London, 11 February 2010

The International Emissions Trading Association has today written to the European Commission urging quick action to close the security gaps in the EU emissions trading scheme that threaten to damage its reputation and distract from the scheme’s success. Over the last few months a number of serious shortcomings have been revealed – most recently the “phishing” scam that has stolen details of registry accounts and EUAs from a number of companies.

Henry Derwent, CEO of IETA, said “These incidents put the reputation of the EU-ETS, and of carbon trading more generally at risk for no substantive reason – just when the political spotlight on trading in the US and Australia (and elsewhere) is brightest, and when public confidence in market regulation and markets generally is at a low ebb.”

IETA stresses that the recent problems have nothing to do with the design of the EU trading system, still less with the core concept of turning emissions reductions into a tradable commodity.

“What makes this particularly frustrating is that basic security precautions, identity checks and active regulation, all familiar from financial crime prevention in other markets, could resolve the problems at once,” emphasized Derwent “the absence of these basic defences is undoubtedly at least part of what is drawing the attention of fraudsters to the EU ETS.  This needs to be dealt with immediately.”

IETA members have carried out pioneering work to monitor the EUA Spot Market and have experience of working with national authorities to prevent financial crime in markets generally.  IETA suggests the following actions:

1.   Introduce anti -“phishing” controls by all EU national registries, involving the secure identification of a controlled list of authorized user computers from which transactions may take place.

2.   Establish a Centralised Monitoring System for Registry Transfers through an internet-based mechanism for sharing registry information among domestic authorities or accelerate the replacement of national registries by a single EU registry system, foreseen for 2012.

3.   Establish a Transaction Checking Service that allows companies to indicate specific EUA transfers and receive back non-confidential information on the amount of time that tagged EUAs take to re-enter regulated trading circles.

4.   Perform extended Know-Your-Customer (KYC) checks on EU ETS accounts and on all future applications to open registry accounts.

5.      Introduce an EU-wide comprehensive change in the VAT status of carbon trades.

6.      Continuous evaluation of the integrity of the EU ETS.

7.      Restricting the online accessibility to account holder data.

“By taking these generally simple measures to step up security,” stated Derwent, “it should be possible to re-establish confidence in emission trading for those operating within the EU ETS as well as for companies and governments outside Europe that are now at a crossroad on cap & trade legislation.”

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