Hungarian companies, which have a cap on how much greenhouse gases can emit, gave back to the government their credits . The Hungarian government, instead of taking those credits out of the system, decided to exchange the credits (CERs) for AAUs (other "monetary" unit) and to later sell them to a third party. Those credits were offered as "new credits". However, they are not "new", they were from Hungary and were already used to demonstrate compliance with emission caps . In other words, they could be registered or used twice.

Will try with an analogy, a credit as a car:

Imagine that I give you a car, for whatever reason, and it is registered in a system. A lot of people use the sytem to buy and sell cars.

After some months you give me back the car because you do not need it. What I do is, instead of taking the car off the registry system, I just change the tyres and give it a new name. Then I sell it to someone else with its new name.

Later, maybe days, weeks or months after the transaction, that "someone" or even somebody else who bought the car, comes to the EU and offers and sells "a brand new car".... and the "brand new car" then gets registered in the system. It is not a new one, but a "recycled" one... it is the same car but only painted in a different color. And now is registered twice in the system. Because it was never taken out of the registry.

If you relied on that system to determine the price of cars (supply and demand), would you trust it if you found that this car, but maybe several others, were sold two or three times, thus being registered two or three times but actually being the same car? At the end, may the registry is inflated and does not mean there are in reality more cars. Maybe for every "real" car, the system registered 2 or 3 cars because of the recycling of cars. Your confidence in the system may disappear and you just try to get rid of any car you have. Then the price drops to the floor... no one wants cars, no one knows if the registry is OK or if it is double-counting and therefore if it is inflated. The system is not working and I can't put my money there.

In the case of credits, their price is subject to the supply and demand. Every time a government issues credits for a company, those credits are registered and if the company sells them, then the transaction has to be recorded on the system. If the company sells them or give those back to the government, the system has to register how many were sold or given back and who is the current owner. The caveat is that the credits may only be used once.

Where the credits came from in the first place:

The European Union (EU) has the commitment, under the Kyoto Protocol, to reduce its greenhouse gases emissions by 2012. The commitment is established with different percentages for each of the countries within the EU. In order for the EU to comply in the most economically efficient way possible, the EU countries are able to trade carbon credits in the EU-ETS (emissions trading system).

Every EU country has a cap on how much GHG can emit. THe country establishes specific emissions limits to its different economic sectors, for instance, steel production, cement production, etc. The government of each country auctions a certain amount of credits according to a defined schedule. When the government asks companies to demonstrate their compliance with their emissions cap they can provide their emissions information and, if not in compliance, surrender the credits they bought. The credits were used and are now useless. The mistake is that those credits were offered to someone outside of the EU and offered as offsets, as if they were new, or in other words, as if Hungary had a new project that reduces emissions (maybe on waste treatment or forests or any other).

The problem is that if such practice continues the credibility in the whole carbon credits trading system disappears, because the system is not working and is "allowing" for double accounting of credits.

Hope this helps.