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Theft of EU Allowances - March, 2011

 

Theft of EU Emission Allowances  

Tom Markowitz - Tuesday, March 01, 2011

Welcome to Enerhope
 

Welcome to the March, 2011 blog of www.Enerhope.com  ,  a website providing education, information and professional services in Emissions Trading.

This blog entry includes a summary of major February, 2011 cap-and-trade news items, and a special feature article, "Theft of EU Emission Allownces."

If you wish to comment on the article or the news items, please join the blog at the bottom of the page.
 

Emissions Trading: Major News Headlines of February, 2011

Seoul relents to industry on carbon trading timeline
Seoul is delaying carbon emission trading to 2015 after opposition from the industry to implement it in two years.
Joon Gang Daily (KOREA)
February 28, 2011
http://joongangdaily.joins.com/article/view.asp?aid=2932787

Senate shows its moderate side
Sharp differences with House on RGGI, others
The New Hampshire House voted overwhelmingly last week to withdraw the state from the Regional Greenhouse Gas Initiative. But don't expect the Senate to agree so quickly.
Concord Monitor (NH, USA)
February 28, 2011
http://www.concordmonitor.com/article/242784/senate-shows-its-moderate-side

Climate change: Would you be willing to pay a carbon tax to help fight climate change?
Far more Canadians than Americans believe climate change is real, according to a report released Wednesday by think tanks in the U.S. and Canada.
Another key finding is that twice as many Canadians as Americans support both a cap-and-trade system for industry and the idea of paying a carbon tax of up to $50 a month.
CBC (CANADA)
February 28, 2011
http://www.cbc.ca/news/yourcommunity/2011/02/your-comments.html

Most Carbon Revenue Spent on Energy-Saving Projects, States Say
A group of U.S. Northeast states has raised $789 million from the sale of carbon-dioxide pollution rights to power plants and spent 52 percent of the proceeds on energy-saving projects, according to a report.
Bloomberg
February 28, 2011
http://www.bloomberg.com/news/2011-02-28/most-carbon-revenue-spent-on-energy-saving-projects-states-say.html

Govt welcomes Australia's carbon initiative
Australia's move to make carbon polluters pay for their emissions will be "very similar" to New Zealand's Emission's trading scheme (ETS), climate minister Nick Smith says.
TV New Zealand
February 25, 2011
http://tvnz.co.nz/politics-news/govt-welcomes-australia-s-carbon-initiative-4040257

Australia unveils plans for a fixed carbon price
Julia Gillard said polluters would pay a fixed price from July 2012, followed by a market-based system by 2017
Guardian (UK)
February  24, 2011
http://www.guardian.co.uk/environment/2011/feb/24/australia-fixed-carbon-price

Heat’s on cap and trade
There’s a persistent myth out there that left-wing loonies are somehow trying to foist carbon cap-and-trade schemes on California business.
In fact, lots of progressives and environmental groups aren’t all that crazy about cap and trade either—and believe that it’s a complicated game which lets polluters off the hook for their impacts on local communities.
In fact, the state’s ambitious anti-global-warming law, Assembly Bill 32, is now stumbling in the courts, because several environmental-justice organizations sued over the controversial cap and trade plan that state regulators approved in December.
News Review (USA)
February 10, 2011
http://www.newsreview.com/sacramento/content?oid=1920200

Republicans Launch Assaults on Obama Administration's Climate and Clean Energy Programs
At a sprawling, daylong hearing punctuated by pictures of Arctic ice caps and coal miners, a House Energy and Commerce panel set the tone for what could be a months-long GOP war on the Obama Administration's climate and clean energy programs, beginning with U.S. EPA's plans to regulate greenhouse gas emissions.
New York Times Climatewire
February 10, 2011
http://www.nytimes.com/cwire/2011/02/10/10climatewire-republicans-launch-assaults-on-obama-adminis-67469.html

Cap, trade repeal bill tabled, but not dead
CARLSBAD — "It's not over until the Legislative session is over."
Those were the fighting words of Sen. Carroll Leavell, R-Eddy, after a bill he co- sponsored to repeal cap and trade rules was tabled in committee on Tuesday.
Current-Argus (Carlsbad, NM, USA)
February 9, 2011
http://www.currentargus.com/ci_17344573

UK VIEWS ON AVIATION EMISSIONS TRADING AND OPEN SKIES STAGE II
Passed to the Telegraph by WikiLeaks
Ref ID: 09LONDON333
Date: 2/6/2009 13:05
The Telegraph (UK)
February 4, 2011
http://www.telegraph.co.uk/news/wikileaks-files/london-wikileaks/8305148/UK-VIEWS-ON-AVIATION-EMISSIONS-TRADING-AND-OPEN-SKIES-STAGE-II.html

March, 2011 Feature Article:

Theft of EU Emission Allowances
© Enerhope.com 2011

March, 2011

According to media reports, cyber-criminals have been breaking into legitimate Accounts in the greenhouse gas emissions trading (“ET”) Registries of European Union members, stealing Allowances, and re-selling the Allowances, before the legitimate owners notice the theft.

