The Kyoto Protocol[1] is an international agreement on reducing greenhouse gas (GHG) emissions. The EU has within the framework of the Kyoto Protocol established an Emissions Trading System (EU ETS)[2] as a key policy instrument to mitigate greenhouse gases emissions.
Verification of effectiveness and reliability of the system was the key aim of the cooperative audit on emissions trading. The audit was carried out in 2012 and involved Supreme Audit Institutions (SAIs) of seven countries: Denmark, Finland, Latvia, Lithuania, Norway, Poland and Sweden.
The EU ETS was successfully implemented in all seven countries. National registries worked properly, facilitating trade in allowances via special accounts in online databases. Phishing attempts were identified in Denmark, Norway and Poland but the operators of national registries, remarkably in Poland, managed to prevent fraudsters from gaining access to confidential data. In July 2012, a single registry at the EU level was set up with the aim of further strengthening the data security.
The joint audit also dealt with implementation and operation of other Kyoto instruments designed to reduce GHG emissions, namely the Clean Development Mechanism (CDM) and Joint Implementation (JI). National audits identified some problems related to the administration of CDM and JI projects. They pointed to a lack of government control and transparency in the procedures for buying allowances. According to the cooperative audit recommendations, CDM procedures should be simplified and more emphasis should be laid on risk analysis so as to identify and eliminate potential problems at an early stage.
Another problem is that cross-border trade in CO2 emission allowances is exposed to a risk of VAT fraud. Such cross-border VAT frauds were detected in the course of national audits in Denmark and Norway. From 2005 to 2009, in Denmark there could be as many as 100,000 fraudulent transactions per day. According to the Danish tax authorities, the VAT loss to the Danish treasury totalled EUR 200,000. But the audit indicated the loss could be greater. 14 EU Member States stated that they suspect VAT fraud of as much as EUR 200 million through the Danish registry. Between December 2009 and February 2010, the VAT fraud identified in Norway caused a loss to the state of about EUR 990 million. In order to reduce the risk of fraud in the future, the VAT system in Denmark, Norway, Finland and Sweden has been changed to reverse charge. In the new tax system it is a single entity (the buyer) that is obliged to pay and then deduct the VAT. Both in Denmark and Norway international cooperation is now strengthened to boost effectiveness of prevention and detection of VAT frauds in the future. However, a fully-fledged solution to prevent VAT frauds is not yet in place.
The cooperative audit findings point out that by the end of 2012 all seven countries are likely to meet the emissions reduction targets specified in the Kyoto Protocol and the EU Burden Sharing Agreement[3]. Yet, there is no evidence that the reduced emissions can be attributed to the effectiveness of the EU ETS. Many experts believe that this may as well be a consequence of the financial crisis which led to lower demand for allowances. The reduced demand caused reduction of allowance prices and therefore provided little incentive to limit emissions.
[1] Kyoto Protocol entered into force on 16 February 2005 and is a supplement to the United Nations Framework Convention on Climate Change on global warming prevention.
[2] European Union Emissions Trading System (EU ETS) is an element of the climate policy. It is supposed to support the countries being its participants in applying the Kyoto Protocol provisions and help them to limit costs related to emissions reduction.
[3] A political agreement of 1998 on dividing the burden related to greenhouse gas emissions reduction unequally amongst member states, taking into account their individual conditions, including emissions levels, the possibility of reducing them, and economic development.
