London, 2 February 2011

Barclays Capital has urged the EU to limit CO2 trade to compliance buyers and regulated firms. In a paper called “€5 billion and counting”, the UK bank said Wednesday that confidence in the world’s biggest carbon market has slid to new lows as faith in the regulatory framework “evaporates”.

The bank warned that unless major changes are made, the EU emissions trading scheme (ETS) could suffer “irreversible damage”.

Barclays’ announcement follows a spate of cyber attacks in January that allowed thieves to steal €45 million worth of EU allowances from governments and companies and led to the closure of national carbon registries and the suspension of spot trade.

The halt to spot trade is expected to be lifted this week following initial security checks, but the UK bank, one of the biggest traders in the carbon market, said that this was not enough.

“Enhanced IT registry security will improve matters but it does not solve the problem; the time has come to fix the problem. Access to the market by criminals needs to be stopped,” the bank said in the paper.

Several scandals

The bank printed a long list of issues including €5 billion worth of VAT-fraud and the prospect that the market has become a “money laundering blackhole”.

“The headline problems, while making grim reading, are to do with implementation rather than the basic principles of the market,” the statement said.

“Indeed, despite the large amount of criminal activity, environmental integrity remains intact and it is the importance of this market in reducing the emissions of greenhouse gases that makes it worth fixing.”

What Barclays wants instead is for the EU to restrict to registry accounts to companies that face caps under the ETS or traders that are financially regulated by the EU.

This, the bank claims, will reduce the scale of illegal activity in the market by limiting the number of companies that can move the allowances around accounts.

Liquidity risk

The banks said it acknowledges restricting access would make it difficult for some companies to participate in the physical markets, but said failure to restrict access means participation will wane and liquidity will drain away.

“With over €5 billion lost already it is clear to us that the economic cost of maintaining unfettered market access far outweighs the economic benefit,” the statement said.

“Failure to introduce proper controls on carbon market access will lead to bad liquidity pushing out the good,” it added.

The bank said a better solution would be for the spot market to be fully regulated, but said that this “will take years to implement” compared to imposing registry restrictions that “can be achieved in weeks.”

Buyer protection

Barclays also called on the EU to extend buyer protection laws to protect traders from unwittingly buying ill-gotten EU allowances.

“The handling of stolen property, and who gets to keep the affected EUAs is legally unclear, creating prohibitive risk to anyone trading physically settled EUAs,”the bank said.

“Stolen EUAs (including those not yet identified) need to be removed from the system or an EU-wide approach of extending buyer protection laws to transactions in EUAs could help resolve the issue.”

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By Andrew Allan – Point Carbon

www.pointcarbon.com