Disaster is averted, but significant problems remain

At last, some welcome positive news for the carbon markets as a number of registries re-opened today. But the good news came amid concerns about further allowance thefts, this time from the Italian registry. All registries in the EU ETS have been closed since 19 January following a string of allowance thefts. Last week the Commission requested that all member states fulfill minimum security guidelines and submit an independent report to it confirming such security measures are in place before it would permit the registries to re-open.  Yesterday it indicated that France, Germany, the Netherlands, Slovakia and the UK “have given reasonable assurances that the minimum security requirements are in place” and their registries would “resume normal operations” at 8am CET today. It has said it is expecting several more reports from other member states evidencing compliance with its minimum requirements in the coming days.

The closure of registries has generally been viewed by the market as a Suspension Event under ISDA based contracts (giving greater leeway for waiting until parties are able to settle trades, as compared with a Settlement Disruption Event). The next important delivery date on 1 March may be easier, given four of the major registries are re-opened.

However, despite the Commission’s efforts, it is clear that confidence in the market has been dented. Outstanding issues remain around legal ownership of stolen EUAs that have been transferred across member state borders. Concern that unwitting purchasers of stolen allowances may have them confiscated in some jurisdictions may damage liquidity in the market.

Although five registries are open, only one exchange, Bluenext, has resumed spot carbon trades today. It says it has installed a filter to screen stolen EUAs which is fine so long as the fact that they are stolen has been made public. ICE has extended the spot transactions suspension until 7 February.

It is clear that the Commission needs to do much more to re-establish the faith of market participants and convince market sceptics of the integrity of its carbon market. Barclays Capital have mooted a potential solution of greater restrictions around who may open a registry account, limiting access to companies with ETS compliance obligations and organisations regulated under the Markets in Financial Instruments Directive. It remains to be seen whether the Commission takes this suggestion on board, but it is clear that a long term solution to the registry security is needed.