The European Commission is preparing tighter regulation for the European carbon market in a bid to clamp down on insider dealing, fraud and manipulation within the EU’s Emissions Trading Scheme (ETS).
Earlier this month, the EU’s law enforcement agency Europol estimated that around five billion euros of ETS monies had been lost to criminals in the previous 18 months.
They estimated that in some countries, up to 90% of the market’s volume had been a sham.
In a statement, Connie Hedegaard, EU Climate Action Commissioner explained that "the market has reached a size which makes it a potential target of fraudulent practices".
"As the market matures and grows further, it is critical that it continues to be subject to appropriate and effective regulatory oversight," she argued.
New measures in sight in 2011
The EU executive singled out the behaviour of 'spot markets' as a particular area of concern.
Spot trading is the practice of selling currencies, units or contracts for immediate or near-immediate delivery. Although it may have represented as much as 20-25% of the entire 2009 trading volume in the European carbon market, it has not been regulated by the EU.
Another Commission proposal suggested classifying all of the ETS’s exotic-sounding mechanisms – emissions allowances, certified emission reduction credits (CERs) and Emissions Reduction Units (ERUs) – as "financial instruments". This would bring them under the oversight of existing financial markets legislation.
A detailed study and internet-based stakeholder consultation will now be launched by the Commission early in 2011. New legislative measures could follow before the end of the year.
The ETS is a "cap and trade" system that allows participants to buy and sell allowances to pollute. Valued at 28 billion euros in 2007, it applies to over 10,000 installations which collectively account for close to half of the EU’s CO2 emissions.
Since 2009, the ETS has experienced VAT fraud, cybercrime, and even the recycling of its certified emission reduction (CER) credits by a member state, when Hungary resold CERs that had already been used.
Just one week before the Commission announcement, the energy news agency ICIS Heren reported that 1.6 million EU allowances had been stolen from a Romanian account. Holcim, the robbed cement company, said they had retrieved 0.6 million of the allowances.
In Britain too, several emissions registries were reported to have closed abruptly over the weekend of the 11-12 December, after their respective national security agencies warned that they were under threat of an attack.
The UK’s Serious Organised Crime Agency (SOCA) said it was working "with a range of national and international partners to share information and raise awareness of potential criminal threats to the ETS."
One of the biggest ETS "carousel" frauds was revealed in 2009. It involved conmen buying carbon credits in one country without VAT, selling them in another country with VAT added, and then disappearing without paying tax.