Europe's flagship carbon trading scheme suffered a blow today as the Danish government was forced to rush an emergency law through parliament to clamp down on a virulent form of VAT fraud.
On the eve of the Copenhagen climate talks, which will attract world attention to emissions trading schemes, police and tax investigators across Europe are believed to be investigating hundreds of millions of euros worth of fraud involving carbon quotas originating in Denmark.
Since British, French and Dutch governments took similar action in the summer, much of the "carousel" fraud involving carbon credits moved to Denmark, where registration of carbon quotas for the European Emissions Trading Scheme (ETS) is easy and a VAT rate of 25% makes the fraud attractive to international criminals.
Experts said today that Copenhagen had long been an accident waiting to happen in terms of carousel fraud.
Richard Ainsworth, professor of VAT policy at Boston University in the US said: "It is extremely surprising that after the French, British and Dutch had to move against this fraud in the summer that the Danes did not act more quickly, especially with the climate summit about to start."
The Danish government today said it did not know how much money it had lost to the fraud but the number is likely to run into hundreds of millions – if not billions – of kroner.
A spokesman for the Danish Energy and Climate Ministry, which supervises Denmark's carbon quota registry, said the rules for registration were being immediately tightened so anyone applying to trade carbon would face stringent checks.
The fraud occurs when a trader of carbon credits in one EU country buys some from another country free of VAT, then sells them on, charging the VAT to the buyer. The seller then disappears without handing the VAT to the taxman.
Some criminals re-export the credits, reclaiming VAT as they do so, then re-import them. They can do this repeatedly, reclaiming VAT many times, hence the "carousel" label.
Britain lost billions of pounds to carousel fraud, mainly on mobile phones, in 2006 and 2007 before the government changed the mobile trade so that tax was levied only on the final buyer.
The Danes have now introduced similar reforms – a day after a meeting of European financial officials rubber stamped a European Commission decision from September recommending that member states do so.
The news is an embarrassment for the European ETS and for carbon trading generally, which is attracting a growing number of critics.
Europe's carbon market is worth about €90bn a year. It is a combination of futures and spot trading and it is the largely unregulated spot market that was targeted this summer by the fraudsters.
Recent figures from consultants New Energy Finance showed that the ETS suffered its first ever drop in trading volumes in the third quarter of this year because the second quarter had been hugely inflated by fraudulent trades going across France's Bluenext exchange. French VAT rules have now changed.
The European Commission has estimated in the past that EU governments were losing more money to carousel fraud each year than they spent on the Common Agricultural Policy.
www.guardian.co.uk/environment/2009/dec/03/copenhagen-summit-carbon-trading-scam
