Calls have been made for Europe’s Emissions Trading System (ETS) to be scrapped
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Calls have been made for Europe’s Emissions Trading System (ETS) to be scrapped

Calls have been made for Europe’s Emissions Trading System (ETS), which is meant to be central to EU efforts to cut carbon emissions, to be scrapped. The ETS is the world’s largest emissions trading scheme, covering factories and power plants across the EU who have to buy permits in order to pollute.

But it has been marred by a series of scandals about fraudulent use of carbon credits.

Prosecutors in Italy have also said that terrorist organisations could be making money from the much-criticised scheme.

Now UKIP has called for the scheme to be axed altogether.

Its deputy leader Paul Nuttall told this website,”This destructive and corrupt ETS scheme should be scrapped. It is pushing up energy prices, helping destroy our steel industry, is wide open to fraud and gives perverse incentives to heavy industry in China. It is cutting the throat of the manufacturing base in the UK and putting skilled workers on the dole. It has to stop.”

Scottish Conservative MEP Ian Duncan, who is the European Parliament’s newly-appointed rapporteur on legislation to reform the ETS, stops short of calling for it to be scrapped, instead favouring reform. He has written to EU Energy Commissioner Miguel Canete asking him to outline the steps he is taking to address this “serious” issue and “what work you are doing with member states to eliminate fraud and misuse with the ETS.”

Duncan said, “ETS is known to have been exposed to what might be called ‘traditional’ types of fraud. It is crucial that a reformed ETS closes the loopholes to all types of fraud, as criminality of any kind erodes public confidence in the trading scheme.”

He adds, “As Parliament’s rapporteur for the upcoming reforms, I believe it is imperative that steps are taken immediately to crack down on any and all ETS fraud and that all legal loopholes which facilitate this trade are closed as a matter of urgency. The ETS is an important initiative but it must not be open to abuse.”

Carbon credit fraud is a multibillion pound industry in the EU.Criminals register to trade permits to emit carbon which they then import free of VAT and sell in their home country with the VAT added. But instead of paying the tax to the authorities they disappear and invest the cash elsewhere.

Evidence of “suspicious activity” in ETS trading was uncovered just three years after the emissions trading scheme was launched in 2005.

ETS was created as a cap and trade system for transactions of “European Unit Allowances”. Each transfer of EUAs is recorded in a national registry before it is centrally stored at the European Commission.

The idea was to use market forces to reach the EU’s target of reducing greenhouse gases by 40 percent compared to 1990 levels by 2030.

However, a report in July by the European Court of Auditors (ECA) said that a loophole allowing carbon-credit tax fraud had not been fully closed and ETS “remains at risk to VAT fraud.” The potential VAT loss was estimated to reach some €500m.

The ETS has endured a series of damaging scandals over its 10-year existence, including the resale of used credits, phishing scams and cyber theft.

Although steps have been taken to protect the market, the ECA said issues still need to be addressed, such as controls on the opening of ETS accounts, transaction monitoring and market supervision.

At the EU level, there is no specific body responsible for overseeing the market, and the Court said that cooperation between national regulators and the European Commission has been insufficient.

EU police agency Europol works with Eurojust, the Dutch-based EU agency for judicial cooperation in criminal matters, to “identify and disrupt” any “organised criminal structures”.

Even so, one EU insider said, “The scheme is fraught with fraud. The potential for market manipulation is particularly massive since there’s no actual physical commodity delivered.”

A recent conference in the European Parliament on “EU-ETS and carbon credit fraud,” was told that “a clear mutation into service-based fraud has been experienced, as fraudsters have shown interest in intangible items and extended their criminal activities into the environmental and energy markets.”

In Europe, there are six legitimate “trading platforms” for transactions of EUAs, or carbon credits, including the European Climate Exchange in London. More than 2bn EUAs, worth about 90bn euros, have been traded to date but it is not the first time ETS fraud has been detected. In 2010, more than 100 people were arrested  across Europe, including the UK, for fraudulent ETS trading estimated to be worth 5bn euros.

In December 2010, the Italian Guardia di Finanza carried out raids on 150 companies in eight different regions of Italy.This happened just a few weeks after the Italian Power Exchange (GME) halted all trading in carbon credits due to a high number of “abnormal transactiions.”

The potential VAT loss was estimated to be 500m euros.

In 2011, an attack was launched against trade platforms across Europe by hackers who stole 3.3m carbon credits worth 50m euros.

EU counter-terrorism coordinator Gilles Kerchove and the European Commission declined to comment.

By Martin Banks