Tax fraud plagues Carbon Trading program

by Michael Smith (Veshengro)

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 such taxes 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.

However, not only the tax fraud here we must consider. The entire carbon trading market is wide open to abuse and the carbon trading idea should be thrown out right now.

Those carbon credits and other such certificates are nothing but a modern day version of the indulgences that in the 16th century the Roman church sold and which were good even for sins that had not been committed as yet.

In the same way as those indulgences the carbon credits allow countries and corporations to carry on polluting as is on the back of the poor.

This another one of those financial products, for that is how it is being handled, that will be a god-sent to the fraudsters on the trading floors and the entire system is a joke – only no place to laugh – and is not doing any good whatsoever, bar to those trading in those certificates.


© 2010