Used carbon credit seller named, deals revealed

LONDON (Reuters) - London-based Total Global Steel was named by a source on Friday as a seller of recycled carbon credits, as the Hungarian government said it was still unsure as to the remaining used credits' whereabouts.

"Total Global Steel sold recycled CERs over BlueNext," an anonymous source familiar with the matter told Reuters, referring to used Kyoto Protocol carbon credits sold over the French emissions exchange.

It was not immediately clear whether TGS knew that the credits were unusable under the European Union's Emissions Trading Scheme (EU ETS).

A TGS spokesman said the company was looking into the matter and would comment as soon as possible, while a BlueNext spokesman said the exchange is still in negotiations to sort out the buy-back of these credits, called Certified Emissions Reductions (CERs) with the affected parties, and would not comment on the allegations.

Trading used CERs is technically legal, exploiting a loophole under Kyoto, but it's against EU rules for a company to count the permits against their emissions in Europe, making them invalid there.

The report by the Hungarian Ministry of Environment and Water accused the second buyer in the chain, London headquartered Microdyne Ltd, of not being forthcoming in its account of where it had transferred the credits.

Microdyne was not immediately available for comment.

In March, at least 7,000 CERs that had already been turned in by Hungarian companies, reappeared on BlueNext, forcing it and another exchange to shut temporarily.

The Hungarian government report said Martin Lonergan, CEO and President of Total Global Steel (TGS), told them he had not sold CERs over BlueNext in the past 12 months.

"The head of (TGS) informed us in writing that they have not bought CERs from a company called 'Micro Dyne' and have not bought CERs from any UK companies at all," the report added.

Although Hungary claimed it had sold the credits with the assurance they would not be resold in the EU ETS, traders found recycled CERs in their emissions registry accounts after buying credits over BlueNext.

This is the latest in a string of events involving carbon trading, which also include tax fraud and an email phishing scam, that has dented the reputation of the EU scheme to fight climate change.

CHAIN OF DEALS

The report said Hungary, acting on an initial suggestion by Deutsche Bank, sold to Hungarian Energy Power Kft. (HEP) CERs which Hungarian companies had already surrendered against their emissions under the EU ETS.

Hungary agreed to sell HEP 1.743 million recycled CERs for 9.10 euros ($11.56) each in multiple tranches, the report said.

Hungarian Energy Power said it sold the CERs to Microdyne, which said it then sold onto an unnamed Hong Kong-based firm.

HEP on March 22 said it received a letter from Microdyne which said it would ensure its Hong Kong-based buyer knew the CERs could not be re-used in the EU ETS.

The report named the Hong Kong buyer as Mourinio Ltd. The company was not immediately available for comment.

Despite these claims, the Hungarian National Registry said all CERs transferred by HEP were made to TGS's account.

The report also said BlueNext determined that two of its members that had offered recycled CERs over the exchange.

When both members discovered that these CERs had already been used for compliance, one company took immediate action to replace the credits, while the other refused, the report said.

"The second company refused this solution, that is to exchange the surrendered CERs (for) primary CERs at his own costs. The CERs taken by him to the exchange were further sold and got into the possession of another 10 exchange members," the report said.

Neither BlueNext nor the Hungarian government would confirm the identity of either party.

DESTINATION UNKNOWN

The controversy surrounding the sale prompted the Hungarian government to withhold the deal's remaining 949,000 CERs from HEP, and a government spokeswoman told Reuters the already transacted CERs are still largely unaccounted for.

"We received contradictory information," Boglarka Olt, Hungarian environmental ministry spokeswoman, told Reuters.

"The contracts show that HEP would have sold them to the Hong Kong (company), but in fact the CERs got into an account which is linked to Total Global Steel ... We have inquired what happened to the CERs later, but without success."

Although the EU executive commission has since amended trading rules to stop recycled CERs from re-entering its market, the Hungarian report recommended that it change its rules so that governments can investigate transactions of individual emissions trading accounts within 24 hours of suspected fraud.

It also said due to worries over tax fraud, "the opportunity to open individual accounts in Hungary should be suspended."

(Additional reporting by Sandor Peto in Budapest; Editing by Camila Reed)