Five EU emissions registries to reopen Friday – but effects to linger

3 February 2011
EU Emissions Trading Scheme registries in France, Germany, the Netherlands, Slovakia and the UK are set to reopen on Friday – but the effects of the EU allowance (EUA) theft that caused their shutdown are set to linger, say traders.


The five registries “have given reasonable assurances that the minimum security requirements are in place”, the European Commission said. Other registries are expected to file reports on security measures in the coming days.

More than 3 million EUAs, worth around €45 million, have been stolen from registries in Austria, the Czech Republic, Estonia, Greece and Romania, which hold and track the transfer of EUAs used for compliance with the EU ETS. Some of these allowances will have been transferred to other national registries as they were sold to unwitting buyers.

On 19 January, the Commission ordered registries to shut down, putting a halt to spot trading of EUAs, but futures trading – which accounts for the vast majority of transactions – has continued.

Meanwhile, the UK Environment Agency, operator of the country’s emissions registry, has been served with an injunction to recover stolen EUAs, according to Carbon Finance. Lawyers in London said they understood the agency is subject to a “disclosure order” from the court, that was applied for by someone who wants to recover stolen EUAs that are currently held in the UK’s registry.

A spokeswoman for the Environment Agency, when asked specifically if the agency had been served with such an injunction, replied: “Investigations are ongoing.”

While traders have welcomed the imminent reopening of the registries, the effects of these thefts could be felt for months, as uncertainties over the legal nature of EUAs raise ongoing risks even once security is tightened at Europe’s emissions allowance registries.

“Currently, we won't trade spot or forward over the-counter with intermediaries, or take delivery of a long position from a futures exchange until there is complete resolution,” said Louis Redshaw, the head of environmental markets at Barclays Capital in London, one of the most active participants in the carbon market.

Stolen EUAs still in circulation
With stolen EUAs likely to be still in circulation, traders risk unwittingly receiving allowances that could be claimed back by their original owners. “We’re probably going to be out of the exchange-based spot market for months. It shackles our business,” Redshaw added.

The International Emissions Trading Association offered a list of ongoing problems caused by the EUA thefts, including “unwitting purchase of stolen and potentially reclaimable allowances, damage claims for non-respect of contractual arrangements that require delivery of allowances at a specific date and money laundering charges if stolen allowances are unwittingly passed on. This could significantly harm liquidity in the market, without necessarily demonstrating effects in the near term.”

BlueNext, the Paris-based exchange which runs the leading physical market for EUAs, “will only restart the [spot] market when we’ve filtered out all of the questioned permits,” said spokesman Keiron Allen. “We need a list of all those that are questionable.”

The main issue is the differing legal treatment of EUAs by different member states and the lack of a centralised response from the European Commission, which has limited powers over member states regarding the operation of the EU ETS.

Coordinated response needed
“There needs to be a coordinated response,” said a spokesman for the European Federation of Energy Traders (EFET). “Otherwise, when the registries come back online, the spot market will remain dead.”

EFET is calling for the publication of a list of the serial numbers of the stolen EUAs, coordinated by the Commission, and clarity on the legal implications of holding and trading stolen allowances. “No-one in the market has a clear view – if you ask three lawyers, you get at least three opinions,” the spokesman said.

In some jurisdictions, such as the UK, stolen EUAs must be returned to their rightful owner, even if they are bought unwittingly. In Germany and the Netherlands, however, buyers of EUAs bought in good faith are assumed to hold ‘good title’ over the allowances – although this interpretation has not been tested in court.

Barclays and other banks would like to see EUAs treated as cash, placing the onus on holders to prevent theft. If this happens, “the ownership debate goes away,” said Redshaw.

Looking forward, Barcap has proposed limiting access to registries to emitters and regulated financial firms, to avoid “irreversible damage and a slide to disorder” caused by the access to the carbon market of “criminal elements”.

“The heart of all of the problems affecting the carbon market is that criminal elements have access to the market. Anyone wanting to engage in criminal activity can open up an account in a registry, take delivery of EUAs, transfer them on and receive payment. This facilitates VAT fraud, out and out theft, and leaves the door wide open to money laundering,” the bank says.

Christopher Cundy and Mark Nicholls