Taking responsibility in the EU ETS

The European Union is rightly proud of its emission trading system. Arguably it is the most important mechanism in the world today for fighting climate change. Unfortunately the system does not work. I do not refer to its effect on greenhouse gas emissions. I refer to the fact that the infrastructure of registries and the citl is unreliable.

In trading a couple of weeks ago we encountered a flaw in the system which meant that tens of thousands of EUAs worth several million were held up for over 40 hours in a limbo between the French registry and the Danish registry. The next day another large chunk of EUAs got stuck in the Danish registry for several hours. Today again the citl is not allowing transfers of EUAs from registry to registry. Can the world’s fastest growing commodity market robust handle the pressure?

In this volatile market system interruption can cause traders substantial losses. And when several million Euros of your client’s allowances disappear into a system run by the European Commission, you get scared.

To come across glitches like this – whether bugs or procedural errors – in the fourth year of the operation of the EU ETS is scary. But there are a host of technical and procedural issues which plague the system:

How about the fact that when you initiate a transfer you cannot see the name of the intended recipient, just an ID number? Or in the French registry which does not have a confirmation step before sending allowances?

How about the admission that the CITL team has no internal compliance deadline for resolving problems, so there is no sense of urgency for solving multi-million Euro hiccoughs? Or again on the topic of time-keeping, the absence of any commitment by the EU to execute a transfer instruction within a set time? How appropriate is it to apply to EUA trading a UN standard which dictates 4 hour updates and 24 hour “cleaning cycles” – in a market where prices change materially within minutes?

When you are in the middle of a technical crisis with large financial implications, you look around for someone to blame. But whose fault is it? Surely, we can complain about the functionaries at the French registry, whose sullen indifference implies a reinterpretation of Liberté, Fraternité, Égalité: “Do what you want, chum, it’s all the same to me.” But the Danish registry personnel could not have been more helpful and conscientious, while the Commission staff also took the matter seriously and worked hard and professionally on it.

Complaining about these people does not get to the heart of the problem. The heart of the problem is the use of a system which is not suitable for fast, high volume trading which has become the norm in the EU ETS. A design was accepted which appears inappropriate for the ambitions of the scheme; similarly, operational procedures are set to the plodding standards of inter-governmental activity and not international electronic trade. These issues are the responsibility of senior people who have taken decisions in the past about software procurement and internal processes – and the current problems are the results of these decisions. Now those senior people should be called to account.

In the cosy bureaucracies of emissions trading, it is rare for people to be seen to take responsibility. There has been a series of delays and failures in the EU ETS: the ITL-CITL link, the release of emissions information in May 2006, the delays in issuing EUAs well beyond the statutory deadlines. Yet no-one from the UNFCCC, from the Commission, or the member states has taken responsibility for these miserable muddles.

The excuse is a self-indulgent reference to “learning-by-doing”. By continually forgiving themselves for their own failures, the leaders of the fight in climate change are setting themselves mediocre standards. Now it is time for the management of the EU ETS to set very high professional standards for themselves, and carry the can if they cannot meet these.

This intolerable situation needs to be addressed and the Commission needs to come clean with some frank and open communication, and some taking of responsibility.

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