The UK, France, Germany, Netherlands and Slovakia will be the first European countries to reopen their national registries for spot trading in carbon allowances under the EU emissions trading scheme (EU ETS) tomorrow at 7am.
The move follows the emergency shutdown of all national registries on 19 January after a spate of sophisticated cyber-thefts of EU allowances (ENDS Report, January 2011).
The European Commission made its announcement after the countries concerned provided evidence that all necessary security measures had been implemented.
Energy and climate minister Greg Barker confirmed today that the Environment Agency, the UK registry administrator, sent its report earlier this week.
The latest thefts highlighted that up to 14 registries, notably in eastern Europe, had failed to introduce new security measures agreed after similar incidents last year.
The commission has now said it will not permit any EU ETS registry to reopen without proof of adequate security. It will not comment on how long the rest of the bloc’s registries will take to reopen. Connie Hedegaard, European commissioner for climate action has written to governments urging them to act as swiftly as possible.
The commission will not comment on criminal investigations into the thefts now under way at national level. It does not have, nor will it release, full details of the losses incurred. Analysts have suggested that at least 3.2 million allowances were stolen in the latest round of thefts, worth about €48m.
The security breaches mainly affected the spot market, which accounts for up to 20% of total market volume. The far larger futures trading market was unaffected by the raids and both national allocation and surrender of allowances continued throughout.
Even so, the latest scare follows a series of major incidents, including the closure of registries last year to halt the illegal resale of international offset credits within the EU ETS where these had already been surrendered for compliance (ENDS Report, March 2010), and large-scale carousel fraud on VAT from EUAs.
On 26 January, HM Revenue and Customs announced the arrest of seven men, mainly from London and the Home Counties, in connection with raids in August 2009 and May 2010 regarding VAT fraud (ENDS Report, June 2010).
As a result, analysts point to serious cumulative reputational damage and a need for much stronger measures.
Mr Barker cautioned that: “While it is important to ensure a minimum level of security now to ensure the reopening of the registries, the UK will continue to press the European Commission to ensure that registry security across Europe is raised above this level. This is vital to ensure continued confidence in this growing market.”
Many traders are questioning the competence of the commission to administer the scheme. The latest debacle has led to a multiplication of calls for an independent regulatory body to take over. The futures market has escaped the attacks as it is much more tightly regulated under EU financial market regulation, but even if the commission agreed to do so, bringing the spot market into this system would take several years.
Barclays Capital called this week for trading to be restricted largely to participants obligated under the EU ETS, affiliates and other registered firms as an interim measure to cut the risk of fraud. Low levels of confidence will otherwise damage the market, it warned.
Another outstanding issue, and one that could yet blow up into a full-scale row, is the return of stolen allowances received unknowingly in accounts under other national jurisdictions.
The commission says recovery procedures “have not been harmonised” across the EU. This means in practice that some jurisdictions have been criticised for offering little help in recovering allowances removed from the country, while others can penalise innocent recipients, and still others may allow EUAs to be kept.
However, the commission added that companies could seek financial compensation for fraud-related losses as an alternative.