This article is part of our special report Fluorinated gases.
In its crackdown on planet-warming fluorinated gases, the EU introduced annual quotas in 2018, hoping the resulting price increase would encourage the use of greener refrigerants. But instead of a green transition, the move has generated a black market economy raking in the surplus.
A renewed push at EU level to shift towards less polluting refrigerants, planned for late 2021, should help customs authorities come down hard on smugglers, the industry hopes.
“Illegal imports have been piggybacking on the fact that prices were very high mainly in 2017-18 and these products are freely available in China,” said Murli Sukhwani, from the European FluoroCarbons Technical Committee (EFCTC).
The EFCTC is an umbrella trade association comprising the five major fluorocarbons manufacturers – Europe’s Orbia/Koura, the US’s Honeywell and Chemours, France’s Arkema, and Japan’s Daikin.
Companies placing bulk hydrofluorocarbons (HFCs) and equipment on the EU market receive annual quotas in carbon dioxide equivalent (CO2e) that are transferable under certain conditions but not freely tradable, as is the case with emissions allowances swapped under the EU Emission Trading System.
Europe is faced with a significant level of illegal HFCs on its territory, according to the Environmental Investigation Agency (EIA), an international NGO. “As much as 16.3 million tonnes of CO2e of bulk HFCs were illegally placed on the market in 2018,” or 16% above the 2018 quota, the EIA said in a report last year.
The gap reveals discrepancies between EU customs and HFC registry data that needs “to be examined further at company, country and EU level,” the EIA said, attributing the difference to cross-border smuggling of HFCs originating from China, the world’s largest producer of F-gases.
The illegal market could equate approximately a third of the formal market, according to a report by economics consultancy Oxera commissioned by the EFCTC.
Eurostat imports and Chinese exports data reveal that HFCs illegal imports could represent up to 34 million tonnes of CO2e annually, a surplus which doesn’t match with normal market dynamics.
Yet the European Commission urged caution about the volume of illegal imports “due to the lack of precise data,” an EU official told EURACTIV.
“It is clear that some illegal imports are happening and therefore the Commission has made it a priority to prevent such illegal activities,” the official said.
The legitimate supply chain is complex. HFCs are imported in large ISO tanks and sold to distributors or to large scale industrial users directly. They are then repackaged in smaller cylinders (of 5-60 litres) and sold to wholesalers supplying the building, automotive or hospital sectors.
But companies still manage to circumvent customs channels, securing an unknown quantity of non-quota HFCs, as “a number of loopholes in the system allow unscrupulous traders to reap quick profits,” the EIA report says.
Fraudulent import declarations, including counterfeit, misdirected trans-shipments, mislabelling and fake resellers permits are among the breaches flagged up in the report.
“The average size of a container is 20 tonnes, worth around €80,000, and customs authorities physically inspect an average of less than 5% of the merchandise,” Sukhwani said.
Under the Montreal Protocol 2019 HFC amendment, country-specific reporting of bulk HFCs is mandatory, meaning imports and exports should be declared by the country of origin/destination. Lack of EU-wide harmonisation in the HFC registry has enabled multiple quota abuse.
Difficult to trace
Using outside customs channels via land or sea borders, black-market operators are bringing non-quota HFCs to Europe, relying on ever-changing intricate manoeuvres including re-sketching trade routes.
The number of companies trading HFCs has exploded “from around 50 companies in 2014 to around 2,000 in 2018,” said Honeywell’s director Tim Vink. “Most SMEs investing in equipment, training, reclaiming and recovery see their business disappear to e-commerce platforms,” he added.
Rita Tedesco, programme manager at ECOS, an environmental NGO, reported traders establishing multiple shell companies to import quantities under the 100 tCO2e threshold, through a practice known as “smurfing” in the money laundering business.
The industry indicates that Croatia, Greece, Romania, and Poland are the most porous borders through which illegal HFCs enter from Russia, Ukraine, Turkey and Albania with most of the consumption, eventually ending up in Germany, the UK and France.
Non-refillable cylinders, which are banned in Europe since 2007, are most often placed on the market containing products such as HFCs R-134a, R-404A, R-410A, R-32 and R-407C or HCFC R-22, which are also illegal, the EFCTC said.
Prices are still approximately 3-4 times higher than those practised by distributors on the world market, after going up more than 10 fold in 2018.
Crunching the numbers
Data investigation agency Kroll, which fed industry input into the European Anti-Fraud Office’s (OLAF) own intelligence, built evidence of at least 3,000 tonnes of illegal HFCs (4.7 million CO2e) in 2019.
Seizures of nearly 100 tonnes in disposable cylinders were reported in Italy, Romania and The Netherlands by National authorities and OLAF this summer.
“We need mandatory monitoring, harmonised penalties, obligatory registry through a real-time IT system making sure that customs are connected on a common database, customs officials need to be trained to level up with the new standards,” Sukhwani said, referring to the upcoming F-gas review.
As a result of the fraud, the sector may have faced hundreds of millions in lost profit last year, industry sources said.
And it’s not just industry, governments too have lost tax revenue because of illegal imports. A recent report from Polish NGO PROZON, cited in the EIA investigation, estimated that Poland’s treasury lost €7 million in 2018 due to illegal refrigerant imports valued at €55 million.
Losses to the Lithuanian and Greek exchequers have been estimated at €5 million and €20 million respectively.
Looking ahead, the industry fears that the next quota reduction, planned in January 2021, will reduce the legal trade in F-gases even further, giving an additional boost to the black market. To mitigate that risk, the EFCTC has demanded greater checks along the entire supply chain as well as reinforced customs controls.
Meanwhile, some EU member states have taken the matter into their own hands. “Germany is drafting legislation to empower authorities not only to check the legitimacy of the imported merchandise but to track the whole supply chain,” said Vink.
(Edited by Frédéric Simon]