EU tightens up carbon emissions trading scheme

The EU has tightened up the security of its carbon emissions trading system following recent thefts. Robert Camp reports

The EU's emissions trading scheme (ETS) is the largest of its kind in the world and was set up in 2005 as Europe's response to meeting its obligations on climate change under the Kyoto Protocol.

Under the scheme businesses are awarded a quota of permits to produce carbon and those that produce less can sell their spare quota to the bigger emitters. By putting a price on carbon the idea is to incentivise companies to cut emissions.

The system limits the carbon emissions of around 11,000 installations across the EU's 27 member states in heavy industrial sectors covering around 45% of total EU emissions, and including sectors like cement and steel production. But the system was rocked at the start of the year when a spate of cyber attacks saw more than three million carbon credits stolen from member states' national registries, where the credits are traded, and from companies in the ETS.

This included 1.6million credits from the Romanian account of 680 Holcim worth €24million, 600,000 of which were later recovered, according to Romanian authorities. Greece-based Halyps also had around €4million of credits stolen when its computer system was hacked.

As a result carbon registries across Europe suspended trading and the market ground to a halt for more than a week.

The issue was further complicated by the difficulty of tracking stolen credits because they can change hands very quickly electronically and this means companies can unwittingly buy stolen credits for which the penalties - if proved - can vary widely from country to country.

There is also disparity between member states when it comes to levels of security around national registries, and different regulations for the transfer of credits.

To prevent further problems the 1022 European Commission recently passed a raft of anti-fraud measures that are designed to tighten the carbon trading system, restore faith in the market and create regulatory parity throughout the EU.

Single system

The measures approved by the EC in June are more akin to the sort of stringent controls seen in the financial markets and will include the introduction in early 2012 of a Europe-wide single registry to replace national registries, some of which have been wanting when it comes to security, as highlighted by the cyber attacks.

The new regulations will also include the introduction of a trusted account list and new account categories to weed out so-called 'carbon crooks', tighter controls over authorised representatives on accounts and 'out of band' confirmation of transactions, which means transactions must be confirmed over two separate networks - such as telephone and email.

The EC said authorities will also be able to respond more quickly in cases of fraud, for instance by delaying the completion of some transactions, by freezing allowances and accounts in case of a suspicious transaction, and by giving wider access to law enforcement authorities to confidential information.

Measures are also being put in place to ensure that the markets are less disputed if frauds do occur to avoid a repeat of January's suspension, which severely undermined confidence.

Autumn target

The EC said that the regulations will be adopted after a three-month scrutiny period, assuming the 1066 European Parliament and the Council do not raise objections, which means they are likely to be in place by the autumn of this year.

The changes also pave the way for the third round of the ETS which is due to be introduced in 2013 and last until 2020.

This will move away from emissions caps set at member state level to one single EU-wide cap per sector; and instead of carbon allowances being issued for free, more than half will be auctioned.

The European cement industry has welcomed the reforms, having pushed for maximum security of the system while recognising the importance of ensuring that the market remains fluid enough for spot trades.