Tax Fraud Plagues Carbon Trading Program

According to Bloomberg New Energy Finance, tax fraud is the carbon trading market’s most egregious form of cheating, affecting about seven percent of this $125 billion market in 2009.

In August 2009, seven people were arrested near London for not paying tax on the sale of carbon permits, for a total of £38 million (about U.S. $63 million). The taxes were levied as part of the European Union Greenhouse Gas Emission Trading System, created in January 2005 and based on Directive 2003/87/EC, which was enforced beginning Oct. 25, 2003.

Carbon emissions trading, or cap-and-trade, is a system whereby governments tell industry how much carbon dioxide a particular factory or operation can emit. If the factory or operation manages to emit less than the mandate allows, it can sell its excess on the open market, but either it or its designated seller is required to report the transaction and pay taxes on it, as on any financial gain.

Where industrial operations emit more than their share of carbon emissions, they must buy carbon credits, and their purchase – usually also from a designated carbon trader – is also reported to the appropriate agencies, who carefully regulate the buying and selling of credits.

In the European Union, trading has been moving toward centralization since 2008. The E.U. Emissions Trading System is currently in the second trading period of 2008 – 2012, with hopes that centralization can be achieved during the third period. Centralization would hopefully prevent the windfall profits and tax fraud generated by the first and second periods, during which carbon allowances were given freely to all E.U. member countries.

The E.U. Emissions Trading System currently trade for about 15 euros ($21) per ton. The 2009 carbon emissions tax evasion scheme involved traders and companies who bought carbon credits outside E.U. countries which applied the Value Added Tax, or VAT –- or where VATs were lower –- then sold them (usually in the United Kingdom) with the VAT added, without subsequently paying the tax back to the government.

The same thing occurred again this past April, albeit on a larger scale, involving 22 people in the United Kingdom (13 in England, eight in Scotland, and one detained on an E.U. arrest warrant) as well as an unreported number so far in Germany. The investigation also overflowed into other E.U. countries, namely Belgium, the Czech Republic, Cyprus, Denmark, Finland, Norway, Portugal, Spain and the Netherlands.

In Germany, officials and tax investigators swept 230 offices and residences, including Deutsche Bank AG, Munich-based HVB Group (the second largest private German financial institution and retail bank), and RWE AG, a German electric and natural gas public utility headquartered in Essen.

All detentions and raids across the European Union occurred on April 28 in an aggressive attempt to round up carbon emissions trading cheaters at every level. In this particular sweep, Germany is looking at 180 million euros ($239 million) in tax evasions by 150 individuals at 50 companies. In the United Kingdom, the Revenue & Customs office, or HMRC, targeted 81 sites.

The VAT tax varies according to the E.U. country levying it, and the product or the nature of the service delivered. Thus it is possible to buy carbon credits without the tax (or at a lower tax rate, i.e., Poland), and resell them in high-VAT countries.

The E.U. carbon emissions trading fraud is huge, but perhaps nothing compared to the potential for cheating that will become available in the United States once Waxman-Markey, or some similar scheme for reducing carbon emissions, emerges from the Senate to become law.

One current contender for that slot is the American Power Act, which aims for an 83 percent reduction in carbon emissions below 2005 levels by 2020, and permits only exchange-traded and cleared transactions at a value of between $12 and $25 per tonne, with the Commodity Futures Trading Commission having jurisdiction. A tonne is 1,000 kilograms, roughly 2,204 pounds, and the gap between $12 and $25 is significant enough to be disconcerting, but overall this act seems the most promising of the bunch to curb chicanery.

In the United States, carbon credits are currently traded exclusively on the Chicago Climate Exchange, or CCX. Once trading is approved by law, other trading forums will undoubtedly spring up, leading the larcenous to find ways to defraud not only industry and the government, but one another as well. Of course, the United States doesn’t have a VAT tax per se. But as Bloomberg notes, a carbon trading market organized around derivatives (sometimes known as credit default swaps, or CDS) is “open to manipulation,” in the words of billionaire hedge fund investor George Soros.

In fact, some old-school environmentalists see the whole carbon trading scheme as not a way to curb climate change, but merely a way to make the rich even richer at the expense of the rest of us. As Larry Lohmann, the founding member of the Durban Group for Climate Justice, says, “Dishonesty is rife throughout the carbon offset market.”

In January, investigators from Belgium said that in some E.U. countries, 90 percent of the market volume in carbon trading was based on criminal activities.

Article by Jeanne Roberts appearing courtesy Celsias.

photo: Kevin H.

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