Carbon Credit Watch

Who to blame? UN wants to make auditors of carbon credit projects liable for their work

(September 21, 2009) The UN’s new plan to help regulate the carbon market will make auditors liable for their work, writes Brady Yauch.

As the controversies surrounding the United Nations’ (UN) carbon credit scheme continue to mount, the agency is trying to pass the buck on liability for exaggerated carbon-reducing claims. The Executive Board—the body that overseas the UN’s international carbon credit scheme, the Clean Development Mechanism (CDM)—has tabled a proposal [PDF] to make the companies that verify carbon emissions liable for excess credits.

The plan, in essence, would allow the UN agency to shift responsibility to police the market away from itself and ultimately, help shield the agency from controversy.

According to reports, the UN’s proposal will require carbon credit authorizing auditors, known as Designated Operational Entities (DOEs), to buy back excess credits if they over-estimated carbon reductions for a particular project. Secondary buyers, according to the UN would not be held liable if they purchased carbon credits that were wrongly issued.

In the UN’s proposal [PDF] , DOEs would be held liable if they validate credit-earning projects using false or incomplete information that leads to excess number of credits being issued.

To enforce the new rules, the proposal says the UN will conduct regular surveillance, including on-site visits. If the UN finds serious flaws in the validation reports of a DOE, it also retains the right to suspend or revoke the DOE’s licence to review UN-approved carbon credit projects.

Unsurprisingly, the International Emissions Trading Association (IETA), which boasts the major auditors and many of the banks invested in the carbon market as its members, says the proposal would seriously damage the CDM.

In a letter obtained by Reuters, IETA said: “IETA is concerned that the risk to DOEs…is so great that it could lead to the decision to exit the CDM system.” IETA also said the proposal, which will impose liability for, “incorrectly applying a CDM rule or requirement,” is too ambiguous.

According to Reuters, IETA believes it is unfair to make auditors liable without evidence they have acted at fault and is concerned about situations where a project developer has misrepresented information.

But, says Patricia Adams, Executive Director of Probe International and watchdog of carbon markets, the role of the auditors is precisely to expose project developers who are misrepresenting their emissions reductions. If neither the auditors nor the UN are prepared to stand by their carbon reduction estimates, then why should the public have any confidence in buying them, she argues.

The UN says it is allowing auditors three weeks to study the proposal [PDF] .

The dispute comes after the UN said it is reviewing the issuance of new carbon credits for the destruction of HFC-23, a by-product in the manufacturing of the refrigerant gas HCFC-22. According to Bloomberg [PDF] , UN regulators have frozen new credits to plants emitting hydrofluorocarbons HFC-23 until it completes a comprehensive investigation to ensure the projects are not producing excess credits.

The move by the UN, and subsequent reaction by the auditing and emissions trading companies, shows the difficulty—and likely impossibility—of policing the global carbon market. Proving emission reductions has been controversial from the get-go.

The current set-up means the UN is the ultimate arbiter of projects in the developing world that are approved to receive carbon credits. As a result, it has become mired in a number of controversies regarding the environmental benefit or accuracy in measuring the emissions reductions of these projects.

Now, it plans to pass the buck to the auditors—who, for obvious reasons, are resisting.

Adams thinks that if the carbon credit market actors aren’t prepared to take responsibility for the quality of their product, this may be a sign that the “market” for carbon credits is imploding. “If the market participants can’t monitor and enforce standards for carbon credits,” she says, “then this may spell the end of the carbon credit market experiment.”

Brady Yauch, Probe International, September 21, 2009

Further Reading from Probe International:

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