Carbon Credit Watch

Backgrounder: A roundup up of Carbon Fraud reports

Probe International
January 8, 2009

From Probe International:

Who is cashing in on carbon credits? Probe International unveils its interactive carbon credit database: To help keep track of dealings and hold accountable parties that are buying and selling these carbon credits, Probe International has created an interactive Carbon Credits Database. The database provides a comprehensive list and associated documentation of all the projects around the globe that have received carbon credits through the UN’s Clean Development Mechanism (CDM). Use the database.

Russian Roulette: Russia’s surplus of carbon credits too big of a gamble for some: A recent article in the Wall Street Journal details one of the many problems facing the implementation of carbon markets: the political tampering of an artificial market. According to the story, Russia is demanding that it be able to retain its massive surplus of emissions permits after they expire in 2012. Yet, critics argue that if Russia were to off-load these credits on international carbon markets, it would lead to a collapse in the price of carbon. Read the full story here.

UN has second thoughts about giving carbon credits to China’s wind farms: Recent reports say that a United Nations committee has stopped giving carbon credits to developers of wind energy projects in China, citing concerns that the projects qualified for the credits unfairly. The UN is concerned that the Chinese government lowered its subsidies to wind farms so they would qualify for carbon credits through the UN’s Clean Development Mechanism (CDM). Read the full story here.

Carbon credit scams add to the growing list of alleged fraud cases: Officials in at least five European countries are investigating an international carbon credit scam considered to be worth more than $1.5 billion. According to a recent report for the Guardian, the scam was originally coordinated by gangs in Britain and Spain who bought and sold emissions allowances across borders in order to avoid paying Value Added Tax (VAT). Read the full story here.

At what cost are carbon credits funding hydro projects in the developing world: The Clean Development Mechanism (CDM), a market-based tool developed by the UN to cut green house gas emissions, may be heralding a boon in hydro development projects in China and the developing world—and doing so at the cost of the environment and local landowners. As policy makers and environmentalists across the globe prepare for the Climate Change Conference in Copenhagen this winter, criticisms of carbon credit schemes like the CDM are beginning to surface. Read the full story here.

The Guardian: Indian environmentalists criticize UN carbon credit scheme
: Environmentalists criticize the UN’s Clean Development Mechanism as “ineffectual,” the Guardian reported on February 5. Read the full story here.

World Bank climate funds: “a huge leap backwards”: The recently proposed climate investment funds to be administered by the World Bank are under heavy fire for proposing a governance structure that replicates the inequities of the Bank’s board, undermines the UN framework convention on climate change (UNFCCC) and fails to clarify whether money to these funds would be additional to G8 commitments on overseas development aid. Meanwhile World Bank’s support for coal-fired power generation is on the increase. Read the full story here.

Carbon Boondoggles: To reduce greenhouse-gas emissions, Canada’s federal government plans to push Canadian corporations into buying carbon credits under the so-called “Clean Development Mechanism” (CDM), a system established under the Kyoto Protocol by which companies in rich countries buy “rights to pollute” from companies in poor countries. The poor-country companies, in exchange, promise to give up their own greenhouse-gas producing activities. Read the full story here.

Reports:

From Deloitte: Carbon credit fraud: The white collar crime of the future

Australia’s Carbon Pollution Reduction Scheme (CPRS) will soon require the largest emitters of greenhouse gases to offset their carbon footprint. Such schemes have already been subject to fraud, misstatement and the involvement of organised crime in the UK and Europe. Deloitte Forensic is now warning Australian companies and regulators to prepare for the potential fraud risks. Read the full report here.

More from Deloitte:
Avoiding Fraud: It’s not always easy being green

Fraud in the green market can take many forms – from intentionally inaccurate carbon footprint measurements to misleading green marketing claims to the double counting of carbon offset credits. In addition to these “environmental” fraud risks, there is another set of fraud risks that companies should be aware of, especially if they are thinking about entering into the carbon offset market. These are considered “transactional” fraud risks, examples of which are explained below. Read the full report here.

And even more from Deloitte: Carbon accounting challenges: Are you ready?

The development of carbon markets worldwide has created a host of challenges for companies – and of these challenges, accounting is perhaps one of the least understood. After all, even Europe (a four-year veteran of carbon trading) still has not come to consensus on how to account for emission allowances. Carbon traders in the United States have only begun to grapple with the accounting issues of an already complex and unfamiliar market. Moreover, as carbon markets evolve and incorporate new elements, additional accounting challenges will continue to emerge. Read the full report here.

