Financial Times Uncovers Widespread Carbon Trading Fraud

The Financial Times, in a series of articles published today, probes the workings of the carbon trading business, and uncovers widespread fraud: buyers paying for reductions that don’t occur, organizations extracting large carbon reduction payments for programs they were going to implement regardless, clueless or complicit brokers, offset programs that are shams.

We have been skeptical about carbon trading because it was an inferior (although politically more palatable) policy choice. Even Harvard professor Greg Mankiw (no liberal; he is Mitt Romney’s economics advisor) favors a carbon tax. And we were also concerned about the higher administrative costs, and potential for cheating and market manipulation, which would not only increase costs but would reduce investment and distort incentives by creating an unstable price for carbon (a Financial Times editorial cited the importance of having a stable price for carbon, which runs counter to the notion of an actively traded market).

But what the FT has found is even worse than what we had imagined, worse in the sense that the abuses are so widespread. We hope you will read the stories in their entirety; this is Pulitzer Prize level work (and far more important than the options backdating story that won this year). It will be interesting to see how much, if any, of the FT’s reporting is picked up in the US.

Below is the overview article, “Industry caught in carbon ‘smokescreen’:”

Companies and individuals rushing to go green have been spending millions on “carbon credit” projects that yield few if any environmental benefits.

A Financial Times investigation has uncovered widespread failings in the new markets for greenhouse gases, suggesting some organisations are paying for emissions reductions that do not take place.

Others are meanwhile making big profits from carbon trading for very small expenditure and in some cases for clean-ups that they would have made anyway.

The growing political salience of environmental politics has sparked a “green gold rush”, which has seen a dramatic expansion in the number of businesses offering both companies and individuals the chance to go “carbon neutral”, offsetting their own energy use by buying carbon credits that cancel out their contribution to global warming.

The burgeoning regulated market for carbon credits is expected to more than double in size to about $68.2bn by 2010, with the unregulated voluntary sector rising to $4bn in the same period.

The FT investigation found:

■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

■ Brokers providing services of questionable or no value.

■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

Francis Sullivan, environment adviser at HSBC, the UK’s biggest bank that went carbon-neutral in 2005, said he found “serious credibility concerns” in the offsetting market after evaluating it for several months.

“The police, the fraud squad and trading standards need to be looking into this. Otherwise people will lose faith in it,” he said.

These concerns led the bank to ignore the market and fund its own carbon reduction projects directly.

Some companies are benefiting by asking “green” consumers to pay them for cleaning up their own pollution. For instance, DuPont, the chemicals company, invites consumers to pay $4 to eliminate a tonne of carbon dioxide from its plant in Kentucky that produces a potent greenhouse gas called HFC-23. But the equipment required to reduce such gases is relatively cheap. DuPont refused to comment and declined to specify its earnings from the project, saying it was at too early a stage to discuss.

The FT has also found examples of companies setting up as carbon offsetters without appearing to have a clear idea of how the markets operate. In response to FT inquiries about its sourcing of carbon credits, one company,, said it had not taken payments for offsets.

Blue Source, a US offsetting company, invites consumers to offset carbon emissions by investing in enhanced oil recovery, which pumps carbon dioxide into depleted oil wells to bring up the remaining oil. However, Blue Source said that because of the high price of oil, this process was often profitable in itself, meaning operators were making extra revenues from selling “carbon credits” for burying the carbon.

There is nothing illegal in these practices. However, some companies that are offsetting their emissions have avoided such projects because customers may find them controversial.

BP said it would not buy credits resulting from improvements in industrial efficiency or from most renewable energy projects in developed countries.

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  1. Anonymous

    Keep in mind that the FT is not the first to “discover” through investigative reporting that carbon markets are still infant. Businessweek ran a very similar story last month. However, I don’t think either of these deserves a pulitzer.

    However, neither of these is saying anything that those familiar with this market don’t already know: You have to be careful that you get what you pay for. You can walk into a room and slap some money on the table and ask for carbon credits, but unless you’re using a reputable broker with clearly defined projects, you don’t know what you’re getting.

    As both the FT and BusinessWeek are no doubt aware, there are certainly previous instances of a new market arising in which people could buy and sell an intangible good whose value was not transparent. When trading of stock in companies began, some people were swindled by crooks selling worthless pieces of paper. However, many people saw value in this system despite early flaws, and it continued, evolved, engendered regulation, and is an indisputably important instrument today.

    Obviously there are some differences, but the idea is not dissimilar. Thankfully we have much more practice now with making markets, and can help them evolve far more quickly toward a usable and stable point.

    Whether a tax or a cap-and-trade system is the more effective choice for dealing with this problem is a fair question that deserves to be argued, but noting that a brand-new market is not without flaws is small revelation.

  2. Alasdair

    The trouble is not the fact that the market is new, it is that it is also fundamentally flawed. By handing out carbon allowances to the world’s biggest polluters, the system basically rewards the biggest producers of CO2 for making tiny cuts while ignoring the work which others have done to reduce emissions, by not building fossil fuel plants in the first place, reducing consumption etc.

    Secondly the idea that one tonne of carbon offset by installing a solar cooker or planting trees is as good as changing the system of fossil fuel use is false. Reductions which spark innovation and a technological revolution are obviously more important in the long run than say switching a power station from low quality to high quality coal.

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