Climate campaign creates carbon crimes

AMSTERDAM | Customs agents this week arrested nine people in the London area suspected of a multimillion-dollar fraud in trading carbon permits, bringing attention to a rich new field for crime sprung from the fight against climate change.

The arrest confirmed fears among law enforcement officers that swindlers - operating from the trading floors of Europe to the tropical forests of the Pacific - are being attracted to a market that has grown to more than $100 billion.

A few years ago, carbon dioxide, for most people, was just the breath you exhaled. Today it’s more likely to be seen as a pollutant derived from fossil fuels that needs regulation, making permission to produce it a commodity that can be traded like gold, oil or hog futures.

Trade in CO2 permits has expanded exponentially since the European Union required thousands of industries to limit carbon emissions to specified targets. Industries exceeding their ceiling can buy credits from companies that have held their emissions below target, acting through commodities exchanges. The average price this year for a ton of carbon is about $15.

That carbon market will get a lot bigger if the U.S. Congress passes its own cap-and-trade bill, the central component of President Obama’s climate and energy policies.

And it could grow bigger still if a new international climate change agreement includes financial incentives for countries to protect their forests. Negotiators from 192 countries hope to conclude a global warming accord at a major U.N. conference in Copenhagen in December.

On Wednesday, 130 British customs agents raided 27 properties in and around London for evidence of a “carousel fraud” believed to have robbed the Treasury of $63 million in unpaid value-added taxes. Seven men and two women were arrested and released on bail.

Customs spokeswoman Sara Gaines said it was the first time the scam has been uncovered in the carbon market, expanding from the more established trade in mobile phones and computer chips.

The carousel fraud, also known as a missing trader scheme, exploits VAT-free commerce between countries. Conspirators import goods free of the value-added tax, sell it domestically with the tax to another company, which exports the products to a third country. Rather than pay the VAT owed to the government, the merchants pocket the tax and disappear.

In July, France, the Netherlands and Britain initiated action to pre-empt the swindlers. France and Britain set a zero VAT rate for carbon trading, while the Netherlands transferred the obligation to pay VAT from the seller to the buyer.

“We saw big possibilities of fraud,” with a potential loss of hundreds of thousands of euros, said Marcel Holman, a spokesman for the Dutch tax authorities. He declined to say whether the Finance Ministry’s financial intelligence unit had actually uncovered a carousel fraud in operation.

The British Treasury also warned last month that Britain would become a major target of tax theft in carbon emissions permits in the next few months.

The London office of global accounting firm KPMG said suspicions of VAT fraud surfaced last May when the volume of carbon trade rose on the Paris BlueNext exchange from 27.2 million tons in October to 186 million tons six months later.

Andrei Marcu, a former head of BlueNext and former president of the Geneva-based International Emissions Trading Association, said the risk of fraud can be high in any new commodities market, and CO2 is no different in the need for high regulatory standards.

When the carbon market was getting started, big companies were involved and the traders knew each other, he said. But it has grown so fast that small unknown operators are now doing big business, making self-policing more difficult.

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