Analysis: EU carbon theft knocks dream of global market

LONDON Thu Jan 20, 2011 1:00pm EST

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LONDON (Reuters) - The discovery of widespread theft in European Union emissions trading this week may push the distant dream of a global carbon market to fight climate change even further from reality.

The EU on Wednesday halted spot trade for one week after the theft of emissions permits worth up to 30 million euros ($40.2 million) and said on Thursday that the new problem could be resolved cheaply and swiftly.

But the theft, possibly a concerted hacker attack, added to clouds gathering around the global future of carbon markets. The latest in a string of scandals, it added to factors discouraging other countries from adopting similar cap and trade systems.

"I'm so upset this market is really suffering, and once again we are revisited by the same issues of fraud," said one carbon trader on Thursday.

"I'm managing to trade options, but no one really cares."

The halt in spot trade did not prevent trading in the larger market in derivatives including futures, but volumes on Thursday were about half normal levels.

Some carbon traders and investors are already actively promoting an alternative capital market approach to fighting climate change, notably drumming up support for green bonds underwritten by governments to help secure debt financing of low-carbon projects.

That is considered as a possible approach to ramp up finance of emissions cuts especially in developing countries, until now served by a rich-poor trade in carbon offsets worth 18 billion euros last year.

DELAY

The prospect of an expanded carbon market beyond Europe was already in doubt before Wednesday's halt to spot trade in emissions permits, called European Union allowances (EUAs).

A U.N. climate conference in Cancun, Mexico last month failed to guarantee that developed countries would face binding emissions targets after 2012.

Such targets, under the Kyoto Protocol, have until now driven demand for tradable emissions permits, also called allowances or offsets.

And perhaps more importantly, the United States delayed last year plans to launch its own cap and trade scheme, which appeared on the cards two years ago, leading to similar delays in Australia and Japan.

The EU thefts follow other scandals to derail the carbon market in the past two years, including the re-sale of used offsets, VAT fraud, hacking and an email phishing attack.

BUS PASS

This week's theft was probably achieved by a combination of hacking and stealing passwords, helped by lax access to the market, EU sources said.

Not long ago it was exceptionally easy to open a carbon trading account in the EU scheme, requiring just two proofs of address, much like the rules in some shops to rent a DVD.

A bus pass could satisfy for proof of identity, said one trader. "You could pop out at lunch and open one."

Some registries were still negligent, said EU officials who were swift to play down any impact on the reputation of its emissions trading scheme (ETS).

They promised action to improve security and re-open the system as each national registry proved it could resist further attacks.

"It does not cost that much money to have checks in place, maybe a couple of hundred thousand euros, while the potential losses could go into the millions of euros," said Jos Delbeke, the head of the Commission's climate action division.

He said the problem was caused by negligence by EU states in how they oversaw their national registries. The EU has already voted to scrap that discredited idea in favor of a single, secure EU register from 2013.

Unfortunately, clamping down on access may not be enough, because traders themselves may have perpetrated the fraud, said one senior EU source.

"We cannot exclude that companies themselves may be at the origin of all this. That is where we need a full legal investigation."

Meanwhile, victims of the theft may be left out of pocket, lawyers said. "Unwitting recipients of EUAs that are alleged to be stolen could find themselves with no easy solution," said Andrew Hedges, a partner at the law firm Norton Rose LLP.

(Additional reporting by Pete Harrison in Brussels. editing by Jane Baird)

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