The European Commission has suspended transfers of carbon dioxide emissions allowances for at least a week while it investigates some computer-aided thievery, including the loss of 475,000 of them from a registry in the Czech Republic.
The move allows most of the trading in the world's largest carbon emissions trading system to continue because the bulk of the market's activity is in forward or futures trades. But buyers and sellers who expected to transfer the instruments, which permit utilities and large manufacturers to emit a ton of CO2-equivalent, are in trading limbo until law enforcement officials trace the stolen documents.
"This is not good for the credibility of the market," explained Kjersti Ulset, head market analyst for Point Carbon, a Norway-based firm that closely follows the trading. "But at the same time, it should be possible to find measures that will make it possible to avoid this in the future."
In a statement, the European Commission called it a "transitional measure" taken "in view of recurring security breaches in national registries over the last two months." The statement also mentioned hacking attempts on Austria's registry last week and claims of a theft of 1.6 million allowances from Romania's registry in November.
The shutdown in deliveries came after a Czech carbon trader reported the theft of the 475,000 allowances worth €6.9 million, or $9.3 million.
The Czech trading firm, Blackstone Global Ventures, said 470,000 metric tons of E.U. allowances were stolen from its account after a hacking attack on Tuesday and transferred to Poland, then Estonia. From there, they were transferred to Liechtenstein and then disappeared.
More questions for cap and trade
This led to the closure of emission registries in the Czech Republic, Poland and Estonia on Tuesday and carbon trading volumes falling nearly 90 percent on the BlueNext exchange in Paris. BlueNext limited carbon trading after the theft was reported, allowing transactions to take place but blocking payments and deliveries.
Ulset said that while the thefts involve only a tiny fraction of the huge market's volume, officials in various countries will have to examine pending deliveries to see whether the allowances involved are among those stolen. If they are, they will have to be replaced.
The market is a cap-and-trade system somewhat similar to one proposed last year by House and Senate Democrats as a tool for companies and traders to limit future U.S. emissions. However, after Republicans raised questions about the market's accountability and branded it a "cap and tax" measure because of its impact on the price of electricity, the Senate bill failed to pass.
"People who are against emissions trading have another argument," said Ulset of Point Carbon, but she said she was certain that Europe will remain committed to its market.
The E.U. allowances, or EUAs, have unique serial numbers and are traded electronically, with the price hovering around €14.50 per metric ton yesterday. The total value of the global carbon market grew 6 percent in 2009 to $144 billion, according to the World Bank. By far the largest contributor was the E.U. Emissions Trading System, which accounted for $118.5 billion, up from $101 billion in 2008.
Chain of thefts begins with stolen passwords
Evidence of thefts began last year in January, after hackers acquired passwords to several CO2 accounts. Two hundred fifty thousand allowances with a market value of $4.2 million were stolen in Germany, the country's Federal Environment Agency said. The Romanian unit of Holcim, the world's second-biggest cement maker, had 1.6 million allowances worth $19 million stolen from its account last November.
The company said it recovered 600,000 of the electronic certificates and posted the serial numbers of those still missing on its website. It said the stolen emission credits were transferred to accounts in Liechtenstein, Italy, Britain, the Czech Republic and France and asked the European Union to track them down.
Carbon market players in the United States expected little fallout to occur from the suspension of allowance spot trading in Europe. But experts acknowledge that the ongoing instances of fraud and abuse in Europe's carbon market make the case for bringing cap and trade stateside all the more difficult.
"There is already a series of problems that detractors point to," said Dan Mees at Worcester, Mass.-based World Energy Solutions, a U.S.-based carbon broker. "And any of that in this kind of environment, where it's a harder sell, it can have a negative effect or more of a negative effect than it would if it were just an occurrence in isolation."
IntercontinentalExchange (ICE), which recently acquired the European Climate Exchange through its purchase of the Chicago Climate Exchange, said it would comply with the suspension order and halt all spot trading activity until the morning of Jan. 27.
But ICE says futures trading in a variety of carbon-linked financial instruments -- where the bulk of trading activity occurs -- would continue apace. That includes trading in futures and options contracts for EUAs and the carbon offsets credits issued by U.N. organizations, the Certified Emission Reduction futures and options and Emission Reduction Unit futures.
ICE said the trading suspension in spot contracts was instituted after its Trade Emergency Panel took a formal legal ruling that an "undesirable situation or practice" was harming the integrity of carbon trading.
Clarification: The description of World Energy Solutions was changed at Mees' request.