Carbon cowboys. VAT carousel fraud. Double-counting. Hackers. A fake bomb scare in the Czech Republic’s carbon registry. Phishing via fake carbon registry websites. Invented carbon credits. Overvalued carbon credits. Boiler rooms. Imaginary baselines. Auditors with conflicts of interest.
The list of scams in carbon markets is long and the cost in Europe alone is in the order of €15 billion. In an excellent recent article for The Atlantic, journalist Ryan Jacobs highlights fraud in the forest carbon markets. Towards the end of the article, Jacobs notes that,
There is something especially insidious about these fake forest carbon credits. Investors and corporations who buy voluntary credits believe they are buying into something grander than, say, the efficiency improvements of a single factory in China. They believe they’re funding not only the preservation of trees, but also the wellbeing of local forest communities. Unwittingly, they might be financing the destruction of both.
You can read the article here: “The Forest Mafia: How Scammers Steal Millions Through Carbon Markets”.
The article starts with the arrival of balding Australian, David Nilsson, in Peru. Nilsson turned out to be a carbon cowboy, looking to exploit the indigenous Matses people and their forests. Stephen Rice and Liam Bartlett, investigative journalists with 60 Minutes Australia, exposed Nilsson’s plans to cash in on the carbon and then to log the forests and export the timber to China.
Nilsson refused to speak to The Atlantic.
Jacobs interviewed Davyth Stewart from Interpol’s environmental crime unit. A recent report from Interpol describes the risks and the types of financial fraud in the carbon markets. Stewart points out that,
“The experience we’ve had with Europe was that it was often the case of chasing their tail. You know, constantly on the backfoot, and having to plug holes that were being exploited. By the time they get around to discovering the fraud, a number of billions of dollars have already gone missing.”
Jacobs sums up the problem: “The product is invisible, poorly understood, and regulation is extremely limited.” Stewart explains that carbon markets are not like other markets in that there is no concrete commodity to point to:
“It’s not like a bag of rice or other commodities that can, at some point, be easily verified. Here, you’ll have projects that are operating in very remote parts of the world, difficult to access. It becomes very difficult even for an independent auditor who goes, who can make it all the way out to that remote village or that remote town to verify that the project exists — and that they’re doing what they say they’re doing.”
Tom Bewick of the Rainforest Foundation US describes forest carbon credits as “an abstract commodity of nothing happening”.
In remote areas of forest, maps of the land are often poorly labelled or inaccurate. Boundaries may be unclear or in dispute. The same plot of land may have been awarded as a plantation concessions, and as a mining concession – to different companies.
Jacobs points out that the emissions baseline, the rate of forest destruction in the absence of the project, is “imaginary” and “easy to game”:
While this might be easier to prove on a factory retrofit, by, for example, using an emissions device to measure how much carbon dioxide is released before modifications, determining how nature and markets will act on a forest in the future is a guessing game subject to significant corruption.
The problems with forest carbon credits don’t end there. Just because a carbon trading project is established in a remote area of forest does not mean that the threats to the forest necessarily go away. Stewart points out that,
“When you retrofit out a factory or you change the smokestacks and you change the machinery and you double-glaze the windows, you know that there’s going to be long-lasting benefits. Whereas with forests, they’re constantly under pressure for being cleared and for being logged. So the level of oversight is currently inadequate, I think, and not only does it need to be improved, it needs to be … sustainable and long-term.”
The title of this post comes from William Magrath, a natural resource economist at the World Bank. During a meeting he took part in with Interpol officials a few years ago, he told Jacobs, one man called carbon “a con man’s dream”. Indeed, Interpol’s Peter Younger has been warning about fraud and carbon trading for several years. In 2009, he predicted that, “There will be fraudulent trading of carbon credits.” Unfortunately, it seems that no one pushing carbon markets was listening – including the World Bank, where Bank staff still talk about carbon as “the currency of the 21st century”.