The Carbon Carousel: VAT Tax Fraud


VAT tax fraud – dubbed by the mainstream media as ‘carousel fraud’ or ‘missing-trader fraud’ – has been troubling the carbon trading industry for a few years. The scam involves setting up a trading account within one national carbon registry with which to buy and sell carbon credits within the EU Emissions Trading Scheme (EU ETS). Carbon credits are purchased from another country, as cross-national trades do not face VAT tax. The credits are then sold on in the country where the account is registered, with VAT added. But instead of paying the VAT to the tax authorities, the traders keep it as profit made on the transaction before disappearing into the ether. Bloomberg New Energy Finance have estimated that the fraud affected 7 per cent of the $125bn carbon market in the EU throughout 2009, with Europol (the EU-wide law enforcement agency) announcing a loss of 5bn euros for European governments in the 18 months leading up to December 2009.

The VAT scam has been made very public following EU wide police and tax authority raids on the 28th April 2010. In Germany 230 offices and homes were raided, with a total of 150 suspects at 50 different companies, including the offices of German energy giant RWE and Deutsche Bank at which there are seven suspects. Deutsche Bank employees had a warning that the raid was going to occur leaked to them by an unknown source, which German prosecutors are investigating. Deutsche Bank claim there is nothing to suggest that any evidence was destroyed as a result of the warning. Business seems, however, to be continuing as usual as, despite itself issuing a carbon-market critical report in November 2009, Deutsche Bank signed a record offsetting deal with the Government of Ecuador in June 2010. The bank are expected to gain up to 440,000 Carbon Emission Reduction (CER) credits from the offsetting project, in which they fund the Ecuadorian government’s distribution of energy efficient lightbulbs to ‘poor households’. The bank can then trade these credits for a profit to polluting companies who need a way to cover that their emissions are above their given quota/cap.

In the UK 81 premises were raided with 22 people arrested, whilst a further 4 were arrested in May. All individuals were arrested, interviewed and released on bail with no charges brought. HMRC will not disclose names of the companies or individuals involved as police investigations are ongoing. The Environment Agency, which manages the UK registry, has disclosed that no companies have been removed from the UK registry as a result of VAT fraud despite the police investigation. It is unclear whether or not trading by those companies continues.

Europol has reported that France, the Netherlands, UK and Spain have all altered tax law on carbon credit transactions to prevent future VAT fraud, after which market volume in those countries plummeted by, at the top level, 90 per cent. In Denmark, where VAT is one of the highest in Europe at 25% on every transaction, 80 per cent of the accounts in its national carbon registry, in which all traders within the EU ETS much register, closed down after the beginning of a large media investigation into VAT fraud in Denmark. The Danish government closed 1,060 accounts out of 1,200 in the registry during its own investigations. The proportion of the carbon market involved in this fraud is astounding, and raises key questions about whether a market approach, in which relatively unregulated, complex and difficult to trace transactions are the bulk of activity, is really the best route to a solution to climate change.

Whilst many companies involved in the EU ETS throw their hands up in surprise at their being “touched by the evil eye”, as one broker from Sagacarbon puts it, the ease with which fraud and high-risk activities can hide within such a complex market is again, like with securitised subprime mortgages, revealed. Even the World Bank’s ‘State and Trends of the Carbon Markets 2010’ analyses that hedging and speculation now comprise the majority activity within the carbon market, rather than it being the ‘vehicle’ through which corporations and governments can meet emissions caps:

“The market, which used to be dominated by banks and utilities, witnessed a growing presence of funds, energy-trading firms, and increasingly sophisticated utilities and industrials that used the options market for hedging (both volumes and prices) and profit-making transactions. The bulk of activity now comes from volatility and other relative value trades rather than asset-backed trades (i.e., financial and technical trades now account for a greater portion of market activity than do trades for compliance purposes).”

Others are left wondering how such a relatively simple fraud was able to get so big, and how anyone can comment on the success of a carbon market which deflates by up to 90% after changes to tax law designed to prevent fraud. How is it that so many front companies could be set up and included within national registries without better checks? In Denmark it seems to have sprung from a government drive to increase the number of carbon brokerage firms operating there, with lax regulation and limited ‘bureaucracy’ designed to attract the companies. Since 2007, the Danish Ministry of Finance has cut background checks and limited the information companies were required to provide to trade from the Danish national registry to an email address. A ‘pro-business’ attitude is thought to have routed up to one third of all EU carbon trades through Denmark, but also left them wide open to fraud. But scams and fraud are not simply carried out by opportunistic observers of the carbon markets, jumping on board once they see where a buck can be made or a regulation bypassed. It is particularly visible within offsetting projects themselves, as a result of the incentives built into the ‘liberalised’ market-based system which reveal the that the interests the whole trading system is set up to serve.

And what does the World Bank have to say about all of this? Well, in its 2010 ‘State and Trends of the Carbon Market’ report, it attempts to re-assure us with this beautifully spun statement:

“The EU ETS was also marked by controversy during 2009. … evidence surfaced of “carousel” Value-added Tax (VAT) fraud in countries like France and the United Kingdom and a phishing attempt was made on Germany’s national EUA registry… Ironically, however, these controversies provide evidence that the emissions market is maturing and becoming mainstreamed within the European economy. Entities don’t seek out loopholes in insignificant markets, fraudsters do not focus on small businesses… ”