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Carbon Markets Need Oversight, Not Boostrapping


On the eve of Cancun some are pressing that negotiating parties guarantee the future of carbon trading.


During a three-day official visit to Vietnam, the World Bank's Vice President for Sustainable Development, Inger Andersen, told Agence France-Presse, that one key goal delegates have in the coming Cancun talks is, "[T]hey have to find out how to ensure that carbon trading does not collapse."


Anderson added that "finding a way that that can be ensured would be very important to the world."


Yet carbon markets have not become the major drivers in reducing the rise of atmospheric carbon dioxide. Worryingly, as carbon markets mature they are increasingly characterised by crime, corruption, institutional malfeasance and incompetence. These problems increasingly appear
to be systemic.


Since the conclusion of the first phase of the world’s largest formal carbon market (the EU-ETS) in 2007, carbon market crime has cost the market no less than €5 billion. Since the last quarter of 2009, our preliminary
analysis reveals 17 unique incidences of fraud that together represent almost
90% (89.9%) of publicly-known incidences of fraud since the end of phase one.
Contrary to predictions and proclamations: as the formal carbon market matures,
without proper oversight, criminal activity, corruption and ethical malfeasance
are on the rise.



Rising carbon market crime presents law enforcement, regulatory and analytical challenges for existing and emerging carbon trading initiatives, in Europe, the
US and other countries considering market-based climate solutions.



Carbon market corruption and crime has involved manipulating project additionality; forging certifications; falsifying documentation; misrepresenting the extent of
public participation; bribing public officials; obfuscating methodological
protocols; and producing greenhouse gases for the purpose of generating
lucrative offset credits. Whereas market malfeasance has seen abuse of power at
the project level, through questionable land grabs for example; and unethically
(yet permissible) carbon credit double-counting. These practices are not just
limited to countries across Africa, Asia and Latin America, where transparency
and corruption indices are worrisome and carbon market institutional
infrastructure is weak or non-existent. Disturbingly, the biggest frauds and
scams seem to be systematic to the core of the EU cap-and-trade system. This
reality is cause for grave concern, and may multiply the problems for
regulation, as architects of the ‘next largest carbon market’ –in the US--
borrow ideas and practices, from a system suffering from deep, intractable
crimes, corruption, unethical practices and malfeasance.



Most worrisome are allegations that some polluters have increased their greenhouse gas emissions solely to cash in on extremely lucrative offsets. Industrial
gases are the most notorious, but new research in Indonesia raises serious
questions about that country's recent high profile commitment to curtailing
deforestation.



As markets mature and malfeasance and fraud grow, corresponding regulatory infrastructure has not emerged—despite clear and urgent calls from many
sectors. Accordingly new market scams are flourishing. Most recently
market phishing scams, value-added tax (VAT) evasion, and carbon credit
recycling (which was
technically permitted) have cost markets and taxpayers
billions of dollars—even by conservative estimates.



The most damaging cases of fraud are those with direct environmental consequences, even though the highest profile arrests have involved fraud with little
environmental consequences. Project-level environmental fraud must receive
explicit regulatory attention. The rapid increase of fraudulent practices
indicates that these issues must be addressed in policy design and not be left
for later, and it is questionable whether the task can be left to the UN
process.



Risk in carbon markets has parallels with that faced by the financial system during the subprime mortgage crisis. Subprime lending based on derivatives exacerbated bad
faith lending practices, jeopardising the whole American financial system by
hiding questionable loans. Carbon reduction projects must in good faith
actually achieve real and additional reductions, yet even now some market
proponents lobby for weakened additionality procedures, and the evidence
already exists that markets sometimes produce perverse incentives at the
project level. Since an offset is used to justify emissions elsewhere, the
crime of every fudge, cheat and dirty trick is double.



Climate change is a diffuse long-term public interest problem which is especially worrisome for the world's most vulnerable groups. Yet carbon markets propose to
confront the problem through short-term private gain for quite a small group of
elite market participants. The risk of pervasive fraud in carbon markets is
continued and even accelerated accumulation of greenhouse gas emissions in the
atmosphere.



Interpol’s Environmental Crime Unit and related venues may offer spaces to foment rules to address seemingly broad, systemic problems in carbon markets. Such efforts may accommodate the needs and interests of
multiple stakeholder participants as some have advocated but ultimately must
achieve real emissions reductions. The inability to bring robust and adequate
governance structures around carbon markets will exacerbate injustice,
facilitate new problems of wealth disparity and may ultimately cause increases
in emissions.



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