(This article follows “A Bullet-Proof Cap-and-Trade System,” which was published on September 1st, 2010, as
http://www.enerhope.com/_blog/Enerhope's_September_1st,_2010_Newsletter_-_A_Bullet-Proof_Cap-and-Trade_System
The September article described problems with ET to that date, and recommended solutions.)

The criminals establish trader Accounts on the ET Registries of various EU countries. The criminals use phishing tactics to learn the trading passwords of targeted, legitimate Account holders. Then, the criminals use the stolen passwords to open the targeted, legitimate Accounts, and transfer Allowances to the criminals’ own Accounts in other countries, The criminals then sell the Allowances to Capped Facilities in other countries, before the thefts are noticed by the legitimate owners of the Allowances.

According to the New York Times Climatewire, the thefts began in January, 2010, when two hundred and fifty thousand Allowances, with a market value of $4.2 million, were stolen in Germany.
http://www.nytimes.com/cwire/2011/01/20/20climatewire-european-commission-halts-transfers-of-carbo-22394.html

In a world where cyber-crimes are reported frequently, the attack against European ET Registries is not a surprise. Highly skilled hackers have also penetrated national governments, security agencies, major corporations and social media web sites. The problems of cyber-crimes in ET Registries are complicated by the intangible nature of Allowances and Offsets. An Offset is a reward for not emitting greenhouse gases. Unlike a barrel of petroleum or a bushel of wheat, an Offset is not a tangible commodity that can be located in a storage tank or a silo. Among the 30 EU ET Registries, security standards vary from rigorous to not-so-rigorous.

This report from the Prague Post, on January 26th:
“The Czech Registry for Emissions Trading reported that it had lost 7 million euros worth of the pollution permits.
“The European Union has been forced to shut down its carbon credit markets after hackers stole up to 30 million euros ($40.8 million/728.4 million Kc) worth  of the emissions Allowances from the Registries of five European countries, including the Czech Republic.

“The Czech Registry for Emissions Trading was one of the worst affected by the hack, losing 7 million euros worth of the pollution permits, known as EU Allowances (EUAs).

“Some 2 million EUAs were stolen by hackers from Austria, the Czech Republic, Greece, Estonia and Poland within a few days. Each credit allows the bearer one
ton of emissions and is worth 14 euros.”
http://www.praguepost.com/business/7290-hackers-steal-carbon-credits.html

The Financial Times reported, “The thefts at OTE (Czech Republic) were one of at least six attacks on operators of the EU emissions trading system across eastern and central Europe in the past three months. All told, cyberthieves swiped Allowances worth more than €50m before panicked authorities in Brussels were forced to pull the plug and halt spot market trading.”
http://www.ft.com/cms/s/0/368f8482-387d-11e0-959c-00144feabdc0.html?ftcamp=rss#axzz1E5UT9AnR

On January 20th, the EU halted all transfers of EU Allowances. All 30 EU ET  national Registries were closed.
http://www.nytimes.com/cwire/2011/01/20/20climatewire-european-commission-halts-transfers-of-carbo-22394.html

As of February 24th, only ten of the 30 national Registries that comprise the EU ETS had reopened for business.
http://www.monstersandcritics.com/news/europe/news/article_1621399.php/Three-more-states-to-rejoin-EU-emission-trading-scheme-on-Thursday

Some of the stolen Allowances have been located in Accounts in the Registries of various EU nations. The criminals have not been apprehended.

An editorial in the Wall Street Journal (February 2nd) attacked the EU ET system. “Europe’s Emissions Trading Scams: This isn’t a market; it’s merely designed to look like one.”
http://online.wsj.com/article/SB10001424052748703439504576116020196050548.html?mod=googlenews_wsj

On February 16th, EU Commissioner for Climate Action Connie Hedegaard replied to the February 2nd criticism. “To put things into perspective: the thefts constitute less than 0.02% of the Allowances in the market.”
http://online.wsj.com/article/SB10001424052748704409004576145972982710188.html

A well-designed ET  Registry
is highly resistant
to problems of theft and fraud.

Let’s review the basics of registry design. Here is the idealized, Enerhope definition:
Registry
A data base which tracks the history of every Tradeable Unit (Allowance or Offset) and every facility or organization that holds any Tradeable Unit. The Registry shows the Creation, Allocation, Transfer and Retirement of every Tradeable Unit. The Registry can be presented like an old fashioned bank ledger, with each page of the ledger showing the history of one Account. The Registry is operated by the government, which is responsible to the nation for the success and integrity of the ET system.

The Registry is visible to the public. Allowances are a public asset. The public has a right to know the disposition and history of every public asset that the government sells or gives to a private company.

Account
Each Capped Facility has an Account in the Registry. Each Offset-holder has an Account. The Government has an Account, to show the creation of Tradeable Units. Brokers may open Accounts on the Registry, after satisfying the Registry operator of their integrity. The only other Account is the Retirement Account.

