Carbon market fraud is not just a carousel ride

The European police agency Europol has found evidence of huge volumes of fraud in the EU Emissions Trading Scheme (EU ETS), amounting to a loss of around 5 billion euros in national tax revenues over the past 18 months.

Europol estimates that in some countries up to 90 per cent of the whole market volume was caused by fraudulent activities.

This is further evidence that carbon trading is not a credible system for tackling climate change. With the ETS consistently failing to reduce emissions, European Commission officials and carbon market advocates have clung to evidence of increasing trading volumes in the ETS are a sign that the market was working. Europol has now revealed this to be a sham.

The ETS is particularly susceptible to carousel fraud because the market is poorly regulated. This hole could in theory be closed with EU-wide legislation, but the regulators are failing in their job. The DG Environment and the Directives that establish the EU ETS make no particular provisions on how to regulate this complex market as a market - simply assuming it works like any other. This needs to be re-examined.

It is certainly possible that VAT-carousel fraud loopholes could be closed with better regulation, but we've seen with the ETS that when one hole is plugged others open. In the third phase of the ETS, all six greenhouse gases will enter the system - whereas now it covers almost exclusively CO2. Such gases were treated as equivalent within the UN's Clean Development Mechanism, and this has been a major source of fraudulent "reduction claims", with companies some companies ramping up production to cream off credits that can then be sold back into the ETS.

The other further, major loophole is the spread of "linking" between ETS systems. The EU is pushing hard to make permits from different markets "fungible" (exchangeable). This will lead to a race to the bottom in terms of environmental integrity, but also offers plenty of new loopholes for fraudsters. If they can't even control a carousel fraud within their own system, what hope have regulators got when faced with large volumes of permits exchanged between multiple emissions trading systems?

Ultimately, though, a system with so many loopholes will always be a fraudsters paradise. Time to tear it up and start again.

A clear graphic explaining how the carousel fraud works can be found here http://www.europol.europa.eu/images/pressreleases/carbon_credit_carousel.pdf