By Fiona Harvey and Chris Flood
Published: March 22 2010 19:47 Carbon traders tried to calm market fears on Monday after the latest blow to the credibility of the European Union’s emissions trading scheme.
The International Emissions Trading Association, an industry body for traders, called for a halt to resale of certain carbon credits, after concerns that “used” credits were being “recycled”.
Credits that were submitted by companies to cover their obligations under the EU’s trading scheme were then re-sold back into the market by Hungary’s government, in a decision that – although legal – was said by carbon experts to raise questions about the correct working of the system.
Henry Derwent, president of IETA, said: “The reaction from market participants and observers across the world should convince governments that recycling is strongly disliked by the market. It also impacts the reputation of the EU ETS.”
The European Commission is to close the loophole.
Under the EU ETS, companies in certain energy-intensive industries are issued with rights to emit carbon dioxide, some free and some bought at auction. The companies must surrender to their governments enough permits to cover their emissions each year.
Companies are able increase their quota of permits by buying carbon credits from overseas, issued by the UN under the Kyoto protocol.
FT interactive graphic: Explore the technologies adopted and various developing nations’ level of participation
These are cheaper than the permits issued by the EU. It was about 1.7m of these UN credits – worth nearly €20m ($27m) – that were then re-sold by the Hungarian government, in a move that is allowed under the rules but that caused market participants to question the value of the recycled credits.
The UN credits were trading at €11.46 a tonne on Monday while EU permits were at €13.12 a tonne.
The Bluenext and Nordpool exchanges halted trading in carbon credits last Wednesday to investigate whether recycled credits were being circulated, but reopened on Monday.
The Hungarian government named Deutsche Bank as one of the bidders for the recycled credits, but the bank said it pulled out for ethical reasons.
Microdyne, a small London-based company, said it took the credits, which were then sold on to a Hong Kong company.
There was widespread anger in the market. “Hungary is playing with fire,” said one trader.
Mitchell Feierstein, chief executive of Glacier Environmental Funds, called the re-sale of used credits “idiotic” and said traders must conduct due diligence on their counter-parties.