Stolen carbon credits hit market integrity

The thriving carbon market received a jolt recently when an unexpected phenomenon in this age and time of cutting edge technology was detected —that of stolen EUAs (European carbon allowance). It led to temporary suspension of spot trading in carbon. Thefts of up to two million tonnes of EUAs from the accounts in the Austrian and Czech Republic registries have been reported.

As the EC responded with a suspension of all registries, spot trading in carbon came to a halt as no contract could be physically settled. However, the market seems to have weathered the storm. The largest part of the market, over 90 per cent, is in forward-delivery contracts (the December 2011 contracts) which remained trading with robust volumes.

It is also reported that prices in the aftermath of the event have remained trading in the €14-15 a tonne level that they have been in since the start of the year. While the functioning of the market remains intact as does the environmental integrity of the scheme, the incident highlights a couple of issues, Barclays Capital pointed out in a recent report.

First, it highlighted the issue of IT security and the failure of a number of registries to fully implement approved improvements in IT security protocols. Certainly, the EC suspension of the registries has focussed on both the issues, that of isolating the stolen EUAs and ensuring that each individual registry improves its IT security to the level required by the registries regulation.

The second issue the incident highlights, Barclays Capital said, is the difficulty of dealing with stolen EUAs. Unlike in other commodity markets which see theft of the underlying (asset), EUAs are uniquely identifiable and exist only within the registries themselves. Once stolen, EUAs are quickly traded to unwary buyers before the theft is realised. Once sold, then the ability to find them raises a legal question of whose property they now are.

The matter gets complicated because the treatment of stolen goods (that have been subsequently sold to unwitting buyers) varies across states. It becomes an issue of large legal complexity, the report observed.

Worse, the reputation of the market takes a beating because of these operational issues. Experts point out that the mess is largely the result of making it too easy to have access to registries. This incident is another one in a line of problems that would largely be solved by only giving access to this market to compliance entities and registered financial intermediaries.

According to Barclays Capital, after a couple of months of soft trading, there would be a more sustained bull run for EUAs with forecast for prices above €16.5/t from Q2 this year.

COMMENT NOW