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Carbon Trading Plagued by Massive Fraud: Financial TImes

"The police, the fraud squad and trading standards need to be looking into this. Otherwise people will lose faith in it." -- Frances Sullivan, HBSC environment adviser.

Industry caught in carbon 'smokescreen'

Financial Times, April 25, 2007

By Fiona Harvey and Stephen Fidler

Companies and individuals rushing to go green have been spending millions on "carbon credit" projects that yield few if any environmental benefits.

A Financial Times investigation has uncovered widespread failings in the new markets for greenhouse gases, suggesting some organisations are paying for emissions reductions that do not take place.

Others are meanwhile making big profits from carbon trading for very small expenditure and in some cases for clean-ups that they would have made anyway.

The growing political salience of environmental politics has sparked a "green gold rush", which has seen a dramatic expansion in the number of businesses offering both companies and individuals the chance to go "carbon neutral", offsetting their own energy use by buying carbon credits that cancel out their contribution to global warming.

The burgeoning regulated market for carbon credits is expected to more than double in size to about $68.2bn by 2010, with the unregulated voluntary sector rising to $4bn in the same period.

The FT investigation found:

* Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

* Industrial companies profiting from doing very little or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

* Brokers providing services of questionable or no value.

* A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

* Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

Francis Sullivan, environment adviser at HSBC, the UK's biggest bank that went carbon-neutral in 2005, said he found "serious credibility concerns" in the offsetting market after evaluating it for several months.

"The police, the fraud squad and trading standards need to be looking into this. Otherwise people will lose faith in it," he said.

These concerns led the bank to ignore the market and fund its own carbon reduction projects directly.

Some companies are benefiting by asking "green" consumers to pay them for cleaning up their own pollution. For instance, DuPont, the chemicals company, invites consumers to pay $4 to eliminate a tonne of carbon dioxide from its plant in Kentucky that produces a potent greenhouse gas called HFC-23. But the equipment required to reduce such gases is relatively cheap. DuPont refused to comment and declined to specify its earnings from the project, saying it was at too early a stage to discuss.

The FT has also found examples of companies setting up as carbon offsetters without appearing to have a clear idea of how the markets operate. In response to FT inquiries about its sourcing of carbon credits, one company, carbonvoucher.com, said it had not taken payments for offsets.

Blue Source, a US offsetting company, invites consumers to offset carbon emissions by investing in enhanced oil recovery, which pumps carbon dioxide into depleted oil wells to bring up the remaining oil.

However, Blue Source said that because of the high price of oil, this process was often profitable in itself, meaning operators were making extra revenues from selling carbon credits for burying the carbon.

There is nothing illegal in these practices. However, some companies that are offsetting their emissions have avoided such projects because customers may find them controversial.

BP said it would not buy credits resulting from improvements in industrial efficiency or from most renewable energy projects in developed countries.

Additional reporting by Rebecca Bream

Beware the carbon offsetting cowboys

The Financial Times, April 26, 2007

By Fiona Harvey, Environment Correspondent

Deciding to go 'carbon neutral' in late 2004 was a pioneering step for HSBC. The bank's board agreed that it should become the first big company to cancel out all of its impact on the climate.

"It was a leap of faith," said Francis Sullivan, deputy head of group sustainable development at HSBC. "But we knew it was something we should do."

First, the bank would cut its greenhouse gas output, and then offset the rest by funding emissions reductions elsewhere, such as buying better cooking stoves for remote settlements in Africa.

Since then, many more companies have announced plans to go carbon neutral, such as BSkyB, News Corp, Marks & Spencer, PwC, Aviva and Barclays. Some, including British Airways, BP, Expedia and Land Rover, offer customers the chance to offset emissions spent in using their products.

Offsetting is a fundamental principle of the Kyoto protocol -- an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called "clean development mechanism". This awards such projects "carbon credits". The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (¬3.66-¬11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases -- such as nitrous oxide and methane -- are measured as equivalents of CO2 .

Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union's emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.

In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU's emissions trading scheme, and $3bn through the Kyoto mechanism.

The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.

