The case of the missing carbon credits

The European Trading System suspended spot trading in carbon credits on 19 January 2011, after 475,000 EU carbon dioxide emissions allowances (EUAs) were stolen from the Czech Republic’s carbon registry. The theft was discovered at 8:00 a.m. on 19 January 2011, by which time the thieves had already sold the credits.

The theft provides a glimpse into the mess that is carbon trading in Europe. Each country in the EU ETS has its own registry. The registries give a serial number to the carbon credits, allowing the buyer to know where the carbon credits come from and to make sure that that carbon credits have not already been sold to someone else (called double-counting). In Europe, there are 27 different registries, set up by 27 different development teams.

The carbon credits were probably stolen on 18 January 2011, around 11:00 a.m., when a bomb scare was phoned in to the Czech Republic’s carbon credit registry, OTE, and everyone left the building. By 12:00 am, the stolen carbon credits had been sold on to an account in the Estonian registry.

Oddly enough, no one seemed to notice that the carbon credits had gone until the following morning, when Nikos Tornikidis, of Blackstone Global Ventures group was checking the firm’s inventory.

“That’s when we found that our account was empty and the details of our account had been changed,” Tornikidis told Ecosystem Marketplace. Tornikidis informed OTE, the Czech registry, that 475,000 carbon credits were missing.

At this point, the story becomes even more bizarre. In order to find the numbers of the missing carbon credits, “OTE has to trawl through their whole book by hand,” Tornikidis told Ecosystem Marketplace. The search for the numbers took all day.

On 19 January 2011, the European Commission posted a notice on its website announcing the suspension of transactions in all EU ETS registries until at least 26 January 2011. The theft of carbon credits from the Czech registry was not the first such “security breach”:

Following a first such security breach in early 2010 the Commission has worked closely with national authorities responsible for registries to ensure that adequate security measures are put in place in all registries. The incidents over the last weeks have underlined the urgent need for all registries to ensure that these measures are speedily implemented.

On 20 January 2011, the European Commission announced that more than two million carbon credits were stolen in total, from Austria, Greece, the Czech Republic, Poland and Estonia, worth a total of US$37.7 million.

The European Commission has been aware of the security problem at the registries for several months. In October 2010, as Ecosystem Marketplace reports, the European Commission issued a “Registry Directive” that among other things calls for improved security measures (which apparently would cost less than US$10,000 to put in place). But of the 27 EU registries, 14 had still not implemented the security measures before the latest attack.

This is not the first example of fraud in the European carbon markets. Kjersit Ulset, manager for the European carbon market at Point Carbon, notes in a statement that:

“Hacking attacks of this type have also occurred elsewhere within the European Union in the recent past. Although such incidents are negligible in terms of actual market impact, they will over time undermine the credibility of carbon trading as a policy measure to reduce emissions in Europe.”

This is something of an understatement. According to Europol, about US$6.8 billion has been lost to VAT fraud in the ETS. Law enforcement authorities continue to investigate the criminal networks involved. In December 2010, the Italian police raided 150 firms in Italy. A few weeks earlier, the Italian Power Exchange stopped all trade in carbon credits after what Europol calls a “high number of abnormal transactions”.

Earlier this year authorities in France, Germany, Spain, United Kingdom and other countries conducted numerous operations against criminal networks involved in carbon credit fraud. The biggest swoop, initiated by Germany in late April, saw more than 2500 officers involved across Europe and in non-EU countries.

In total, more than 100 people were arrested in 2010, suspected of crimes related to carbon trading in Europe.

Other frauds involving carbon trading in Europe in the past two years include a phishing scam, the re-sale of used carbon credits and in November 2010, 1.6 million carbon permits, worth about US$19 million, went missing from the Romanian registry account of cement-maker Holcim.