EU carbon system needs more protection from market abuse - auditor

* EU Commission, member states did not manage system adequately

* Improvements needed to scheme’s framework

* More controls, monitoring and market supervision required

LONDON, July 2 (Reuters) - The European Union’s carbon market is still failing to be managed properly and more improvements are needed to protect it from abuse, the EU’s auditor said on Thursday.

The EU’s Emissions Trading System (ETS) is central to the 28-member bloc’s efforts to cut greenhouse gas emissions but has endured a series of damaging scandals over its 10-year existence, including value-added tax fraud, the resale of used credits, phishing scams and cybertheft.

The system, which is supposed to cap the carbon emissions of about 11,000 factories and power plants, has also seen a permanent surplus of permits called EU allowances since its launch in 2005.

The glut was exacerbated by the financial crisis, which cut economic output and pollution, leading to prices that are too low to drive a shift to low-carbon energy sources.

The system is being reformed to reduce the surplus but the European Court of Auditors did not examine the effectiveness of those measures, focusing instead on steps to protect its integrity.

The auditors’ report found the European Commission and member states had not adequately managed the ETS, particularly during its second phase (2008-12).

Although steps have been taken to protect the market, issues still need to be addressed, such as controls on the opening of ETS accounts, transaction monitoring, market supervision and the verification of emission levels at firms under the scheme.

“Improvements are needed to the framework for protecting market integrity and the system as a whole needs to be better implemented,” said Kevin Cardiff, the court member responsible for the report.

Even though the ETS has now been included in the scope of the bloc’s financial market regulation, there are still concerns regarding bilateral over-the-counter spot trading and smaller market participants.

At the EU level, there is no specific body responsible for overseeing the market, and cooperation between national regulators and the executive Commission has been insufficient.

The auditors said there needs to be a clearer legal definition of what an EU allowance is and improvements made to the registry that processes the scheme’s data.

The full report is at (Editing by Dale Hudson)