According to AFP, the alleged scheme targeted the European Union Emission Trading Scheme, the largest international greenhouse gas emissions trading organization in the world, involving more than 12,000 companies.
The Kyoto Protocol, an international agreement on reducing emissions, limits the amount of carbon dioxide that companies are legally allowed to emit. In order to meet these limits, companies are able to sell excess carbon emission permits to companies that need them.
German prosecutors claim that the suspects claimed tax rebates on emissions permits that had never been paid for in the first place.
The scheme worked by purchasing imported carbon permits in an EU country without paying the value added tax (VAT) and then selling the permits in another country with the VAT added to the price, so that a profit was made from the “tax.”
Carbon fraud is one of many variations of VAT fraud which exists in other markets.
The trial, which was delayed in June due to the volume of evidence, is expected to have more than 300 witnesses and last until March 2012.
The suspects were advised by defense attorneys not to enter pleas as of yet.
One of them however admitted to his involvement in the scheme and claimed that he did not realize he was committing fiscal fraud under the German law, but felt it was ethically and morally wrong.
The defendants face a sentence of anywhere from six months to 10 years in prison for each indictable charge if found guilty. Judge Martin Bach presiding over the case said that the defendants could get reduced sentences if they choose to cooperate, otherwise they will receive the maximum penalties for their alleged crimes.
Reuters reports that defense lawyers spoke out against Judge Bach’s premature assessment of sentences while defendants were still being interviewed by authorities to determine their willingness to cooperate.
German prosecutors have identified another 170 suspects in the case from the United Arab Emirates, Britain and Switzerland as a result of an investigation into the extent of the carbon fraud. Authorities believe that more than €850 million ($1.18 billion) dollars was made from the scheme.
Seven other suspects from the UK have been charged with VAT fraud in trading carbon permits and have their first hearing in October.
AFP reports that VAT fraud is widespread throughout the European Union, and it is estimated to have cost member states more than €5 billion ($7.2 billion) between 2008 and 2009.
The prevalence of this type of fraud linked to carbon credit trading has lead to stricter laws in Europe and new regulations including a “reverse VAT” where the company purchasing the credits now must also pay the VAT.
According to Reuters, since its inception in 2005, the EU carbon market has experienced other scandals and forms of fraud including excess permits, theft, and the recycling of permits.
Editor's note: Updated to remove the names of defendants.
