wsj. EU Says $38 Million Lost in Carbon-Trading Theft

wall st journal JANUARY 20, 2011, 8:46 A.M. ET http://online.wsj.com/article/SB10001424052748704881304576093383625187362.html EU Says $38 Million Lost in Carbon-Trading Theft

BRUSSELS—The European Commission denied Thursday that its carbon-trading system was under threat as a tool to reduce greenhouse-gas emissions, after emission permits worth €28 million ($38 million) went missing and the commission had to suspend trading on the market.

A maximum of two million permits to emit carbon dioxide, equivalent to 0.02% of total allowances on the market, have gone missing, said Jos Delbeke, director general for Climate Action at the commission.

The commission Wednesday suspended spot trading on the Emissions Trading System until at least Jan. 26. The ETS is a virtual market where companies can buy more allowances to emit carbon dioxide if they need to produce more, or sell them if they pollute less. It has a cap to make sure emissions are limited.

"The system continues to be an attractive model," Maria Kokkonen, spokeswoman for climate issues, said during a press briefing.

While a major overhaul will be implemented in 2013 to include new sectors and limit the number of allowances given out for free, the system has lately suffered some setbacks and its functioning has been crippled by illegal actions.

The commission's decision follows "repeated" security breaches in some member countries in the last two months, it said.

EU countries, and also Norway, Liechtenstein and Iceland, keep track of the transactions on the market in an electronic registry that ensures accounting of all allowances issued and records their ownership.

An official from the Czech company that reported Tuesday's theft said the incident reflected weak oversight of national registries.

Some 475,000 allowances worth an estimated €7 million ($9.43 million) were stolen electronically from OTE AS, the Czech registrar of carbon-emission allowances.

The allowances were owned by Blackstone Global Venture, an environmental consultancy that trades carbon credits for industrial companies. It was the third such theft in central and Eastern Europe in as many months.

The Czech incident was preceded by an anonymous bomb threat made by telephone to Czech State Police, saying there were explosives at the location of the registry. Police cleared the building that houses the registry for five hours while they searched for explosives, though no such devices were found, according to a police statement.

The move left the trading system and the allowances held in its accounts unmonitored for the afternoon.

"A lot of people think our account is not the only one affected [in this incident]," said Nikos Tornikidis, a portfolio manager at Blackstone Global Venture.

"We were the first to alert [the registry] and we got the list [containing details of stolen allowances] from them, but then they shut the system and others couldn't" access their accounts to determine whether further allowances had been stolen, he said. "I would be surprised if it was only us," he added.

According to initial media reports, the credits were immediately transferred to Estonian registry accounts.

Zuzana Zahorovska, OTE's registry administrator, said isn't yet clear if allowances were stolen from other accounts, and said the registry was suspending trading indefinitely until the cause of the theft has been identified. OTE is a private company that manages the Czech Republic's carbon-emission registry.

Just before the theft took place Tuesday, Prague police came to OTE and told employees they had to leave the building, Ms. Zahorovska said.

While the registry was empty and employees weren't monitoring their workstations, hackers broke into the registry's computer system, changed account-ownership information and executed illegal trades, Mr. Tornikidis said.

OTE failed to catch the theft and it was only discovered Wednesday morning when Blackstone Global Venture logged into its account at OTE and discovered the theft, Mr. Tornikidis said.

"The response [from OTE] yesterday was too slow" and the registrar's oversight was weak and failed to catch the theft, he said.

In addition to halting spot-market trade of carbon-emission allowances for a week, the European Commission has criticized national carbon-credit registries for being too lax on security.

The theft from the Czech Registry comes on the heels of an early-January theft of credits from the Austrian registry. In November, €24 million worth of allowances were stolen from the account of Holcim Ltd., the Swiss cement maker, at the Romanian National Registry for Greenhouse Gases.

The commission, the EU's executive arm, will make another announcement early next week, it said. "The commission will proceed to determine together with national authorities what minimum security measures need to be put in place before the suspension of a registry can be lifted," it said.

Around 80% of the trade in the carbon market is futures trade. The global carbon market was worth €92 billion last year, according to consultancy Point Carbon.

Write to Sean Carney at sean.carney@dowjones.com and Alessandro Torello at alessandro.torello@dowjones.com