Creation of Accounts
Only the government has the right to create Tradeable Units. At the beginning of each year, the government creates enough Allowances to equal the announced Emissions Cap for that year, and deposits these Allowances in its own Account. The government then transfers Allowances from its own Account into the Accounts of Account holders, according to a fair, pre-arranged scheme. The government can also create Offsets, to reward emission reduction projects, and transfer these Offsets to the Accounts of the project owners.

Transfer
Tradeable Units can be Transferred (e.g. sold) from one Account to another. In each Transfer, the buyer and the seller must satisfy the Registry operator of their agreement to Transfer specified Tradeable Units from one Account to the Other. Each Transfer must be recorded in the Registry.

Retirement
At the end of each year, each Capped Facility must Retire (Transfer to the Retirement Account) Tradeable Units equal to its Reported emissions for the year.

Retirement Account
At Retirement, an Account holder withdraws Tradeable Units from its Account, and Transfers the Tradeable Units to the Retirement Account in the Registry.

The Retirement Account functions as a “graveyard” for Retired Tradeable Units. The “tombstones” are marked with the serial numbers of the Retired Tradeable Units. Retired Tradeable Units are never Transferred out of the Retirement Account.

(Notice that in the Enerhope Registry, Allowances and Offsets NEVER leave the Registry. At the end of their useful life, they are deposited in the Retirement Account in perpetuity. A criminal cannot remove Allowances from the Registry and sell them in another country.)

A Registry meeting the above definition would be highly resistant to problems of theft and fraud.

More Recommendations for Each EU ET Registry:

Better Security for the Registy
The problem of protecting the Registry from fraud and theft is no different from protecting brokerage Accounts from the same threats. Only reputable companies should be allowed to open Accounts. Each Account holder should provide multiple passwords before accessing the Account for trades. No trade should be registered without the intervention of a Registry Officer.

Education
The system would eventually benefit from greater understanding of ET by the public and to the ET community, if the EU provided more educational services, explaining the mechanics of a correctly functioning ET system.

To Reduce the Complexity of the Registry:
(a few suggestions)
(1)
Reduce the number of Allowances, Offsets:
Allocate one Allowance for each 1,000 tonnes of CO2e, not each tonne.
(2)
Do NOT create Allowances or Offsets for future years.
(3)
Schedule Allocation and Retirement once per year, not per three years

International Trades

The single-nation Registry described above would be highly resistant to theft and fraud.

Unfortunately, the trading situation becomes more complicated when Tradeable Units are transferred across national borders, from one national Registry to another. In January, 2011, thieves were able to steal Allowances from their rightful owners and sell them to unsuspecting buyers by transferring them across national borders. National Registries were unable to track the international transfers.

The risks involved in international trades can be minimized by increased supervision by national Registries. International transfers should be from nation to nation, only. Each national Registry should include a separate Account for International Transfers. This new Account for International Transfers can track the serial numbers of the Allowances that disappear from the national Registry, or appear from other nations.

Here’s an example of a supervised international trade of an Allowance:

Company X, a capped facility in the ET Registry of Country A, wishes to sell Allowance A2011A500 to Company Y, a capped facility in the ET Registry of Country B.

Company X and Company Y obtain the approval of the national Registries of Countries A and B for the trade.

Company X transfers A2011A500 to Country A’s Account for International Transfers.

Then, Country A transfers A2011A500 to Country B’s Account for International Transfers. (This international transfer between nations should be the only way an Allowance can disappear from Country A’s ET Registry.)

Finally, Country B transfers A2011A500 to Country B’s Account in country B’s Registry.

The transfer of an Allowance between the Registries of Country A and Country B is clearly tracked in the International Transfer Accounts.

Such precautions would slow the pace of trades in emissions trading Registries. Would the system suffer from the reduced frequency of trades? On February 15th, the Financial Times reported, “Europe’s climate chief wants to slow down the pace of trading in carbon markets in order to make the system less susceptible to cyber-thieves.”
http://www.ft.com/cms/s/0/76176956-384d-11e0-8257-00144feabdc0.html#axzz1E5UT9AnR

Moving to a Single Registry
In the foreseeable future, the EU ETS will replace the 30 national Registries by a single, centralized EU ETS Registry. 

“The revised ETS Directive adopted in 2009 provides for the centralisation of the ETS operations into a single European Union registry. This new registry will be operated by the Commission and will replace all EU ETS Registries currently hosted in the Member States.”
http://ec.europa.eu/clima/policies/ets/Registries_en.htm

Moving to a single EU ETS Registry would reduce the problems of monitoring transfers of Allowances and Offsets across national borders. However, the EU ETS would not operate in complete isolation from other ET systems, because the ETS would probably continue to accept new “CER” Offsets from the United Nations FCCC ET system.

The unified EU ETS will require uniform standards for integrity of Account holders, Allowances and Offsets among all EU ETS members.

 


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