NOLAN RIEGLER

February 10, 2011

E.U. Carbon Markets Fall Victim to Theft, Fraud and Other Black Market Skullduggery.

Recent investigations have uncovered wholesale theft and bribery within the European Union's carbon market. The most sophisticated and profitable of these schemes was a "phishing" scam, where black market programmers constructed websites mimicking those of national carbon registries. Carbon traders and industry clients were sent e-mails inviting them to update their information on the false sites. That information was used to hack into the actual registry databases and steal millions of dollars of carbon allowances from accounts.

Spot trading in the emissions trading system was suspended on January 21, 2011, when $ 39 million in allowances were reported stolen by numerous registries in Germany, Estonia, and Austria. While trading reopened on February 4, trading was down due to fears that the market was still insecure.

Critics of carbon trading argue that these investigations prove that market-based mechanisms are too prone to corruption to be effective at mitigation. Supporters respond that the structure of the European carbon market is what is at fault. Every country has its own registry, and thus the market depends on each country monitoring its own registry for fraud and criminal activity. Many countries, they argue, have not treated carbon allowance theft as an important issue, and thus crime has run rampant in the market. Supporters will have a chance to test their theory when the European Union converts to a single registry in 2013. Until then, they will have to hope that each nation monitors its activity more closely.

San Francisco Judge's Tentative Ruling Could Halt Implementation of California's Cap and Trade Program.

A California superior court judge tentatively ruled that the California Air Resources Board failed to undergo the proper administrative procedure when it adopted the state's plan to implement AB32, better known as the "Global Warming Solutions Act of 2006." Holding that the Board failed to adequately consider alternatives to the cap and trade mechanism outlined in the plan, superior court judge Ernest Goldsmith stated that the Board "seeks to create a fait accompli by premature establishment of a cap-and-trade program before alternative (sic) can be exposed to public comment and properly evaluated by the [Board] itself." While the Board's findings articulated five alternatives, it spent 10 pages of its report discussing one, while devoting a total of three pages to the other four.

The plaintiffs in the suit include a number of citizen environmentalist groups that defended AB32 from Proposition 23, a citizen referendum that, had it passed, would have suspended implementation indefinitely. These groups, including the Center on Race, Poverty and the Environment, have been raising questions regarding the impact of the cap and trade mechanism on low income communities, particularly those that live near pollution sources. Justifying the court action, which, if successful, could also suspend implementation, Alegria de la Cruz, the Center's director, stated "[T]here's a way to both be supportive of AB32 implementation but to be responsible in that support and ethical in that support, and we ask the same of the board." The court set the deadline for party response to the tentative decision as February 8, 2011.

EPA Air Chief Announces that New Standards Will Not Include a Cap and Trade Element.

In a public hearing, EPA air chief Gina McCarthy announced that a cap and trade program will not be a part of the New Source Performance Standards (NSPS) expected to be finalized in 2012. McCarthy described these proposed standards, part of a settlement agreement reached between the Obama administration and a coalition of environmental groups last December, as a "level the playing field" step in emissions reduction. Their purpose is to "set a floor" to determine the best available and most affordable control technology.

While industry representatives reacted, for the most part, quite positively to this first of four scheduled public hearings, some members of Congress are not supportive of the NSPS. Rep. Fred Upton described the NSPS as "a backdoor attempt to implement their failed job-killing-cap-and-trade regime." Upton, the Chairman of the House Energy and Commerce Committee, has authored legislation that would block the EPA's authority to regulate greenhouse gasses altogether.

Assuming the EPA retains that statutory authority, this is phase one of a longer process, and the EPA intends to hear testimony from a variety of stakeholders. In that regard, it may be too soon to tell if a trading mechanism will or will not be included in the final NSPS standards.

Sources:

Nathaniel Groneberg, Europe's Carbon Emissions Trading —Growing Pains or Wholesale Theft?, N.Y. Times, Jan. 31, 2011, http://www.nytimes.com/cwire/2011/01/31/31climatewire-europes-carbon-emissions-trading-growing-pai-74999.html?pagewanted=1.

Flemming Emil Hansen, Europe Grapples with Stolen Carbon Credits, Wall St. J, Jan. 31, 2011, http://online.wsj.com/article/SB10001424052748703439504576116483436132722.html.

Terry Macalister, European Carbon Market Reopens but Traders Stay Away, Guardian, Feb. 4, 2011, http://www.guardian.co.uk/business/2011/feb/04/european-carbon-trading-resumes.

Wyatt Buchanan, California Cap-trade plan dealt blow by S.F. Judge, S.F. Chron., Feb. 4, 2011, http://www.sfgate.com/cgi-bin/article/article?f=/c/a/2011/02/03/BAOO1HIDT2.DTL.

Dina Fine Maron, Regulation: EPA Official says Cap & trade won't be a part of new CO2 rule, www.eenews.net, Feb. 7, 2011, http://www.eenews.net/climatewire/2011/02/07/3/.