GENEVA (Commodity Online): With Hungary planning to sell 'recycled' Certified Emission Reductions to an undisclosed intermediary, similar attempts could put companies and other organisations at risk of purchasing CERs or ERUs that have already been submitted to compliance authorities.

The International Emissions Trading Association warned of the dangers for investors and the carbon market from the recycling of CDM credits said that the CERs exchanged in this transaction had been previously surrendered by Hungarian firms to comply with their emission constraints under the EU ETS. The government subsequently swapped surrendered CERs with Assigned Amount Units (AAUs), allowing the CERs to be resold on the international market.

President of IETA Henry Derwent said: “If Member States ‘recycle’ credits, they will place companies and other organisations at risk of purchasing CERs or ERUs on the international carbon market that have been already submitted to compliance authorities. This apparent double-counting could damage the reputation of the EU-ETS.

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While a permanent solution is being developed to prevent ‘recycled’ credits from reentering the EU ETS, it is vital for any governments that may be considering the resale of surrendered credits to attach a ‘ due diligence’ letter to those credits which explainstheir status to the buyer and which contractually obliges the buyer to pass the letter on in the case of further resales, clearly stating that the credits have already been surrendered to the CITL and cannot be used for compliance in the EU-ETS.”

Once compliance units are surrendered to EU Member State governments, the Community Independent Transaction Log (CITL) retires each unit’s identification code, making it impossible to surrender the same unit to the CITL more than once. The Hungarian transaction raises concerns that such credits could reenter the EU ETS, unknown to market stakeholders, and thereafter be mistaken as compliance grade credits. A distinction between ‘recycled’ and compliance grade credits would be difficult for everyday market participants within the CITL to make.

The EU proposes to change their registry regulations to make the position clearer for investors. However, if the credits are sold for compliance outside the EU, a similar problem arises, and there is no comparable authority to improve transparency for investors. IETA will be working with the European Commission over the coming weeks to ensure that the risks inherent in these sorts of transactions are minimized and transparent, a press release said