EU Speeds Up Work on Carbon-Market Oversight After Thefts
The European Union will speed up work on protecting the world’s biggest carbon market from fraud and will discuss with emitters and traders next month how to handle allowances stolen in computer-hacking attacks.
The European Commission discussed proposals to “strengthen the integrity” of the EU emissions market at a meeting with member states in Brussels today and one option on the table was extending the bloc’s financial-markets regulations to include spot trading. The efforts to tighten oversight come after hackers roiled the market in the past months, illegally transferring from national registries around 60 million euros ($82.4 million) of permits.
“The commission has identified a range of actions that member states can already take in the short term to further improve security, for example by regularly reviewing security plans, by reinforcing registry account policies and identity checks,” EU Climate Commissioner Connie Hedegaard said in a statement today.
The commission said it will shortly propose a modification to the EU regulation on national registries that keep tabs on pollution permits “to give a stronger legal basis for measures to protect the integrity of the carbon market and uphold the reputation” of the bloc’s emissions trading system.
Broad Terms
“Member states welcomed in broad terms the proposals by the commission for enhanced registry security measures as a basis for the further discussions,” the EU executive said after the meeting. “At the same time several emphasized the need for striking the right balance between enhanced security requirements and the administrative costs for authorities and market participants.”
The commission imposed a suspension on all 30 registries in Europe on Jan. 19 after reports from companies and national authorities that hackers had illegally transferred about 32 million euros of permits from Austria, the Czech Republic and Greece. It has allowed 10 of the carbon centers to reopen; the remaining 20 yet have to present independent reports showing they meet the minimum security requirements.
Suspended registries can’t record transactions, except for the surrender and allocation of permits. That prevents account holders from selling or buying permits for spot delivery and drove spot carbon markets to a halt for 15 days before the BlueNext SA exchange resumed earlier this month.
Energy Exchange
Spot trading on the ICE Futures Europe, the biggest energy exchange in Europe, is still frozen, even as registries in France, Germany, the Netherlands, Portugal, Slovakia, Spain and the U.K. have reopened in the past weeks. Those in Belgium, Estonia and Luxembourg are to resume full operations tomorrow.
European spot trading accounts for 10 percent to 15 percent of the region’s carbon market, according to the EU estimates. Trading in futures wasn’t halted by the crisis, and allowances for December lost 0.4 percent to 15.29 euros in London on ICE.
Hedegaard said earlier this month that the commission was mulling a “delay mechanism” to protect it from speculation and crime. The commission and member states will discuss introducing a 48-hour delay on delivery of spot carbon allowances, a person with knowledge of the matter said today.
The mechanism will provide extra time for the transfer of permits between user accounts in the registries that track ownership of the allowances, said the person, who asked not to be identified because the consultations are private.
Carbon Derivatives
An analysis by the EU regulator in December showed that while trading in carbon derivatives already falls under financial-markets regulation and is subject to appropriate oversight, the regime for spot trading requires further examination. One available option was the classification of carbon allowances as a financial instrument, it said.
The commission “will intensify work to make the European carbon market subject to appropriate financial-markets legislation,” it said today. “The commission will bring forward and shortly initiate a public consultation on enhanced carbon-market oversight.”
Last month’s attacks on the EU carbon market followed “carousel fraud” involving value-added tax collection and password “phishing” last year. Holcim Ltd., a Swiss cement maker, reported 1.6 million permits missing from its account in November and managed to track 600,000 of them. Italian energy trader TCIE Srl, operating under the name The Cube Energy, still hasn’t found around 268,000 allowances that disappeared from the registry last month.
Missing Allowances
Both TCIE and Holcim are suing the commission, demanding help in locating the missing allowances and seeking as much as 100,000 euros a day in penalty payments.
Some member states and firms neglected security rules, Jos Delbeke, director general for climate at the commission, said on Jan. 28. Organized crime may be responsible for the theft, and national authorities are working with Europol to catch the criminals, he said.
Still, even as the three countries attacked by hackers in January managed to locate some of the missing permits, legal questions about how to prevent recirculation of the stolen allowances and how to recover them are keeping investors away from spot trading. The EU has said the recovery of any allowances transferred illegally has not been harmonized in the 27-nation bloc and is a matter for national law and local enforcement authorities.
“The topics to be discussed at a meeting next month will include how to deal with stolen allowances and how to prevent thefts in the future,” said Isaac Valero-Ladron, EU climate spokesman.
To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net
To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net
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