Emission trading has been suspended for more than a week now and it is not clear yet when the market will open again. The reason is fraud, again we should say. What has happened?
Underlying the carbon market in Europe is a system of national registries. If you are a company that is participating in the emission trading, you get an account in this registry. The emission rights that you get from the government (your allocation) are then put into this account. If you make a trade, for example you sell rights, they will move from your account to the account of your counterparty. The whole system is run over the internet. Smart fraudsters have found a way of hacking the registries. They get into people’s accounts, grab the rights that are there, transfer them to their own account and rapidly sell them in the spot market. By doing this, they have recently made some 30 million euro’s. The registries of Austria, Czech republic and Greece were affected.
I think it’s not surprising that this happens. Emission rights are money and where there is money there is fraud. Moreover, the market was created from scratch in 2005, which is also true for the IT-infrastructure that is to support it. That probably explains the loopholes in the security systems. The authorities are now ramping the security up and are refusing to re-open the registries for rights transfers before they have everything tested. This standstill is not without consequences. If there is no possibility of transferring rights from one account to another, there is no possibility of spot market trading. Therefore there has been no more spot market trading since the suspension. How long can this last?
Regular readers of this blog will know that my enthusiasm for emissions trading is very low. It is a classical example of a great idea that turns into a bad practice for several reasons:
- Emission trading creates an immense amount of organizational difficulties. Protection against fraud is a good example of that. But also for the participating companies, the system creates an important extra administrative workload. They have to lobby for allocations, manage the account in the national registry, report on emissions, have those reports audited, manage trades, etc. I can hardly imagine that this paperwork is beneficial to the environment.
- Both trading periods in ETS were over-allocated. As long as the system is over-allocated, it is not contributing to the reduction of emissions of carbon dioxide. It creates an extra – unasked for – source of income for those that have laid their hands on the excess emission rights. And it creates an extra cost for electricity consumers as power producers hedge the costs of emission rights by incorporating them in their pricing.
- And even if allocations were short, I still doubt whether emission trading would contribute to reducing carbon dioxide emissions. I’ve discussed this with a client last Thursday. He asked me what my prognosis for long term emission rights prices is. The only sensible thing I could answer was ‘somewhere between zero and infinity’. And he responded, ‘Well that is why we don’t take into account savings on emission rights when we make a decision on investment in increased energy efficiency’. The price signal is too shaky to be significant.
Emission trading has missed its goal (reducing emissions of carbon dioxide), has created unnecessary administration and has also been a source of financial fraud at several occasions. What more does it take to make this suspension permanent?
There are a few thousand people winning money by having a job as a consultant, trader, broker, software developer, auditor, journalist etc. in the emission rights market. They will do all they can to keep this monster alive that they have contributed in creating. The EU has prided itself about the creation of emission trading across the planet. Admitting that it is a failure isn’t very easy. But is it really so hard for common sense to win? How much more money needs to get lost?