Carbon Permit Spot Trade Should Be Regulated: BarCap
Author: Nina Chestney
The spot trading of European carbon permits should be better regulated so the market is no longer open to fraud, Barclays Capital said on Tuesday.
Last year, the EU's flagship emissions trading scheme (EU ETS) was open to abuse through value-added tax fraud which led to more than 5 billion euros ($6.73 billion) in tax revenue losses for several EU nations.
A phishing scam followed in February, when online fraudsters targeted the market to steal emissions permits from companies and sell them illegally.
Last month, carbon offsets which had already been used for compliance found their way onto France's BlueNext spot exchange.
Although steps have been made to stop such activity, it stemmed from parties wanting to profit from fraudulent or criminal activity having access to the market.
That access was provided by the spot market, which is unregulated and not scrutinized like the derivatives market.
Britain's Financial Services Authority regulates trading in derivatives such as carbon futures, but not spot trading, classing them as normal goods.
"More robust regulation of registry accounts and regulation of the spot market would erode access to market to all but the most sophisticated of these participants (fraudsters)," Trevor Sikorski, BarCap's head of carbon research, said in a research note.
The analyst advocated the classification of all carbon permits as a financial instrument, which is still being considered by the European Commission along with other options.
"This is our preferred option because it brings the spot market into a more comprehensive regulatory framework without having to reinvent a new set of regulations," he said.
Classifying carbon as an asset would make the practice of layering carbon transactions through other, non-regulated, but legitimate businesses, harder.
As transaction volume increases in the run up to the third phase of the EU ETS, which runs from 2012 to 2020, better regulation would reduce the scope for criminal activity such as money laundering, the analyst said.
Opening an account at a national emissions registry to trade spot carbon has also been far too easy, in some cases requiring little more than two telephone numbers and a company registration number.
This could be tightened by increasing due diligence checks on people who want to open an account, Sikorski said.
On Monday, a French government report urged the tighter regulation of emissions trading, proposing heavier penalties for those who abuse the market or commit fraud.
(Editing by William Hardy)