Most companies going carbon-neutral use intermediaries to buy offsets on their behalf. But after evaluating the markets for some months, HSBC decided not to. Mr Sullivan said the bank concluded that intermediaries "do not all add very much value, they do not all do this at the minimal cost, and they are not all truly credible". He said: "The confusion in the market is still such that you have to do as much due diligence on these brokers as you do on the projects themselves."

Other companies, however, have found the use of intermediaries beneficial. BSkyB said it valued projects identified by the Carbon Neutral Company, one of the biggest intermediaries, which is also used by Barclays. The bank said it had a good relationship with it and Climate Care, another big offsetting specialist.

Businesses are advised to check the offsetting companies' credentials. One hedge fund manager, who asked not to be named, said he had been offered credits he did not trust because the intermediaries could show only a spreadsheet to prove their existence. "There are plenty of carbon cowboys out there, looking to make a quick buck," he said.

Some brokers have recognised customers' concerns by banding together to self-regulate. They have set industry benchmarks, such as the voluntary carbon standard, established by the International Emissions Trading Association, the Climate Group and the World Economic Forum, or the "gold standard", backed by several environmental charities.

Unlike the Kyoto and EU markets, the voluntary market is unregulated, with no legally binding standards, giving rise to several potential problems:

* The risk of fraud, such as sale of credits from carbon reduction projects that do not exist. It is often difficult for buyers and brokers to verify the existence and effectiveness of projects as many are in remote areas.

* Funding of carbon reductions that could have happened anyway. In the jargon, they would not be "additional". Under the Kyoto protocol, qualifying projects must be "additional" -- meaning, in most cases, that they would not be economically viable without carbon credits. The FT has, however, uncovered examples where carbon credits have merely provided another source of revenue to projects that would have happened anyway (see the story below).

* The risk of companies selling the same credits several times over. Under the Kyoto mechanism, carbon credits are tracked through the UN's International Transaction Log, which records every purchase or sale. When companies are buying credits for offset, the credits should be "retired" and not used again. But on the voluntary market, there is no central register, so unscrupulous companies could "double count" or sell the same credits more than once.

Bill Sneyd, director of operations at the Carbon Neutral Company, said his organisation tried to ensure that the credits it supplied from project owners were not also sold elsewhere. It employs KPMG to audit its carbon credit accounts. But he acknowledged a serious problem in the voluntary market: "There is the possibility for double counting at the project developer side. The project developer could sell carbon to us and to others."

He said a register of credits sold in the voluntary market was being set up that would meet similar standards to the UN's transaction log.

Although the carbon-offsets market is booming, BP has struggled to find enough emissions reduction projects to meet its quality standards, says Kerryn Schrank, programme director. BP launched its Target Neutral programme last August, inviting motorists to pay an average £20 ($40, ¬29) to offset their emissions from a years driving.

Barclays has also found a lack of projects meeting its criteria. Andrew Flett, head of environmental management at the bank, said: "Of the projects identified as meeting our criteria, there were only credits available for 40 per cent [of our needs]." As a result, the bank bought its other offsets via the Kyoto market.

Reduced operations could bring gains

Financial Times, April 26, 2007

By Fiona Harvey and Chris Bryant

A US company bought last year by a private equity group stands to make financial gains selling carbon credits that have resulted from reducing its operations.

The gains arise because the Freescale Semiconductor has exceeded targets for cutting carbon emissions, in part because it has closed plants. The gains raise questions about whether some voluntary carbon trading programmes are effective.

Freescale, along with companies such as Ford Motor and Stora Enso, are participants in the Chicago Climate Exchange, under which they undertake to reduce emissions by 6 per cent by 2010.

Since CCX began, Freescale, which was bought out last year by Blackstone, has cut greenhouse gas emissions at US sites by 45 per cent. "Of that 45 per cent reduction, about 30 per cent of it came from facilities closures, and 70 per cent ... from process improvements, efficiency gains, equipment optimisation," said the company, which planned to sell the credits later this year.

Ford said it had cut its emissions as measured by the CCX by 1m tonnes, resulting in potential credits that would fetch $3.5m. It said it had not sold any credits and had no immediate plans to. It has said the cuts were down to efficiencies rather than downsizing.

