The British tax authority lifted the levy on trades of European Union carbon permits in July 2009 after a pan-European investigation discovered that carbon credits were used to commit a widespread value-added tax fraud known as carousel fraud.
Up to now, most carbon credit transactions within Britain are charged with a standard rate, while imported carbon credits are free from value-added taxes. However, this situation gives criminal groups the opportunity to commit carousel fraud.
Carousel fraud occurs when a local company sells imported carbon credits to other domestic buyers and charges the value-added tax, but then disappears, along with the money that should be paid over to the tax authority.
The European Police Office estimated that around 116 arrests have been made so far in at least 11 countries, and 30 of them happened in Britain. Fraudulent traders have caused 5 billion euros ($6.32 billion) worth of damage for the European taxpayer in the past 18 months.
The fraud has become so rampant in the carbon market that the Europol assumed that up to 90 percent of the carbon market volume in some European countries are scams, particularly from Britain, France, Spain, Denmark and the Netherlands.
The European Union will now impose a new form of reverse value-added tax on carbon credits to minimize the risk of fraud following a regionwide directive set last March. Under the new accounting mechanism, customers who purchase carbon credits must pay for the value-added tax on any trade, instead of the supplier.
However, the reverse charge plan will only apply to business-to-business transactions in Britain.
Officials confirmed last week that the new tax regime will come into effect beginning November 1, 2010 and will cover European Union carbon allowances, certified emission reductions and emission reduction units.
Certified emission reductions are carbon credits issued under the Kyoto Protocol’s Clean Development Mechanism. Emission reduction units are credits issued under the protocol’s Joint Implementation mechanism, in which industrialized nations finance carbon mitigation projects in developing countries to offset their own emissions.
All three carbon credit units can be traded in the European Union’s emissions trading system, reportedly the world’s largest carbon market. The European carbon market is estimated to be worth about 90 billion euros annually.
With the global carbon market expected to hit $3 trillion by 2020, carbon fraudsters could be on the prowl unless preventive measures will be taken, said Kroll, a business risk subsidiary of global professional services firm Marsh & McLennan.
«These criminal activities endanger the credibility of the European Union Emission Trading System and lead to the loss of significant tax revenue for governments,» said Rob Wainwright, director of Europol.
The police agency added that there were reasons to believe that fraudsters might soon ambush the gas and electricity industries of the energy sector.
Reverse charge value-added tax is already applied to other products in Britain, such as mobile phones and computer chips. Experts expect the new tax regime to catch on in other countries.
