Apparently, the carbon trading market – which has grown to more than $100 billion, the Washington Post reports – is attracting more than just businesses seeking viable ways to manage their CO2 emissions. Crooks, too, are drawn to carbon permit trading, as evidenced by last Wednesday’s arrest by British customs agents of nine people in the London area suspected of a £38 million ($63 million) “carousel” carbon permit fraud. (This was the first carbon scam British Customs has uncovered.) What are the implications of this development on sustainability and business?
The problem stems, in part, from the fact that nowadays, carbon dioxide is more than just a gas. Instead, CO2 is viewed as a pollutant, the monitoring of which can have significant environmental benefits. Accordingly, the European Union has limited the amount of CO2 many industries can produce, and companies must obtain permits to produce CO2. Companies that exceed their CO2 limit can purchase carbon credits from other companies that haven’t exceeded theirs – a system known as “cap-and-trade.” As a result, permission to produce CO2 has become something of a tradable commodity.
The carbon fraud problem also stems from taxation loopholes in the system of value-added tax (VAT)-free commerce between countries. In this system, a company imports goods without tax and sells them domestically with VAT to another domestic company, which then exports the products to a third country. The importing company should then repay the VAT to the government. In the “carousel” fraud, the thieves pocketed the VAT instead of paying it to the government. (The government became suspicious in May, when the volume of carbon trade on the Paris BlueNext reached 186 million tons – an increase of almost 159 million tons in just six months. The next month, the British government established a zero VAT rate for carbon trading to prevent future VAT-fraud attempts.)
One important implication of carbon permit fraud for sustainable businesses could be its potential impact on the passage of Obama’s climate and energy policies, which feature a cap-and-trade bill. I can already see opponents to the bill (*cough* oil industry supporters) staking their claim: if passing climate legislation could encourage crime, it shouldn’t be passed. (Carbon fraud could have a similar impact on the passage of an international climate change agreement – the topic of the UN Climate Change Conference in Copenhagen in December.) In fact, the problem gives rise to a whole host of additional issues. For example, are cap-and-trade systems even effective if (a) companies can still over-produce CO2 (can trading carbon permits really trim a country’s overall CO2 production?) and (b) crooks can chip away at the money a country makes through its clean tech investments and policies?
What do you think the bigger-picture ramifications of fraud in carbon trading could be?