EU to Classify Spot Carbon as Financial Instrument, Draft Shows
The European Union’s regulator will propose classifying spot carbon-dioxide contracts as financial instruments to better protect the world’s biggest emissions market from fraud, an EU draft document showed.
The European Commission opted to extend its Markets in Financial Instruments Directive, or Mifid, to cover spot carbon deals rather than design a tailor-made regime, according to the draft proposal obtained by Bloomberg News. The commission wants to enhance supervision of the market after thieves in January illegally transferred allowances valued at about 23 million euros ($31 million) at today’s prices.
“Both spot and derivatives markets will be under a single supervisor,” the commission said in the explanatory memorandum accompanying the proposal. Mifid and the EU rules on market abuse “would apply, thereby comprehensively upgrading the security of the market without interfering with its purpose, which remains emissions reduction.”
While carbon futures are already subject to Mifid and the Market Abuse Directive, known as MAD, 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, known as EUAs, from companies including Prague-based CEZ AS.
Regulatory Mismatch
“While EUAs would not represent typical financial instruments in terms of their sustainability and appropriateness for investors, this potential mismatch in regulatory focus would be largely overweighed by greater security as banks and investment firms, entities obliged to monitor trading activity for fraud, abuse or money laundering, would assume a bigger role in vetting prospective traders,” according to the draft.
The commission has said it will present the draft around October. It will need to be approved by national governments and the European Parliament to become binding.
Asked whether a draft document has been finalized, Isaac Valero-Ladron, a climate spokesman for the commission, said: “We’re working to integrate the carbon market in the upcoming proposal to review the Mifid and the MAD. We are positive about this necessary step to strengthen the carbon market oversight.”
The ETS is the cornerstone of the EU plan to cut greenhouse gases that scientists blame forclimate change. It imposes pollution limits on companies including German utility RWE AG (RWE) and France’s Electricite de France SA, leading to a cap in 2020 that will be 21 percent below 2005 discharges. Emitters that produce less carbon dioxide than their quota can sell surplus allowances, and those exceeding their limits must buy additional permits or pay a fine of 100 euros per ton of CO2.
Utilities and the International Emissions Trading Association have expressed doubts about whether reclassifying spot carbon permits would enhance security.
To contact the reporter: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net;
To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net
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