Bloomberg News

EU Plan for Spot CO2 Regulation Will Entice Trade, Barclays Says

October 21, 2011

Oct. 21 (Bloomberg) -- The European Union’s plan for classifying spot carbon-dioxide contracts as financial instruments will probably encourage trading after thefts and fraud turned traders away, said Barclays Plc.

“It certainly gives us comfort the system isn’t going to face the same kind of problems it suffered in the past,” said Louis Redshaw, head of carbon, coal, dry freight and iron ore for Barclays Capital in London. While some carbon traders are not enthusiastic about the plan, “industry didn’t come up with anything better,” Redshaw said yesterday by telephone.

The European Commission proposed yesterday to extend its Markets in Financial Instruments Directive, or Mifid, to cover spot carbon deals. 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 ($27.5 million) at today’s prices.

“The proposal for spot trading is an important step towards re-establishing the commission’s authority over the carbon market and enticing investors back into the space,” Redshaw said.

The International Emissions Trading Association said yesterday the EU’s proposal was “not industry’s preferred choice.” Extending Mifid to spot emissions trading “automatically triggers burdensome requirements that are not relevant to the risks in this market,” IETA President Henry Derwent said in an e-mailed statement.

EU carbon permits have dropped 28 percent this year because the market is oversupplied. The higher premium of December 2013 carbon permits indicates sellers are asking for extra value probably because of regulatory uncertainty after 2012, Redshaw said. Commodities that have higher prices as maturities lengthen are in what’s known as contango.

Super Contango

Carbon permits for December 2013 are 73 euro cents a ton more than those for December 2012. That’s 55 percent more than the 47-cent contango of December 2012 over 2011.

“The super contango between 2012 and 2013 may reflect reduction in confidence has not just been in the spot market but also in the European Commission’s ability to sustain a carbon market” beyond 2012, Redshaw said.

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.

Providing Certainty

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

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.

--Editors: Alessandro Vitelli, Rob Verdonck.

To contact the reporter on this story: Mathew Carr in London at

To contact the editor responsible for this story: Stephen Voss at

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