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Carbon Offset and VAT Fraud and a warning to farmers.

Industrial smoke coming from a chimney

Once upon a time there was a butcher's shop with its freezers absolutely full of mobile phones. The business was raided and found to have no meat whatsoever, but thousands of mobile phones. The raid was performed by Customs & Excise and was part of a fraud worth over £176million.

How it worked was that the Fraudsters used a front company to import the phones VAT free within the EU and then sold them on to other traders within the UK charging them VAT which they then pocket and run off with.

The more complicated a transaction the easier it is to use smoke and mirrors to create a fraud. Up to 2009 you didn't need a freezer full of mobile phones for the same fraudulent technique could be used as Carbon Credits could be purchased from another country, as a cross-national trade did not face VAT, it could then be sold on with VAT added and the tax pocketed by the fraudster before they disappeared.

Both the above frauds are relatively simple and known as carousel fraud, but increasingly we are seeing a new market of totally unregulated voluntary credits that is evolving and some interesting requests being discussed. To understand this you need to consider what Carbon credits are and not confuse them with any other service or market that is being created in the wild west that this market currently is:

There are two internationally recognised Carbon Credits - the main one are Compliance Credits - these have to be purchased by certain carbon-producing Companies who then retire those credits (effectively write off the value) as they produce carbon emissions. Each Carbon Credit is equivalent to one metric tonne of carbon emissions. Even this market is subject to controversy and not trusted by environmental groups such as Greenpeace.

Verified Emission Reduction Credits are a similar product that is not regulated. It is basically a promise that carbon has been reduced somewhere in the world to counter the carbon generating activity. These do not have a clear regulation or policing and can only be held up by Company's desire to protect its reputation and be seen to do the right thing. It is the creation of these credits, or the desire to create these credits, that has spawned a group of middle men to approach farmers as they seek to create tangible off sets, usually in the form of tree planting, that help fulfil this trade-able promise. This can very easily be the spawn of a future VAT fraud, or other financial fraud, in my humble opinion.

The reason I suspect this is that there are currently a whole army of market-makers looking to tie farmers and land owners in to long term commitments to create a market of tradeable off-sets without any track record or regulatory framework. Talking to them these people seem plausible but the market is layered and when you look at some of the structures the ownership going back to offshore companies does not instil confidence.

The other thing to be wary of is that Carbon Credits are yesterday's idea. I consider it highly likely in coming years that there will be a pollution tax based on all sorts of things from carbon emission, to methane to nitrates. If you have made a long-term commitment to woodland you may become stuck. It also needs to be remembered that wood does not look after itself and requires a different skill set to other farming activities.

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