposed climate-change legislation in the U.S. Senate may allow utilities and industries to use 2 billion tons of carbon offset credits to mitigate their emissions. As much as 25 percent may be sourced from non-U.S. projects, said Stanley Boots, a foreign legal consultant at Hogan Lovells.

--With assistance from Dinakar Sethuraman in Singapore, Natalie Obiko Pearson in Mumbai and Mathew Carr in London. Editors: Mike Anderson, Stephen Voss.