From Transparency International: Understanding the dynamics: examining the different types of business corruption

Jørund Buen and Axel Michaelowa provide an inside perspective on transparency and accountability issues in the new and rapidly growing market for carbon credits that has been set up as part of the global policy response to climate change. Read the report here.

Minor report from Deloitte: EU VAT implications of emissions allowance trading and the threat of fraud

Faced with the threat of carousel fraud in the context of EU emissions allowances, together with the different responses to this issue by certain EU Member States, the European Commission has published a draft directive giving Member States the option to apply the reverse charge mechanism to the supply of EU emissions allowances, as well as to a list of goods typically susceptible to VAT fraud.

This article looks at the emissions market, the potential for carousel fraud, the reaction of certain Member States to this threat and the implications of the proposed directive. Read the report here. [PDF]

From Kroll: With huge sums at stake, there is a growing recognition of the potential for fraud. A recent report by accounting firm Deloitte warns that fraud in carbon markets “may be especially prevalent during the early stages of regulation by those looking to take advantage of naive market participants.” Read the full story here.  [PDF]

Media roundup:

Carousel Fraud:

From Europol: The European Union (EU) Emission Trading System (ETS) has been the victim of fraudulent traders in the past 18 months. This resulted in losses of approximately 5 billion euros for several national tax revenues. It is estimated that in some countries, up to 90% of the whole market volume was caused by fraudulent activities. Read the full story here.

From BusinessGreen.com: Prosecutors allege that the three Britons, who were arrested in Belgium last month, set up a firm in Tournai, in west Belgium, which then bought emissions allowances in the UK before selling them on through intermediaries. Authorities claim the group then pocketed the 21 per cent VAT leveled in Belgium on the sale of carbon credits, costing the Belgian Treasury €3m in lost revenue. Read the full story here.  [PDF]

From the New York Times: “These criminal activities endanger the credibility of the European Union emission-trading system and lead to the loss of significant tax revenue for governments,’’ Rob Wainwright, director of Europol, said in a statement. Read the full story here.  [PDF]

From the Telegraph: “It is estimated that in some countries, up to 90pc of the whole market volume was caused by fraudulent activities,” a Europol spokesman said, after Britain, France, Spain and the Netherlands brought in emergency VAT suspensions on carbon allowances to limit the fraud this year. Read the full story here.  [PDF]

More from the Telegraph: The very nature of carbon credits makes them “an incredibly lucrative target for criminals”, Rafael Rondelez, who was involved with the Europol investigation, has warned. Read the full story here. [PDF]

And even more from the Telegraph: Officials suspect that the traders have been avoiding VAT payments on carbon permits – which must be bought by heavy industry to cover the cost of their emissions. Read the full story here. [PDF]

From Pajamas Media: In the latest scam (which is a mutation of the EU’s notorious value-added tax carousel fraud), criminals open a carbon trading account on one of six recognized European carbon markets, in the name of a newly registered company. They then buy tax-free carbon credits in another country, transfer those credits into their account, and then sell them to a carbon broker in yet another country. The fraudsters collect VAT (which varies from between 15 to 25 percent depending on the EU country) on each transaction, but never pay the VAT monies to any European tax agency. The company and its owners vanish before tax authorities realize they are owed large amounts of VAT. Read the full story here. [PDF]

From the Accountancy Age: The European Council has announced plans to strengthen moves against VAT evasion on imports. Under the directive, conditions in which the importing of goods is exempt from VAT if followed by a supply or transfer of those goods to a taxable person in another member state, according to tax-news.com. Read the full story here. [PDF]

From the Environmental Leader: To cut down on fraud in the carbon trading market, the European Union is proposing a reverse payment scheme for value added taxes (VAT) on carbon trading, reports Carbon Offsets Daily. Read the full story here. [PDF]

Other types of Fraud:

From Reuters: “If you are going to trade any commodity on the open market, you are creating a profit and loss situation. There will be fraudulent trading of carbon credits,” Peter Younger, an environmental crimes specialist at Interpol told Reuters in an interview at a forestry conference in Nusa Dua on the Indonesian island of Bali. “In future, if you are running a factory and you desperately need credits to offset your emissions, there will be someone who can make that happen for you. Absolutely, organized crime will be involved.”  Read the full story here. [PDF]

From the Daily Mail: Extensive tests by an independent laboratory showed dangerous contaminants in the land and water around the factory – chemicals that match those pollutants produced by GFL. Interviews with the people living nearby reveal their livelihoods and health have been severely affected. We found that the auditors who were supposed to verify the carbon savings were paid for by GFL, a stipulation of the scheme, and they checked only for greenhouse gases, caring little about other pollution. Read the full story here. [PDF]

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