Fraud within Europe's carbon credit trading system has cost taxpayers more than $7 billion in the last 18 months, European police said Friday.

Geese fly past a Kansas smokestack. Companies in some countries buy credits to offset their greenhouse gas output. (Charlie Riedel/Associated Press)

Officials at Europol, the body in charge of co-ordinating police forces inside the European Union, say fraudulent activity on the EU's Emission Trading System was first suspected in late 2008 when police noticed the volume of trades in certain countries would mysteriously spike.

"It is estimated that in some countries, up to 90 per cent of the whole market volume was caused by fraudulent activities," Europol said.

Since late 2008, the total value of fraudulent activity is believed to be in excess of five billion euros ($7.7 billion Cdn) from bogus trades in European unit allowances, or EUAs, the credits that companies in some countries buy to offset their greenhouse gas output.

In the EU and other jurisdictions, caps are put on the total amount of carbon dioxide that is allowed to be emitted. Companies that pollute more than their fair share must then buy carbon credits from companies that don't pollute, to keep the total output below the prescribed cap.

Market volume on the EU's carbon trading system peaked in May 2009, with several hundred million EUAs traded in France and Denmark alone, Europol said.

Market worth $140 billion annually

At the time, one EUA was worth about 12.5 euros, or about $19.30.

In the scam, criminals set up a carbon trading account on a recognized European market. They would then buy credits tax-free on exchanges in countries outside Europe. Those credits are then transferred into the European account, and the fraudsters collect tax on that transaction, but the monies are never paid to any European tax agencies.

The bogus trading account is then shut down before tax authorities can collect.

To prevent further losses, governments in France, the Netherlands, the United Kingdom and most recently Spain have all changed their taxation rules on the transactions. Trading activity from the aforementioned countries has declined by as much as 90 per cent as a result, Europol said.

Police agencies throughout Europe are currently collaborating to uncover specific fraudulent trades, and there are reasons to believe that fraudsters might soon migrate toward the gas and electricity branches of the energy sector, Europol said.

The EU carbon trading market is estimated to be worth nearly $140 billion a year, and 12,000 emitters have purchased more than two billion EUAs thus far. The Emission Trading System is one of six recognized European carbon trading markets.