By Troy Lanigan and Maureen Bader
Reprinted from The Taxpayer Winter 2010

Europol, the European Union’s joint criminal intelligence agency, said over the past 18 months since December, criminals have used the EU’s Emissions Trading System (ETS) to earn $7.4 billion in elicit gains. (photo: Dr. Meierhofer)

Founded in 2005, the ETS is the world’s largest carbon trading market and is the model for global cap and tax schemes discussed in Copenhagen. Europol investigators say up to 90 per cent of the trade in some European countries was bogus.

Europe leads what is expected to be a world-wide explosion in carbon trading markets from an estimated $132-billion in 2009 to $3-trillion by 2020. To put that in perspective, the trading of a colourless, odorless gas – C02 – could surpass the $2-trillion dollars traded in oil. A global financial services firm recently called it “a fraudster’s dream come true.”

Under cap and trade, companies will need permits for their right to emit C02.  These permits – the theory goes – will be offset by others who either sequester (by planting trees for example) or do not use C02. These permits will be traded on exchanges akin to a stock market.

Chis Perryman of Europol sates: “It is clear that fraudsters are fully aware of the potential that trading in intangible commodities has to further their ends. Such goods or services can be traded without the need to be physically moved or transported, which represents an obvious opportunity to frustrate law enforcement efforts to trace and track transactions.”

How does fraud work? Well, one could buy carbon credits tax-free in one country, then sell them in another at a price including value-added tax then not remit the tax revenue to the government. In another case, a car manufacturer in South Korea might buy a permit from a forestry operator in Russia. The South Korean company receives a permit and away it goes. But what stops the Russian company from selling the same permit to companies in other countries? What stops fraudsters from setting up bogus wind farms in Africa and selling permits in North America?

Unlike most commodities, C02 has no value. The value rests in the permit. Neither buyers nor sellers will have incentive to scrutinize each other. With government regulators serving as gatekeepers for this soon-to-be multi-trillion dollar industry, rampant fraud and corruption are as sure as death and taxes.

With notes from Patricia Adams probeinternational.org