Fraud on the European Union Emissions Trading Scheme: Effects, Vulnerabilities and Regulatory Reform

As the European Union Emissions Trading Scheme (EU ETS) has grown in size and value, it has become an increasingly attractive playground for fraudsters. The past two years have seen value-added-tax (VAT) fraud and emissions allowance thefts emerge as major threats to the EU ETS market.

This study explores the effects that these forms of fraud have had on parts of the EU carbon market; uncovers vulnerabilities in the regulation of the registries (the ``banks'' of accounts in which emissions allowances are kept and from which they are traded) and the oversight of the EU ETS market; and analyses the adequacy and wider implications of the regulatory reforms recently proposed by the European Commission.

A series of semi-structured interviews conducted for this study exposes a significant amount of discomfort amongst stakeholders regarding the proposed reforms to the regulation of the registries system, which is felt could still leave the system vulnerable to fraud and its effects. The potential extension of the EU financial markets oversight regulations has also led to fear that the future regulatory framework may be disproportionately burdensome for some market participants, potentially compromising the cost-efficiency of this emissions abatement tool.

Moreover, the paper highlights the difficulties involved in the investigation and prosecution of fraud in the carbon markets and assesses the extent to which recent developments in EU criminal law, in particular since the ratification of the Lisbon Treaty in 2009, hold the potential to overcome some of the existing barriers to the effective criminal law cooperation between the Member States.