Bloomberg News

EU to Put Financial Instrument Label on Spot Carbon Contracts

October 20, 2011

Oct. 20 (Bloomberg) -- The European Union’s regulator proposed classifying spot carbon-dioxide contracts as financial instruments to better protect the world’s biggest emissions market from fraud.

The European Commission proposed today to extend its Markets in Financial Instruments Directive, or Mifid, to cover spot carbon deals, it said in an e-mailed statement. The EU wants to enhance supervision of the market after thieves in January illegally transferred allowances, known as EUAs, valued at about 20 million euros ($27.4 million) at today’s prices.

“By treating emission allowances as other financial assets, the proposal extends financial market protection to the carbon market,” said Climate Commissioner Connie Hedegaard. “It will provide further certainty for carbon market participants as the market grows and matures.”

While carbon futures are already subject to Mifid and the Market Abuse Directive, contracts for spot delivery, accounting for about 10 percent of trading, typically aren’t seen as financial instruments and aren’t bound by the same laws. Criminals used this regulatory gap to transfer without authorization about 2 million allowances from companies including Prague-based CEZ AS.

Exemptions

The proposed revision of Mifid and MAD, including the provision to cover spot carbon allowances, requires approval from governments and the European Parliament to become binding.

The draft Mifid regulation offers exemptions from authorization and compliance duties for individual emitters buying or selling allowances on their own account, as well as for entities such as trade associations which provide investment services in carbon permits, as long as this activity is ancillary and they are not part of a financial group, according to the commission, the EU regulatory arm in Brussels.

“If those two conditions are fulfilled, this exemption will also be available to companies other than financial intermediaries providing investment services to the group they are part of,” it said. “Trading venues will not be required to set position limits with regard to emission allowances.”

The proposed market-abuse regulation will prohibit insider dealing and market manipulation and oblige some market participants to disclose inside information.

Disclosure Duty

“The disclosure duty would apply to only those entities, the activity of which on an individual basis can have material impact on the price formation of emission allowances or the consequential risks of insider dealing, ” the commission said. “In practice, only information concerning the activity of the largest emitters in the EU ETS, typically belonging to the EU power sector, can be expected to have a significant impact on the carbon price formation.”

The ETS is the cornerstone of the EU plan to cut greenhouse gases that scientists blame for climate change. It imposes pollution limits on companies including German utility RWE AG and France’s Electricite de France SA, leading to a cap in 2020 that will be 21 percent below 2005 discharges. Emitters that produce less carbon dioxide than their quota can sell surplus allowances, and those exceeding their limits must buy additional permits or pay a fine of 100 euros per ton of CO2.

Utilities and the International Emissions Trading Association have expressed doubts about whether reclassifying spot carbon permits would enhance security and have called on the commission to design a tailor-made regime for the emissions market.

--Editors: Alessandro Vitelli, Raj Rajendran.

To contact the reporter: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net;

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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