LONDON The British government on Wednesday said it will make carbon emissions credits exempt from value-added tax (VAT) from Thursday in response to fraudulent trading on a French emissions exchange.
"The new law, which takes effect from midnight tonight, follows evidence that commodity trading in emissions allowances is being used by fraudsters to steal VAT revenues from the UK, and that the UK may become a major target for this activity in the coming months," the UK Treasury said in a statement.
"The threat became apparent after fraudulent trading on the BlueNext exchange prompted the French government to remove VAT from supplies of emissions allowances in France."
A BlueNext spokesman reiterated on Wednesday that there was no evidence of fraudulent trading on the exchange.
Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the tax to the government.
France and the Netherlands made changes to their carbon credit VAT rules after rumors began circulating that a recent surge in trading volumes on BlueNext was related to carousel tax fraud. Spain is reportedly looking into following suit.
London-based carbon traders welcomed the news, saying it would help mend the carbon market's dented reputation.
"With London being the hub for European carbon trading, it was essential that the government take decisive action to mitigate the possibility of VAT fraud," said Andy Ager, head of emissions trading at Bache Commodities.
"This removes a looming uncertainty and volumes should increase as a result."
Under the EU's $92 billion Emissions Trading Scheme, companies emitting more greenhouse gases than allowed must buy carbon permits from other firms that have cut emissions.
The UK government added it is actively engaged in discussions with the European Commission on establishing an EU-wide solution to the threat of VAT fraud in carbon trading.
(Reporting by Michael Szabo; Editing by William Hardy)