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Carbon Thieves Force European Union to Improve Security, Close Spot Market

The European Union, whose decision to suspend registries halted the region’s spot carbon-emissions market following the theft of permits, said it won’t lift restrictions until member states step up identification checks.

The European Commission, the Brussels-based regulator, was discussing new security measures today with the bloc’s 27 national governments. It suspended most operations at Europe’s 30 registries for greenhouse-gas emissions on Jan. 19 after a Czech trader reviewing his $9 million account found “nothing was there.” The EU estimates permits worth as many as 29 million euros ($39 million) may be missing.

EU Climate Commissioner Connie Hedegaard said after the meeting she was satisfied that the bloc’s member states showed “unanimous understanding of the seriousness of the situation” and the need to ensure “optimal security” before their registries are allowed to resume operations.

“Such decisive action will help fight criminal abuse of the trading system related to the national registries,” she said in a statement.

The EU suspension drove spot trading in the world’s largest carbon market to a halt yesterday and triggered calls from the International Emissions Trading Association for a “speedy” response to missing permits in the Czech Republic, Austria and Romania in the last several months. Barclays Plc, which continues to buy and sell futures contracts for emissions, said it stopped most spot trading last month after Holcim Ltd., the Swiss cement maker, lost 1.6 million permits to CO2 thieves.

‘Unfortunate’ Shutdown

“It’s unfortunate they’ve had to shut down the market to try to fix this,” Louis Redshaw, the London-based head of environment markets for Barclays Capital, said yesterday by phone. “Hopefully this is the wake-up call that’s required for things to actually change.”

The EU market, started in 2005 and intended to be a model for a future global carbon program, had trading volume of 80 billion euros last year, according to Bloomberg New Energy Finance. While spot trading was halted yesterday until Jan. 26, EU allowances for delivery in December 2011 faced no restrictions and rose 0.8 percent today to 14.48 euros on the ICE Futures Europe exchange in London.

National registries won’t be allowed to restart operation until they’ve implemented minimum security requirements, Peter Zapfel, emissions trading policy co-coordinator for the commission, said today in an interview. “The restrictions won’t be taken off the 27 member states in one go,” he said. “For those that are slow it may take some time, but we expect everyone is taking it seriously.”

Cap-and-Trade

Cap-and-trade puts a price on carbon by setting limits on the amount of emissions polluters can produce. Those producing more than the limit must buy permits to offset their emissions, allowing those that emit less to sell their balance in the market. While the system is set to have a central clearinghouse starting in 2013, for now, keeping tabs on permits is up to so- called national registries.

It could take “a long time, possibly years,” to finally resolve who are rightful owners of any stolen EU allowances, said Owen Lomas, a London-based consultant at Allen & Overy LLP’s climate change practice. “It’s difficult to predict how long litigation might take as there may have been a series of transactions that have gone through several jurisdictions.”

The commission said some countries in the region’s cap-and- trade program will be told today they need additional security procedures to supplement existing systems for accessing accounts in national registries. This could include additional passwords sent to mobile phones or the use of ID devices.

‘Insure Deposits’

“At minimum they need to have second authorization in place, such as electronic certificates or ID cards,” said Simone Ruiz, European policy director of the Geneva-based IETA. “Someone needs ultimately to stand behind the integrity of the system. As banks insure deposits against theft, registry operators would surely be more diligent if this was the case for registry accounts.”

About half of the EU’s 27 member states lack such a system, the official said. One of them is the Czech Republic, where a company managing the national database failed to implement the so-called two-factor identification before it got attacked by hackers.

The Czech registry was planning to introduce new security Jan. 19, “but before we did so, we learned permits are missing,” said Zuzana Zahorovska, an administrator at Prague- based OTE AS, which oversees ownership tracking. “More than one company was affected. We’re still checking all transactions, but there are more missing permits than we thought. According to very preliminary estimates it may be around 1 million.”

Blackstone Global Ventures

Blackstone Global Ventures, a trader based in Brno, informed the Czech administrators on Jan. 19 that it lost 475,000 allowances the previous day. The company, which isn’t affiliated with the New York-based asset manager of that name, said the registry should take responsibility for the loss.

The allowances may have been transferred to accounts in Poland, then Estonia, and then Lichtenstein, said Nikos Tornikidis, manager of Blackstone’s carbon portfolio.

“We don’t regard it as Blackstone Global Venture’s loss,” Tornikidis said. “Nobody breached our servers.”

This week’s reported theft followed at least two incidents in the past months involving improper transfers of permits. The allowances are used by more than 11,000 European factories and power stations to lawfully emit carbon dioxide.

Romanian Registry

In November, Romania’s registry was accessed without authorization, prompting a statement of regret from Jos Delbeke, director general for the commission’s climate department, which supervises the carbon market. Last week the Austrian registry blocked access to accounts after a hacker attack on Jan. 10.

BlueNext SA, the Paris-based exchange owned by NYSE EuroNext that last year had the biggest share of spot carbon trading, said its members want regulators to show “some courage and commitment,” according to Chief Executive Officer Francois- Xavier Saint-Macary.

Under a plan the bourse proposed yesterday, members that may have unwittingly purchased allegedly stolen permits would be required to establish an “isolation account,” which would hold those permits and prevent trade until ownership is settled, he said on a call with reporters.

To contact the reporters on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net; Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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