Buyers beware: Brigands and organized criminals threaten the global carbon market

Introduction

Despite its relative infancy, the global carbon market is plagued with a virtual deluge of corrupt and illegal transactions. Over the past two years it appears as if the floodgates have been opened to a torrent of fraudsters, scam artists and fake businesses. It is suspected by international police authorities that this has been led by well-organized criminal elements. Such a rapid spread of corrupt practices now threaten to undermine confidence in the global carbon market, thereby constituting the third and final fundamental flaw confronting the search for market-based solutions to the global climate problem. I shall be addressing this in today’s column.

Both segments of the market, the one dealing with trades in emissions allowances and permits and that dealing in carbon offsets (including forest-carbon) under the Clean Development Mechanism (CDM) and the Joint Implementation (JI) mechanism have been badly affected. In the former market segment, most of the occurrences discovered so far have been on the European Union (EU) climate exchanges, where trading in EU Emissions Allowances (EUAs) dominate. In the latter market segment, several disturbing revelations have been made about trades in the nascent forest carbon projects.

The overall situation has become so worrying that in December 2009 Europol, the European police agency, reported in a statement: “Up to ninety (90) percent of the trading of EU emissions allowances (EUAs) was subject to fraudulent activity.” The agency has also on several recent occasions estimated that the fraud has cost EU tax payers in excess of US$6.5 billion by the end of 2009.

VAT carousel fraud

Thus far the main type of fraud discovered on the EU climate exchanges has been dubbed ‘carousel’ or ‘missing persons’ fraud and scams. These refer to those frauds/scams in which con artists and bogus firms sell carbon credits to businesses that need them in order to comply with regulatory directives. After collecting the accompanying taxes, (mainly value added – VAT), the selling businesses then disappear without handing over the taxes to the fiscal authorities. These frauds and scams are called ‘carousel’ because the fraudulent business can frequently buy back credits and repeat the process several times over!

This type of fraud was first officially detected in the EU at the end of 2000. It has since spread to both EU member and non-member states. Of special note to us in Guyana, Norway has recently been added to the list of countries where active criminal investigations are taking place. There the estimated fraud involves 127 million Norwegian crowns. Other countries where significant investigations by Europol and local police authorities are afoot include Britain (involving about US$65 million), France (involving about US$200 million), and Germany (involving about US$235 million). According to Interpol/Europol Belgium seems to have been exploited as the principal legal loophole, which encouraged the establishment of criminally-fronted business.

This VAT-type fraud performed by brigands had become so widespread that the authorities were forced to alter the way the tax is administered for carbon traders in the EU. Several EU member states first suspended VAT on carbon allowances. Then changes were introduced EU-wide, based on a ‘reverse charge mechanism,’ which removes VAT from individual traders and levies it only on the final purchaser of carbon credits. As a result of these changes the market volume of traded credits fell up to ninety per cent in the major markets of the key offending countries, thereby confirming the widespread nature of carousel or missing person’s fraud.

The EU Commission for Taxation and Customs had declared: “VAT carousel fraud is against Member States’ finances and they should have the means to combat it efficiently.” This statement was designed to be the basis for a coordinated EU-wide response. Soon after, a spokesperson for the UK Treasury publicly declared support for the Commission in seeking “an EU-wide solution.” Meanwhile, Rob Wainwright, Europol Director, confirmed that “Europe is using its expertise and information capabilities to help target the organized crime group involved.”

Carbon offset fraud

The widespread damage to confidence in the emissions allowances/permits carbon market has been somewhat parallel to that in the market segment dealing with carbon offset projects. A couple of examples highlight this. First, Nadine Ghourie writing about The Great Carbon Con: Why are we paying the Third World to poison its environment? chronicles the situation at Gujarat Flurochemicals (India). This firm trades on the European Climate Exchange (ECX) even though grave abuses and the rank hypocrisy of this company have been exposed. It has one of the worst environmental and human rights records in the world and yet is being financially rewarded for perpetuating its business as usual (BAU) practices on the ECX 

(which accounts for the overwhelming bulk of carbon emissions trading in the EU).

Second, the Washington Post has similarly exposed the Noel Kampff Mercado Climate Action Project in North-East Bolivia. This is a forest carbon offsets project involving United States utilities firms, NGOs, and the Government of Bolivia.  The project required the establishment of a standing forest preserve of 6,000 square miles designed to keep 55 million metric tons of carbon dioxide (CO2) out of the atmosphere over the next 30 years. The project has come under serious fire and has now been lowered to one-tenth of its original target (5.8 million metric tons of CO2).

Interested readers can research the internet for more detail on both these projects (as well as others). Both cases allege that fraudulent overstatement by corporate underwriters of these projects took place. There is indeed evidence of the wilful overlooking of potential leakage, overstatement of true additionality, and deliberate understatement of the tasks of independent monitoring, verifying and reporting on the contributions of these projects. In order to raise accounting returns on these projects, “cost-cutting practices” and deception were encouraged rather than a focus on research and developmental efforts (R&D) and investment to improve project viability. As in counterpart markets for finance and credit, enterprises view the BAU scenario as a gamble.

Next week I shall wrap us this discussion of the global carbon market, making references to my evaluation of what the future holds for the REDD mechanism on which the LCDS and the evolution of Guyana’s pristine forests in the context of the global climate problem seem so dependent at the present time.