(Adds dropped word, paragraph 14)
* Spot carbon permits to be treated as financial instruments
* Proposals still have to be approved before adopted
* Compliance firms could face "lighter requirements"
By Barbara Lewis and Nina Chestney
BRUSSELS/LONDON, Oct 20 European Union spot
carbon permits face regulation alongside other financial
instruments under proposed laws published on Thursday as the EU
Commission seeks to bolster a market shaken by fraud and
The EU Commission has proposed that spot carbon permits
should be classified as financial instruments, adding to
futures, forwards and options which are already covered by
financial market rules (MiFID).
"By treating emission allowances as other financial assets,
the proposal extends financial market protection to the carbon
market," EU Climate Commissioner Connie Hedegaard said.
"It will provide further certainty for carbon market
participants as the market grows and matures. This way, the
carbon market will better play its full role to mobilise the
substantial investments needed for the transition to a
low-carbon economy," she added in comments emailed to Reuters.
Under the EU's emissions trading scheme, large emitters are
required to monitor their CO2 emissions and if they exceed a
certain level, must buy carbon permits to compensate.
A Commission source said companies that only bought
allowances to cover their emissions output rather than to trade,
such as utilities and industrials, would face "much lighter
Some traders and industry representatives argue against the
inclusion of the entire carbon market in the new EU rules on
financial instruments, arguing they required special treatment.
"(It) automatically triggers burdensome requirements that
are not relevant to the risks in this market," said Henry
Derwent, president and chief executive of the International
Emissions Trading Association.
He said further work would be needed to ensure the
inclusion of spot permits under MiFID does not undermine market
functioning of the market and effectively prevents abuse.
A series of frauds, together with oversupply and concern
about the European debt crisis, have battered the carbon market,
meaning allowances no longer cost enough to be an adequate
deterrent to polluters.
Fraudsters were able to penetrate the $120 billion European
emissions market through spot carbon permit trade, which
represents 5-10 percent of the overall market.
"This is definitely a step in the right direction, putting
spot permits on the same basis as the derivatives market,"
Trevor Sikorski, head of carbon research at Barclays Capital,
"The idea is to make it harder for unscrupulous firms to
enter the market as everyone will have to apply stringent
know-your-customer to their customer base when dealing in the
market which hasn't always been the case," he added.
Benchmark EU allowances CFI2Zc1 were trading around 10
euros a tonne on Thursday and have lost around 30 percent of
their value so far this year.
Justifying its decision to include the entire market in the
proposed new legislation -- which still has to go before the
European Parliament and the Council of EU member states for
adoption -- the Commission said the carbon market had grown
significantly in size and sophistication.
On the question of which market participants would be
required to disclose inside information on carbon allowances,
the Commission said an exemption was foreseen for those whose
activity was below a certain threshold, which it would
($1 = 0.725 Euros)
(editing by Rex Merrifield and Alison Birrane)