Carbon Credit Watch

Carbon credit fraud makes its way to Liberia

(June 23, 2010) A British company is alleged to have bribed Liberian officials in a carbon credit deal, writes Brady Yauch.

A recent case involving an alleged bribe to Liberian officials by a UK-based carbon trading company is highlighting how prone global carbon markets are to corruption and fraud. According to a report in the Financial Times, City of London police are investigating UK-based Carbon Harvesting Corporation for an alleged plan to pay Liberian officials $2.5-million for land concessions that the company hoped would reap more than $2-billion in carbon credits.

The Financial Times reports that the City police have arrested Mike Foster, director of Carbon Harvesting Corporation, after receiving information that his company paid or proposed to pay a bribe to a Liberian government official.

According to Global Witness, the group responsible for alerting authorities, under the agreement, Carbon Harvesting Corporation would pay a yearly rental fee for a 400,000 hectare concession of forest—a fifth of the country’s rainforest. The company hoped it would sell carbon credits—in effect, generated by the forest—worth $2.2 billion to companies covered by the European Union’s carbon dioxide emissions cap.

Global Witness isn’t able to comment further while the investigation is going on.

The case highlights the difficulties and opportunities for fraud in awarding carbon credits for forestry projects. The United Nations, for example, has not approved forestry projects under its carbon credit program—the Clean Development Mechanism (CDM)—because of concerns that forests are too remote and forestry offset projects are too difficult to govern. To date, carbon credits earned from forestry projects are not used in Europe’s legally-binding carbon market. They are, however, sold in voluntary markets across the globe.

This latest story comes after a group of researchers recently warned that awarding carbon credits for forestry projects would take forest use, management, and ownership, away from citizens in the developing world who depend on the forests for their health and livelihoods. According to the researchers Jacob Phelps, Edward L. Webb and Arun Agrawal from the National University of Singapore and the University of Michigan, over the past 25 years, central governments have been devolving rights and responsibilities over forests to local parties in recognition that it was a cheaper and more effective way to conserve, use, and manage forests.

But that decentralization process could be stopped dead in its tracks if the UN implements the “Reducing Emission from Deforestation and Forest Degradation” (known as REDD+) program. The plan is designed to give developed country CO2 “polluters” opportunities to “sequester” carbon in developing countries by paying governments to capture carbon in their trees, which is what Mike Foster of Carbon Harvesting Corporation was attempting to do in Liberia. Governments are suddenly seeing their forests as cash cows and are reclaiming control over them in order to sell them as carbon sinks.

Forest carbon credit projects aren’t uniquely prone to corruption and fraud in emerging carbon markets. The carbon market as a whole, according to Deloitte Forensic is, “the white collar crime of the future.” Kroll, a business risk subsidiary of Marsh & McLennan, the global professional services firm, calls carbon markets “a fraudster’s dream come true.”

Update 1:

According to this report [PDF] , the deal could have, “bankrupted the impoverished West African state, according to a former government adviser.”

Under the deal, if Liberian forests failed to produce the full number of estimated carbon credits—based on a minimum target price of $13.5 per tonne of CO2—it would have liable to make up the difference to a maximum of $2.2-billion. According to the IMF, Liberia had an estimated GDP last year of $1.6-billion.

Update 2 (October 13, 2010):

According to a report from Liberia, several senior officials of the Liberian government are being held liable and will be reprimanded for their connection to the controversial deal.

Brady Yauch, Probe International, June 23, 2010

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