Carbon scam in Europe

An international carbon credits scam worth more than £1 billion ($2.2 billion) is being investigated by detectives in at least five European countries.

The fraud, originally coordinated by gangs in Spain and Britain, involves the buying and selling of emission allowances across borders in order to avoid value added tax.

The disclosure of the scale of the illegal trade in carbon credits will cause further consternation for the Governments and environmental groups that set up the system to measure and limit emissions. It comes as the EU introduces rules to control the fraud.

Scotland Yard detectives and British Revenue and Customs officers are involved in the investigation to track down gangs operating across Europe. Police in Italy, Spain, Denmark and Sweden are being coordinated by Europol, the European law enforcement agency. A source close to the investigation said: "The inquiry has escalated. This is a Europe-wide operation and we are finding it difficult to keep up."

The EU wants to clean up the market as it tries to get its form of "cap-and-trade" carbon trading scheme adopted around the world as a key weapon against carbon emissions. The EU carbon market is now worth about €90 billion a year. It is the largely unregulated spot market that has been targeted by fraudsters. Nine people were arrested in Britain in August on suspicion of being part of an organised crime group. It is alleged that they traded large volumes of credits. It is understood that most of the suspects are company directors and businessmen.

The scam works by the fraudster or company buying carbon credits from overseas VAT-free sources, then selling them to UK businesses at a VAT-inclusive price. The tax charged is never paid to Revenue and Customs.

It is another form of carousel, or "missing trader", fraud, where standard-rated goods or services can effectively be traded VAT-free between EU countries. A 2008 report estimated that the total in lost tax revenues from fraud across Europe is as high as €250 billion, with €40 billion down to VAT fraud alone.

- OBSERVER