The European Union’s flagship cap-and-trade carbon credit trading system is plagued by massive fraud and is effectively under the control of organized crime, according to a December 9 statement issued by European police. Europol, an EU-wide criminal intelligence agency similar to the U.S. Federal Bureau of Investigation, says bogus trading at the EU’s Emission Trading Scheme (ETS) has exceeded €5 billion (U.S.$7 billion) over the past 18 months alone. Europol says that in some EU countries, up to 90 percent of the entire market volume is fraudulent.
News of the scale of the fraud, which comes just weeks after hundreds of hacked emails suggest that scientists have manipulated and exaggerated global warming data, will cast further doubt over the effectiveness of carbon trading as a way to curb emissions. It may also provide fresh ammunition to critics of the Obama administration’s plans to implement a cap-and-trade system in the United States that is largely based on the European model.
Europol says the fraud was first suspected in late 2008, when the volume of trades in European Unit Allowances (EUA), the carbon credits that companies in EU countries buy to offset their greenhouse gas output, mysteriously spiked.
In the European Union, caps are placed on the total amount of carbon dioxide that may be emitted. Companies that pollute more than their allotted share, such as steel plants, power plants, cement-makers, and other big industries, are required to buy carbon credits from those companies that do not exceed their allotted share, in order to keep the total output below the prescribed cap.
In the latest scam (which is a mutation of the EU’s notorious value-added tax carousel fraud), criminals open a carbon trading account on one of six recognized European carbon markets, in the name of a newly registered company. They then buy tax-free carbon credits in another country, transfer those credits into their account, and then sell them to a carbon broker in yet another country. The fraudsters collect VAT (which varies from between 15 to 25 percent depending on the EU country) on each transaction, but never pay the VAT monies to any European tax agency. The company and its owners vanish before tax authorities realize they are owed large amounts of VAT.
The carousel tax fraud repeats itself over and over, as the criminals set up new companies, using different front men, to collect more and more VAT. Organized crime rings are thought to have dozens or even hundreds of companies whose real owners are difficult if not impossible to trace.
VAT fraud is endemic in the EU, which has 27 different national tax systems and no effective cross-border coordinating mechanism. Criminals are able to defraud the European VAT system largely because goods (especially carbon credits, which are invisible and highly tradable) moved from one EU country to another do not attract VAT at the point of entry. Once the goods are sold to a wholesaler or retailer, VAT is charged. The fraudsters then purloin the tax revenues rather than passing them on to national tax authorities.