Black market exceeds green targets for air conditioners and refrigerators in Europe

BRUSSELS — America’s corporate giants are so hard hit by a wave of European contraband that even the White House has weighed in.

The problem was evident at the Romanian border in March, when authorities acting on a tip stopped a truck from Turkey carrying nine tons of dangerous contraband. Months earlier, Spanish police and customs raided a secret warehouse near the city of Granada, seized 19 tonnes of illicit substances and arrested three people. In August, authorities at the Italian port of Livorno captured an illegal cargo of 3.7 tonnes from China.

What the officials were looking for were not drugs or weapons, but industrial refrigerants.

Italian authorities intercepted climate-damaging refrigerant gases that had been shipped from China to the port of Livorno.


Photo:

Agenzia Dogane e Monopoli / Ufficio delle Dogane di Livorno / OLAF

Climate-damaging chemicals, hydrofluorocarbons, are severely restricted by the European Union, which wants to replace them with newer, greener compounds as part of its efforts to reduce greenhouse gas emissions. American companies have invested heavily in cleaner formulas to gain a larger share of the new European market.

However, the older versions, known as HFCs, are still used legally in much of the world, in cooling systems, from car air conditioners to storage freezers, which means high volumes of trade around the world. whole. The price difference between the new, sophisticated EU-approved refrigerants and the older, cheaper, abundant and generally interchangeable formulas has sparked a black market and attracted smugglers, many of whom are from international criminal syndicates. Illicit offers can sell for about 25% less than regulated gas, according to distributors.

“Profiting from this type of activity is exactly the sort of thing that modern organized crime gangs appeal to,” and the risks are far lower than those of many other criminal activities, said Benedict Hamilton, chief executive of Kroll, a private investigation company. hired by multinationals affected by smuggling, including American industrial giants Honeywell International Inc.

and Chemours Co.

For Honeywell and Chemours, who have invested more than $ 1 billion to develop next-generation chemicals, the problem of law enforcement in Europe has become a business nightmare. Their once promising market has been so diminished by black market sales that they have complained to national governments, and U.S. Trade Representative Katherine Tai recently cited the problem in her office’s annual report on barriers to foreign trade.

US Trade Representative Katherine Tai speaking on screen at a meeting of EU trade ministers in Brussels on May 20.


Photo:

francisco seco / Agence France-Presse / Getty Images

The companies said in a statement they feared that a tightening of EU quotas for HFCs this year “will create new opportunities for smugglers to fill the void.”

Refrigerants are just a small corner of a burgeoning illicit global trade that runs alongside legitimate trade. Easy money from illegal and environmentally damaging activities – from dumping unregulated waste to smuggling pesticides – is a growing threat to ambitious plans to reverse climate change, say people who study the trade .

The issue has gained more attention since the US Environmental Protection Agency proposed rules in May to reduce the use of HFCs, as the EU enacted in 2014 and as did later countries like Japan and South Korea. Investigators say the geography of the United States makes it less vulnerable than Europe, but its problems still serve as a warning sign.

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“Illegal imports are dragging the legitimate market down and slowing the transition to more sustainable solutions,” said Murli Sukhwani, general manager of fluorochemicals at Chemours and head of an industry group investigating the problem. He added that the EU would not be able to meet its climate targets if the level of smuggling continued.

One of the many obstacles to stopping climate change is the smuggling of HFCs. While advanced technologies like offshore wind farms and green hydrogen are gaining a lot of attention, the continued use of coal and charcoal for fuel, the illegal burning of waste, and the unregulated use of chemicals. harmful to the climate threaten to reverse the progress made by high-tech investments.

Compounding the problem, criminal organizations have spotted the possibility of profiting from the violation of European environmental regulations. By some estimates, the smuggling of HFCs costs European governments hundreds of millions of dollars a year in lost tax revenue.

Illicit refrigerant gases harmful to the climate seized by the Dutch authorities.


Photo:

Dutch Ministry of Infrastructure and Water Management / OLAF

According to a recent study by Rand Corp., the fraudulent trade in legal products – dodging taxes, duties and other levies – is the most lucrative criminal activity in Europe, generating around 77 billion euros in 2019, That’s the equivalent of around $ 93 billion, compared to around € 30 billion for illicit drugs, the think tank said.

The HFC smuggling problems in Europe started in 2018, when the first big reductions in the use of chemicals began under the 2014 law, known as the F-gas regulation in reference to gas. fluorinated greenhouse effect. The demand for the new formulations increased until the spring, but then fell. Simultaneously, HFC market prices have fallen, suggesting an overabundance.

Honeywell, Chemours and other legal producers, initially unable to attract the attention of authorities, hired Kroll. Working in part from advice provided to a hotline for local businesses to report suspicious activity, Kroll detectives learned that gas canisters, mostly produced in China and legally sold in countries neighboring the EU, including Turkey and Ukraine, were smuggled into the block.

Once in the EU, gas was stealthily peddled for cash to small businesses, including auto mechanics and air conditioning service companies, at prices well below market rates.

“We were really inundated,” said Alessandro Borri, director of sales and marketing at General Gas, an Italian refrigeration company. He estimates that in the two years up to mid-2020, 20% of the Italian market has been lost due to illegal sales of HFCs, costing his company more than $ 2 million in profits per year. .

Industry experts estimate that in 2018 and 2019, illegal HFCs in the EU probably made up around a quarter of the market and pumped the volume of carbon dioxide into the atmosphere equivalent to an additional 55 million cars.

A building with air conditioners on the facade in Madrid.


Photo:

Cristina Arias / Cover / Getty Images

Since smuggling robs countries of revenue from tariffs and value-added taxes, Kroll drew the attention of customs officials, tax police and the bloc’s anti-fraud agency, known as OLAF, providing advice from the hotline. The investigative company also helped train customs officials, holding seminars in 12 countries and training more than 600 officials to spot illegal shipments and suspicious documents.

Soon, border control officers assisted by OLAF impounded thousands of illegal single-use cans filled with contraband HFCs. The EU requires gases to be transported in reusable containers. In 2020, authorities said they seized around 150 tonnes of chemicals, the equivalent of 320,000 tonnes of carbon dioxide, largely thanks to advice from the companies and Kroll.

However, the success was short-lived. By early 2020, traffickers had moved from smuggling trucks loaded with cans to more open importation of larger quantities of HFCs, to fraud by customs authorities.

“The data suggests we just squeezed the ball and pushed the problem elsewhere,” said George Koutsaftes, president of Honeywell Advanced Materials.

The scams take advantage of regulatory loopholes in EU laws and national customs oversight. While F-gas regulation is EU-wide, each of the 27 countries in the bloc still patrols their borders and collects customs duties. Smugglers started importing HFCs from China and claiming that they were intended for re-export outside the EU, to countries like Ukraine, and therefore exempt from regulatory import limits.

After customs clearance at the port, shipments disappear into the EU black market. Smugglers forgo some customs payments they would recoup on re-export, but earn much more money by undermining legitimate products.

“Our customers are asking us what the next step is” and want more environmental improvements, said Mr. Koutsaftes of Honeywell. “But we can’t do it unless the current rules are applied.”

Write to Daniel Michaels at [email protected]

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