Phishing & VAT Fraud in CO2 Permits: DICE in the EU-ETS Now; DICE in Power Tomorrow

Abstract

In accordance with Directive 2003/87/EC of October 13, 2003, trade in greenhouse gas emissions commenced in the European Union (EU) on January 1, 2005. The EU-Emissions Trading System (EU-ETS) was born. The EU has a Value Added Tax (VAT). VAT is a transaction-based levy on all trade in goods and services. Each Member State has a VAT as a condition of membership. Until January 3, 2017 transactions in CO2 permits are taxed as services. After this date they are exempt as financial instruments. This change in VAT treatment of CO2 permits is directly attributable to rampant fraud in the market. Fraud has been so severe in CO2 permits that public trust in the EU’s emissions trading scheme has been undermined. Important lessons have been learned about controlling fraud from efforts made in the emissions markets. Unfortunately, time and political patience have run out. This paper considers a particular phishing attack in the CO2 market – the January 18, 2011 attack on the Czech registry. The focus of this paper is not on this very sensational fraud; it is on the ETS/ VAT overlap, and the ability to apply what has been learned here to the trade in gas and electricity. Careful consideration of this overlap demonstrates why the Digital Invoice Customs Exchange (DICE) proposal works as an effective fraud prevention mechanism. The moral of this story is that what we have learned can be directly applied to the commodity energy market. We know how that these markets can be secured. We need: (a) an Independent Transaction Log, and (b) a secure self-verifying digital invoice, and (c) a system of automated invoice cross-checking (the customs exchange). Can this be done? Quite simply, “yes.” A call placed to Kim Mayyasi, SmartCloud’s CEO presented this question. Not surprisingly, the response was: “… implementing a real-time transaction database of all power sales in the EU with advanced reasoning for back room analytics could implement the DICE proposal to eliminate MTIC from the EU power markets, and it could do so for the EU CO2 market right now. This is a typical challenge that our technology was designed to handle.”