Bilateral Carbon Trade Surged Last Year, World Bank Says

The value of bilateral carbon trading surged 15 percent last year after thefts of European Union emission allowances suspended prompt trading on exchanges, the World Bank said.

EU greenhouse-gas trades that didn’t involve exchanges or brokers surged to $17.3 billion, the bank said today in its yearly report on CO2 markets. ICE Futures Europe suspended prompt trading in January last year after thefts of allowances roiled buyers. BlueNext SA, the Paris spot exchange that also temporarily halted transactions, reopened for trading Feb. 4.

The shift to bilateral trading “occurred as exchanges exercised increased scrutiny, which certain market participants viewed as cumbersome,” the bank said in its report. “Some players reported favoring long-term relationships with trustworthy commercial partners.”

Security measures introduced by regulators since last year will probably curb prompt trading even after the opening of an EU-wide registry next month, according to STX Services BV, an Amsterdam-based environmental brokerage. Competition from futures markets, where most trades are now carried out, also will soften any spot-market resurgence, Bloomberg New Energy Finance said.
Slowing Down Trade

New security rules such as a 26-hour delay in transactions will probably make the market less attractive, said Guido Levie, head of the emissions-trading desk at STX.

“The 26-hour delay slows down the spot market and doesn’t necessarily protect all market participants,” he said by phone yesterday. “Some factories only check their carbon accounts a few times a year, so they would not necessarily know within 26 hours if they have been robbed.”

Reviving the prompt market is one of the topics being discussed during the next three days at the Carbon Expo conference in Cologne, Germany. The expo has attracted 2,800 delegates including Christiana Figueres, executive secretary of the United Nations Framework Convention on Climate Change.

ICE, the biggest exchange for carbon trading, said May 24 it might extend a 16-month suspension of its prompt market as it waits for a software upgrade at the new EU registry, which the European Commission said will open on June 20.

Tracking Ownership

The upgrade will allow traders to set up so-called trusted accounts in the registry, which tracks ownership of emission allowances. Without those accounts, which will allow for streamlined trading, transactions may take as long as seven days to settle, said David Peniket, the exchange’s president.

“I think it’s right to be cautious,” Peniket said in a phone interview. “Delay in the identification of a theft: that’s the risk.”

The commission has said it will publish a timetable for the upgrade by July 20.

About 89 percent of the $148 billion in EU carbon transactions last year was on exchanges and via brokers, the World Bank estimated. The spot market fell to 2 percent last year from 7 percent in 2008, the bank said. Prompt trading was also tainted by value-added tax fraud in the period.

Futures trading may limit that market’s recovery, said Konrad Hanschmidt, an analyst in London for New Energy Finance. Many companies don’t need spot because they only have to comply with emission rules once each year and holding spot ties up capital, he said.

“For those reasons, futures will likely remain the preferred compliance option for many,” Hanschmidt said. “The share of spot trading will probably rise from current levels compared with futures, but it will most likely not overtake the futures market.”

(Source: Bloomberg Business Week - By Mathew Carr)