EU blocks re-use of offsets, BluexNext to resume

LONDON Thu Mar 18, 2010 3:06pm EDT

LONDON (Reuters) - The European Commission said on Thursday it would prevent from August the re-entry into its emissions trading scheme of carbon permits which companies had already used for compliance with their emissions caps.

The BlueNext carbon exchange on Wednesday had suspended CER trading after it found that "used" permits had traded on its exchange, and said on Thursday that it would resume such trade on March 22, having made it "impossible to trade recycled CERs."

The European Union executive said it would from Friday suspend the process where companies counted carbon offsets against their emissions, except during a two-week period leading up to an April 30 deadline to comply with 2009 caps.

The move would not prevent carbon trading. It was precipitated by trade of permits called certified emissions reductions (CERs) on the Paris-based BlueNext exchange, after companies had already submitted the same allowances against their targets.

The Commission said in a statement that it would amend trading rules from August to prevent "re-entry of already surrendered CERs" into emissions trading accounts, in the scheme meant to fight climate change.

"There is an urgent need to address the market uncertainty," it said.

Last week Hungary said it had sold CERs to a Hungarian trading house, after Hungarian companies had already submitted these against their emissions targets, with the understanding that they could not be re-used in the EU scheme.

The Budapest trade was legal, exploiting a loophole under the U.N.-backed Kyoto Protocol, but it would be illegal for a company to count the permits against their emissions in Europe, making them invalid there.

The EU executive's move on Thursday prevented such carbon offsets from re-entering the EU emissions trading scheme at all.

"It's the right thing to do," said one trader.

Budapest said that when it had sold the CERs it made clear these were only valid for sale to non-European buyers.

That threw a focus on Thursday on the identity of the trading firm which had subsequently sold the CERs without a buyer beware warning, leading them to appear on BlueNext.

Hungarian environment ministry chief Jozsef Molnar told Reuters that it was agreed at a meeting with BlueNext on Thursday that the name of that firm would not be revealed.

Budapest did not rule out selling more CERs, using the same loophole. "We will not take any further steps until we learn the European Commission's new rules," Molnar said.

The week's developments were the latest setback for the European Union's emissions trading scheme (ETS).

Last year fraudsters perpetrated a 5 billion euro pan-EU VAT fraud, adding to technical and over-supply glitches in its five-year history. The scheme now faces low prices in the wake of recession.

(Additional reporting by Sandor Peto in Budapest; Writing by Gerard Wynn; Editing by Anthony Barker)