Belgian prosecutors have charged three Britons and a Dutchman with failing to pay 3 million Euros on carbon trading transactions, according to a report in The Guardian.
This fraud is terrible news for supporters of a U.S. cap-and-trade system.
The “carousel fraud” involves buying credits in one country that allows credits to be sold without charging Value Added Tax (VAT) then selling to buyers in another country that requires VAT to be collected.
The sellers then disappear without forwarding the tax to the government. Similar fraud has cost the European Union an estimated 5 billion euros in the last 18 months.
The problem is unique to the EU’s Emissions Trading Scheme (ETS) because the taxation regimes are not harmonized across different countries. Thus, fraudsters can exploit differences in the taxation rules.
This would not necessarily be a problem if the U.S. introduced a cap and trade plan – which would be governed by one set of taxation rules – but could create enormous problems in an international scheme.
More to the point, gaming of the system also validates the anxiety many people feel about creating a huge, new financial market to curb emissions.
Public trust in Wall Street is at a low-ebb and voters are wary of giving financial firms an entire new market to manipulate in both legal and illegal ways.
The EU believes it has found a way to stop the VAT fraud. But the damage to the EU’s coffers, and cap and trade’s image, has been done.