But the intangible quality of carbon credits dramatically simplified the process. The criminals no longer had to fake transactions by shipping empty containers or forging documents. “Just by sitting and selling goods behind your desk, on your computer, you would suddenly have these … transactions which would allow you to sell goods without VAT across a border and then sell goods with VAT in your own country. And nobody was there to verify it.”
After the BlueNext exchange investigation, authorities concluded that “up to 90% of all carbon trading in some countries was a result of these fraudulent activities. This fraud was estimated to have resulted in losses to several governments of around 5 billion euros in just over 18 months,” according to the Interpol report. The fraud also destroyed market confidence, further compounding the economic loss. According to Perryman, organized criminal syndicates have used the cash they earned from this type of carbon trading to fund other illicit activities in Europe, including cigarette smuggling, drug smuggling, and human trafficking. France and other European countries have since changed their trading rules to remove VAT from carbon transactions.
But VAT was only one of many financial scams.
According to Interpol, the lack of cross-checking or regulations between different international markets and exchanges has also allowed carbon credits from emissions reductions projects to be used on the same market to offset emissions more than once, eliminating the net environmental benefit the credits are supposed to provide.
"We know they traveled the world. Traveled business class. They had nice cars. Jaguars. Porsches. Nice clothes. Rolex watches.”
Additionally, hackers have also compromised weak computer security systems to steal credits. In January 2011, Europol and Interpol thwarted an attempt by Romanian web bandits to sell $38.5 million worth of stolen carbon credits to buyers in the United Kingdom, Austria, and the Netherlands, according to the Wall Street Journal. They had hijacked foreign servers, “using them as robots to penetrate trading systems’ security and accessing member accounts through corporate systems that weren't well guarded.”
In another case, hackers broke into the Czech Republic’s electronic carbon registry, run by the state-owned energy firm OTE. A bomb threat was called into the OTE’s Prague offices as the criminals offloaded the stolen credits, $37.7 million worth, to foreign accounts on registries in Estonia and elsewhere. “Police speculate that the bomb scare provided a diversion so that employees wouldn't see phantom cursors moving across unattended screens or other telltale signs of a breach,” according to Ecosytem Marketplace’s report.
Hackers have also set up fake carbon registry websites that have successfully lured companies and brokers to provide their account login details, according to Interpol’s Stewart. This technique, known as “phishing,” poses an ongoing risk as new registries are established with unfamiliar requirements in emerging markets. “It becomes easier, particularly when you’ve got new investors investing, and markets are new, for people not to really realize that the website that looks legitimate and has the nice logos on it is not actually a legitimate one,” he said. “Because the registries and the websites don’t yet have enough of a broad reputation.”
Since the EU has introduced new VAT rules and a single unified registry, much of the fraud has been eliminated from Europe’s market. But Perryman is still monitoring the system for high-value money laundering. Because millions of credits can be traded in one transaction, they can serve as an easy front for concealing the movement of illicit cash earned from other criminal activities.
Assuming the credits are real, the financial schemes merely result in economic losses. But manipulations also occur on the project side, as well, and that type of fraud can undermine the very emissions savings and environmental good that companies and investors are supposedly paying for. The value of the credits can be superficially inflated, or entirely invented, as Nilsson’s case illustrates. Even when developers are required to hire outside auditors to verify the emissions reductions, some of the projects are still not doing what they advertise.
Carbon cowboys can flourish quite easily because the product they sell is “an abstract commodity of nothing happening.”
In an ideal world, developers set up efficiency projects that demonstrate clear reductions in emissions. Auditors review project claims, visit the site, verify they are real, and approve them under the UN’s Clean Development Mechanism as Ceritified Emissions Reductions (CERs). Once they are approved and registered with the United Nations Framework on Climate Change, they can be traded over the compliance markets to offset the pollution of large emitters and meet legally mandated caps. In the case of forest projects, auditors are measuring something that's much more difficult to quantify. Instead of determining that a factory is no longer producing a toxic spew, auditors must evaluate whether the project is adequately protecting an at-risk forest, measure how much carbon is exactly stored within it, and then certify the emissions savings under the Verified Carbon Standard*. That way, investors can buy offsets knowing the claims have been reviewed.
But the margin of error for determining the environmental benefits of such projects varies widely. It lies somewhere between 10 percent for cement and fertilizer projects and 100 percent for agriculture-oriented projects, according to a 2010 piece in Harper’s. Reporter Mark Schapiro also detailed the cozy relationships and revolving doors that two prominent auditors–which have verified roughly two thirds of the UN-approved emissions savings–share with carbon project developers, who provide payments to the companies that are charged with guaranteeing the veracity of their projects.