Carbon Cowboys - They are here to stay

Last week the European carbon markets were hit by yet another "scandal" - the Hungarian government sold over 300,000 carbon credits (CERs) surrendered by Hungarian installations to comply under the European Union Emission Trading Scheme (EU ETS) to an unidentified Japanese buyer for an undisclosed price. The deal was brokered by a little known Hungarian intermediary. The event led to coining of a new term "recycled CERs". Cheating cried a few. Legally correct said the Hungarians. Traders feared large scale replication by other EU countries.

The CERs sold by Hungarian government were surrendered by Hungarian companies and currently sitting in the Holding account of Hungry. They had not been retired. Economic circumstances and conditions convinced Hungry that it has excess of Kyoto allowances and hence it would not require these CERs to comply with its Kyoto obligations. Hence, they sold the same; they sold the excess.

Above behaviour by a government has found yet another loophole in the emissions trading system. The behaviour of selling excess Kyoto units in not new. Czech , Ukraine, Poland, Estonia and Hungary have sold the Assigned Amount Units (AAUs) to other European and Japanese governments. However because AAUs can be used only for country level compliance and not by private companies that are part of the EU ETS, it did not impact the price of EU ETS which is the most transparent price setter of global emissions trading system. EU ETS units, the European Union Allowance (EUA) are not Kyoto units and can't be used by countries for compliance. However, other Kyoto units that can be used by countries for compliance like CERs and AAUs trade at a discount to EUAs and are highly co-related to its movements. The policy makers till date took proud in the transparent price setting of EU ETS - not any more. EUA prices were impacted by this event, an indication of complex supply demand of the global carbon market. Though, the major exchanges trading carbon in EU have advised members to be cautious against these recycled CERs - another grey area of carbon market.

Is it ethically correct for governments to sell surrendered CERs not withstanding the legal and technical justification? Answer isn't easy. It depends on who you speak to - who is profiting and who is not. Hungary selling these surrendered CERs isn't much difference to it selling AAUs. However, CERs command a slight premium to AAUs and hence more profitable. This should be seen in context of the mega profits people have made since inception of carbon market - the sellers in China and India who made huge profits from their HFC projects to the extent they want to set up new projects dedicated to HFC abatement, EU ETS companies getting windfall profits by selling excess EUAs, people using VAT loopholes to make smart money people term as fraud, countries selling hot air AAUs, brokers charging brokerages on ERPA volume that never deliver, consultants charging huge PDD fees for projects that never take off ground. Everyone has had their chance. Everyone wants to become rich. What's the hue and cry then about? Each participant has had their chance to be the carbon cowboy. No ones seems to have left the money on table in name of ethics.

The question is - what will be the next loophole and who is the next carbon cowboy? More importantly, when will this stop?