(Clarifies definition of carousel fraud in paragraph 13)
March 12 Italian state-owned energy exchange Gestore Mercati Energetici (GME) will close its carbon emissions market on March 22, more than three years after it suspended trade due to what it called "presumed unlawful" activity.
The Rome-based bourse's board of directors made the decision on March 5, GME said in a statement dated March 6 on its website.
A GME official said the exchange was unable to comment further on the matter.
After observing "abnormal" activity in its spot market for EU Allowances (EUAs), GME in December 2010 said it temporarily suspended trade due to "perceived irregular or unlawful behaviours" and promptly reported it to Italian tax officials and authorities.
Spokespeople from Italy's ministry of finance and ministry of economic development did not respond to requests sent on Wednesday seeking information on any investigations into the matter.
GME is owned by Gestore dei Servici Energetici, a wholly-owned subsidiary of the Italian ministry of economy and finance.
The bourse's weekly EUA trading volumes ballooned to over 3 million units in late 2010 from around 10,000 units several months earlier, with the sizeable transactions being done at substantial discounts to market rates elsewhere in Europe.
The number of participants in GME's carbon market nearly tripled to over 150 in 2010, according to exchange data, with many of the new member firms sharing the same business address.
The permanent closure of GME's carbon trading platform is not expected to affect the wider EU ETS, as Italian plant operators and businesses can trade via brokers or directly on emissions exchanges in other countries.
A similar jump in trading volumes and membership on rival spot exchange BlueNext in 2009 was linked by authorities to value-added tax (VAT) fraud, leading it to pay a 32 million euro ($44 million) settlement to French tax authorities before the Paris-based bourse closed in late 2012.
The surge in GME's trading activity has never been attributed to VAT fraud by the exchange or authorities.
Also called carousel fraud, the crime involves firms importing goods into one EU country without paying VAT, and then selling them on with the tax - which can range from 15-25 percent depending on the member state - added to the price.
The seller then pockets the tax instead of paying it to the relevant tax authorities before disappearing completely.
European police agency Europol in 2009 estimated VAT fraud in the EU Emissions Trading System to have cost governments more than 5 billion euros ($6.93 billion) in lost revenue.
At least 16 EU member states have since introduced measures to reverse the VAT charges for spot allowances, meaning the buyers are now liable for the VAT rather than the sellers.
Italy has been criticised by tax authorities in other countries for not following suit.
A spokeswoman for the Italian finance ministry, responding to a separate query sent by Reuters, on Wednesday said "so far we have not had enough evidence of fraud in this specific sector to justify the application of the reverse charge mechanism."
($1 = 0.7212 Euros) (Reporting by Michael Szabo in London; Editing by Anthony Barker and Louise Heavens)