EU CO2 market risks "irreversible damage": Barclays Capital

LONDON Wed Feb 2, 2011 2:39pm GMT

LONDON (Reuters) - The European Union's carbon market was in danger of "irreversible damage" without urgent new restrictions on access, and tough regulation in the longer term, a major liquidity provider Barclays Capital said on Wednesday.

The European Commission halted spot trade two weeks ago after permits called EU Allowances (EUAs) vanished from national, electronic carbon accounts called registries in Greece, Austria and the Czech Republic.

Registries have to beef up security measures before the EU Commission will allow them to reopen.

EU sources told Reuters on Wednesday some registries could reopen on Friday or Monday.

Barclays Capital cited an estimated 5 billion euro ($6.99 billion) tax fraud two years ago and last month's discovery of the theft of more than 45 million euros of stolen permits as evidence of problems in a market it described as "wide open to money laundering."

The EU's emissions trading scheme (EU ETS) caps emissions from the 27-nation bloc's factories and power plants by issuing a fixed quota of EUAs.

The scheme has been plagued by scandals since 2009 including value-added tax fraud, a phishing scam, recycled credits and theft. For a timeline, click here

RESTRICTIONS

To eradicate such problems once and for all, the bank urged the EU Commission once again to limit carbon trade to compliance buyers like factories and power plants and regulated firms.

"This can be done most practically by restricting access to the registry accounts to those companies with installations with compliance obligations under the EU ETS, their affiliates, and MIFID-regulated firms," it added, referring to the EU's Markets in Financial Instruments Directive.

"Anyone wanting to engage in criminal activity can open up an account in a registry, take delivery of EUAs, transfer them on and receive payment," BarCap added.

Better IT security may help guard against theft but will not fully eliminate it and it will not resolve the problem of tax fraud or money laundering, the bank said.

Theft could still happen through more sophisticated hacking or inside knowledge of passwords and security protocols.

Legitimate firms are now questioning their participation in the EU's carbon market because of the risks, BarCap and other players in the market have warned.

European police agency Europol said this week that organized crime syndicates are behind the recent mass theft of carbon permits from registries.

"We suspect that the persons behind those attacks are linked to some of those who earlier have used the trading system for carbon credit fraud, although the modus operandi seems more sophisticated now," Rob Wainwright, Europol director, said in a statement.