As carbon prices hit record high, France urges commission to go further in war on carbon fraud.

The EU launched the latest phase of its clampdown on fraud in the carbon market yesterday, banning any trade in “recycled” carbon credits. The move is designed to avoid a repeat of last month’s scandal that saw a number of firms purchase illegally traded emission allowances that had already been surrendered by other companies.

The fraud stemmed from a controversial decision by the Hungarian government to sell two million certified emission reduction (CERs) credits that had originally been surrendered by firms to count towards the emission targets imposed on them through the EU’s emission trading scheme (ETS).

The Hungarian government sold the CERs to operators outside the EU, but a number of the credits found their way back onto European exchanges, breaching the rules of the EU ETS and leading to the temporary suspension of two leading carbon exchanges.

On Friday the European Commission’s carbon trading committee agreed with member states to ban any trading of surrendered CERs and EU allowances (EUAs) to avoid a repeat of the scandal. The proposals received unanimous support from all member states, including Hungary.

Under the new rules, which came into effect on Monday morning, all CERs and EUAs that are surrendered by companies to their governments will be transferred to a retirement account that will only be released to formally surrender the allowances to the EU each year.

“All trade in recycled credits both inside and outside the EU has been banned,” said Stig Scholset, senior analyst at research firm Point Carbon.

The move came on the same day as the French government urged the EU to go further to tackle fraud in the carbon market.

In addition to the illegal trading of recycled credits, a number of countries have been hit by so-called carousel frauds over the past year, whereby criminals have avoided VAT on traded carbon credits. Figures from the European police agency Europol estimated that the crime had cost Europe’s treasuries more than €5bn (£4.4bn) in lost revenue.

In a new report commissioned by the French government, Michel Prada, former head of the country’s AMF stock market watchdog, urged the EU to harmonise the rules across the EU governing the carbon market and impose stricter fines on those who commit fraud in the sector.

Scholset said the EU was already working on harmonising the VAT rules governing carbon credits to prevent VAT crime, but he warned that it was likely to take several months for the new rules to be finalised.

In the meantime, confidence is fast returning to the European carbon market following a slow start to the year, as the price of EUAs once again hit a record high for the year.

The price of a tonne of carbon in the EU ETS reached €14.82 earlier this afternoon, continuing a run that has seen the price climb almost 15 per cent since official EU emissions figures were released at the start of the month.

“We have been expecting this bull run for quite some time,” said Scholset. ” Utilities are taking up a hedging position for 2012 and 2013, while those industrial companies holding surplus EUAs are reluctant to sell them at the current price as they know they are likely to need them in the second phase of the scheme.”

He added that Point Carbon was predicting that the average price of EUAs during 2010 was likely to hit €17. “There is still plenty of upside in the market and we could see the run continue,” he said.