(August 19, 2013) Vulnerable because of its intangible nature, carbon credit trading has become a haven for a new and emerging type of crime says Interpol, the world’s largest international police organization.

By Patricia Adams and Lisa Peryman

For Probe International

According to a new law enforcement resource issued by Interpol to help authorities respond to an increase in carbon crime, the intangible nature of the global carbon trading market has placed it at risk to fraud and corruption. [See “The Interpol Guide to Carbon Trading Crime”].

What worries Interpol is the chimera of carbon trading, the world’s fastest growing commodities market, valued at US$176 billion in 2011.

Interpol quotes British journalist, Dan Welch, to make the point: “Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened.”

The problem, says Interpol, is that, “Unlike traditional commodities, which at some time during the course of their market exchange must be physically delivered to someone, carbon credits do not represent a physical commodity but instead have been described as a legal fiction that is poorly understood by many sellers, buyers and traders.”

Carbon markets were created under the Kyoto Protocol as a “cap-and-trade” system in which emitters of carbon must buy “carbon credits” from others with schemes to reduce greenhouse gas emissions.  Though saving planet Earth has proved elusive, criminal elements have meanwhile had a heyday exploiting carbon exchanges.

The problem, says Interpol, lies in the fact that:

Carbon as an intangible asset leads to a separation between ownership of the investment project and the rights to trade the emissions that are offset. This makes tracing the origin of carbon credits more difficult than for other credits derived from physical commodities. When trading across international jurisdictions, monitoring capacity is often diluted, making the illegal recycling, double-counting and sale of non-existent or stolen carbon credits much more viable.

Moreover, the world’s largest international police force says, “fraud may also be facilitated by government corruption that allows persons to register forged documents concerning ownership of carbon credits.”

Over-claiming for credits, sales of credits that do not exist, false claims relating to a project’s benefits, money laundering and online credit theft are areas Interpol says criminals are seeking to exploit. The organization also warns that even third party auditors, employed by schemes like the UN’s Clean Development Mechanism (CDM) to verify projects, may be susceptible to “bribes or collusion” to manipulate the results.

Interpol Secretary General Ronald Noble says his organization “will continue to fight the criminal networks which endanger our precious environmental resources and use their ill-gotten proceeds to fund other criminal activities.”

However, the vulnerabilities of the carbon market are bound to persist when the market is as intangible as the commodity it trades in. Interpol warns that strengthening regulation and monitoring of the carbon credit market “will not necessarily overcome criminal activity specific to the environment.”

Probe International has long stressed the carbon market itself is a fraud:

Unlike a real market where the commodity traded has inherent value, CO2 has none. The parties involved in trading carbon permits have no interest in the CO2 per se; the value lies in the permit. If no CO2 is actually offset, neither buyer nor seller would suffer a loss and the essential self-regulating nature of a market — in which sellers and buyers discipline each other to trade a product with real value — is missing. Because this faux market has created many mechanisms for misrepresentation, fraudsters have invaded it, and buyers and sellers are able to exploit their mutual interest in collusion and kickbacks. (See Cap and trade is just another variant of the ‘command and control’ approach, by Patricia Adams, February 6, 2011.)

Further Reading:

Enviro-villains target carbon credit schemes

‘Intangible’ carbon markets are ripe for crime – INTERPOL

Interpol targets criminals who subvert carbon markets

Interpol warns of criminal focus on $176 billion carbon market

ETS still vulnerable to fraud – report

The next big scam: carbon dioxide