Whether the US will in the end wind up with Cap and Trade legislation is still very uncertain, but if it does one can bet that problems with fraud and corruption will provide additional concerns for companies and government beyond the specifics of the law itself.
"One of the questions that's raised is whether the general cap and trade and carbon markets solutions make the most sense for dealing with the climate change problem," says Dr. Eric W. Orts, a professor of legal studies and business ethics at the Wharton School of Business at the University of Pennsylvania in a recent article. "Is it possible to get a sufficient handle on the kind of fraud that is going on so we can trust these kinds of markets?"
Earlier this year, the New York Times reported that there were substantial problems with fraud and corruption in the European Union’s Cap and Trade program, known as the Emission Trading System (ETS). For example, swindlers used the same type of “web phishing” techniques that criminals in the US and elsewhere use to obtain bank account and credit card information from consumers to gain access to codes needed by businesses to access codes needed for the ETS.
The crooks then used the stolen codes to gain access to electronic certificates that represent quantities of greenhouse gases, and sell the certificates through trading accounts registered in Europe. One gang is thought to have made as much as $4 million from a single phishing scheme.
In other cases, crooks added value-added taxes to the price of carbon permits sold to businesses — and then disappeared before turning the tax over to governments.
But there are many more chances for fraud and corruption in carbon emissions trading beyond pfishing, experts say. In summary, a giant trading market as would develop in carbon permits under a Cap and Trade program would be similar the same types of problems that exist in current financial markets today, from Bernie Madoff to the many run of the mill swindlers - but with businesses and regulators not having much experience in combating the problems in this new market.
For example, Orts says that one of the key challenges is deciding who should have jurisdiction over regulating carbon markets and investigating suspected trading schemes.
In the United States, "It's probably not something that the SEC would take jurisdiction over. These are securities in the basic sense, but the expertise needed to ascertain whether it's fraud or not is really science- and environment-based," Orts observes.
Acquiring so-called "carbon offsets," for example offsetting some greenhouse gas emissions in the US by planting trees in South America, is likely to be especially troublesome, many have noted.
That includes a report from
PricewaterhouseCoopers (PwC) earlier this year, that noted in part that carbon-offset schemes are likely to prove fertile territory for fraudsters, with the report warning that offsetting deals that are either poorly structured or wilfully fraudulent could increasingly expose firms to reputational damage and even criminal liability".
Gaming the Carbon Trading System
Michelle Chan, a Friends of the Earth campaigner, told the Wharton school that "Carbon offsets are especially prone to corruption and fraud because they involve representations that greenhouse gas emissions have occurred -- and that ultimately can't be proved.”
She adds: "You're saying, 'My emissions would have been so much, but my offsets reduced it by this much.' In many cases, the emissions reduction ... would have happened in any case. The offsets market is inherently rife with opportunities for truth stretching and outright lies.”
Chan, is the author of the May 2010 Friends of the Earth report, Ten Ways to Game the Carbon Market. The 10 "scams" the report identifies are as follows:
- Boost the baselines: Industries facing carbon limits can inflate their projected emissions levels to claim a greater government allocation of carbon permits (preferably free). The report says that electric utilities in five EU countries could generate from $36 billion to $111 billion in windfall profits from 2008 to 2012 from free permits.
- Ponzi carbon: As in any pyramid scheme, you pay off old investors with the proceeds from a new one, all in the absence of any authentic purchase agreements for carbon. This was reportedly Anne Sholtz's tactic. Investors filed more than $50 million in claims against her.
- Sell fake carbon offset credits: This scheme involves selling investors on an offset project, often far away, that either doesn't exist or doesn't do what is claimed. Offset problems aren't always the result of fraud. Heather Rogers' recent book, Green Gone Wrong, documents the serious problems with a 2002 project that was to have planted 10,000 mango trees to offset the emissions from the British band Coldplay's album, A Rush of Blood to the Head. "Offset brokers," she wrote, "are not compelled to meet any standards, have no required inspections, project approvals or reviews, and no obligatory follow-up assessments to ensure the efficacy of the carbon remediation."
- Carbon bribery: Targets of bribes could include the verifier who is supposed to measure actual carbon reductions, or an agency that issues carbon credits. Host countries are also vulnerable to accepting payments, as in the Foster case. Some verifiers also serve as consultants to those same projects, creating a potential conflict of interest.
- "Carousel" fraud: In this common crime, rogue traders buy credits tax free, then charge tax to paying customers. Taxes are never paid to the government, and the traders disappear after the transaction is complete.
- "Phishing" for carbon: This is the Internet-based crime described in the lead of this story. In a fraud with many variants, traders tell companies they need to re-register their permits, and then use dummy websites to steal account data.
- Falsify information: Carbon offset developers need to prove "additionality," or that their projects avoided carbon emissions. They can do this by demonstrating, perhaps falsely, that the project would not have happened without the offset revenue.
- 'Round-trip' your carbon: In this variation of the classic tax scam, a new company is set up specifically to create carbon offsets. It then deliberately over-charges for the carbon, allowing an existing entity to claim the excess as revenue.
- Recycle your carbon: Traders buy credits or permits that have already been used for a low price, then -- even though the credits or an equivalent number were supposed to be retired -- sell them anyway at a tidy profit. This crime was discovered on two European exchanges in March.
- Manipulate carbon prices to enrich your business: Companies could theoretically bid up carbon prices at their trading desks, then profit in their offset divisions when a trigger price is reached and the government releases extra carbon from the strategic reserve. Variations on that reserve are elements of both the Waxman-Markey climate bill that passed the House and the Kerry-Lieberman bill pending in the Senate.
This is a sobering list – and one which is a reminder that regardless of what the law says, Cap and Trade legislation may have relatively little impact on actual carbon emissions, as thus far has been the case in Europe.
While the various frauds that make criminal money are definitely an issue, but the “deeper problem is measuring whether the so-called reductions in emissions that are claimed by participants in these markets actually happen at all,” said Larry Lohmann of Corner House, an environmental advocacy group in Britain. That, he contended, would “turn out to be the far bigger fraud.”
How big a problem do you think fraud and corruption might be in a Cap and Trade regime? Do you have any knowledge of these problems in Europe? Are these issues big enough to really shuttle the whole idea of progress under Cap and Trade? Let us know thoughts at the Feedback button below.
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