Some companies buying offsets have avoided industrial efficiency programmes for fear customers may disapprove. Kerryn Schrank, programme director of BP's TargetNeutral offsetting scheme, said she excluded such projects: "Industry has to be doing that for itself."

But Richard Sandor, chairman of the CCX, said: "Companies are incentivised to cut their emissions by more than the cap ... by making additional money from selling credits."

On the CCX, about 25 per cent of companies are buyers of credits and 75 per cent sellers. Hedge funds are big buyers, hedging against the risk of mandatory emissions cuts in the US.

Ms Schrank said one of BP's key criteria was "additionality". This is a Kyoto protocol principle requiring that projects registering to receive credits under the UN scheme prove their cuts would not be carried out under "business-as-usual". She said it was hard to prove industrial efficiency programmes were additional.

BP had ruled out most renewable energy projects in developed countries because it was difficult to prove they would not happen without the sale of credits, she said.

Terrapass in the US offers offsets in the form of renewable energy credit certificates from the Ainsworth wind facility in Nebraska. Dave Rich of Nebraska Public Power District, which runs Ainsworth, said the credits were not a factor in the decision to build the facility, indicating they just provided extra revenue.

But Tom Arnold, founder of Terrapass, said the company sold credits from projects that were economically viable but had a low rate of return to encourage more such projects.

DuPont has offered people the chance to offset emissions for $4 per carbon credit through the Natsource website. The cuts come from the destruction of HFC-23, a potent greenhouse gas, at its Kentucky factory.

Tony Juniper of Friends of the Earth said DuPont was charging people for what a responsible company ought to do anyway: "DuPont ought to be switching to renewables rather than trying to profit from greenwash." DuPont declined to comment or specify how much it raised through the sale of these credits as it was at too early a stage.

Offsetting business seen as "booming"

Financial Times, April 26, 2007

By Fiona Harvey

When Barclays decided to become carbon-neutral last year, Andrew Flett, the banks environmental manager, was surprised by the large number of small offsetting companies offering their services.

"It's a carbon gold rush," he says. "It's very easy to set yourself up as a carbon offset provider ... It's a booming industry."

Barclays decided to purchase its offsets through the Carbon Neutral Company and Climate Care, two of the biggest offsetting companies. Mr Flett said he wanted large offsetters with long records of successful projects.

New carbon offset companies are springing up on the internet almost daily. In a six-week investigation, the FT looked at more than 60 companies that have internet operations to buy and sell offset products.

The UK has the biggest crop but they stretch as far afield as the US, Australia, Switzerland and Hungary.

While some companies, such as the Carbon Neutral Company, have been around for several years, many are more recent. A large proportion have set up in the past few months.

Many have been set up by people with little experience in the carbon or financial trading markets but who have an interest in green issues.

For instance, Carbontrees.com, run by Ardent Environmental in Surrey, was set up recently by Stuart Wellman, a surveyor who spotted a gap in the market.

Coco2.org offers to make websites carbon-neutral. It was set up as an offshoot to a media planning consultancy. Henry Lewington, manager, told the FT he would buy emissions credits through Climate Care.

Direct Carbon Offsetting was set up by to encourage people to invest in micro renewables, such as mini wind turbines and solar panels. The company invites consumers to offset their carbon for £22.50 for 10kg of carbon offsetting. The money will be used to purchase micro renewables, which will then be distributed to the contributors to the site, said David Bailey, director. Mini wind turbines cost about £1,000 when government subsidies are included, and solar panels can cost about £3,000.

However, some companies with little experience of the market appear to be unfamiliar with some of the accepted processes.

For instance, many smaller companies do not have their emissions credits verified by an independent third party. Dan Luxton, manager of Carbonfreelife, a treeplanting project through which the Silverdell asbestos removal company is planting 6,000 trees in the UK , said the company did not use an independent verifier because clients just wanted to know they were aiding the environment by planting trees.

Producers and traders reap credits windfall

Financial Times, April 27, 2007

Fiona Harvey and Chris Bryant in London and John Aglionby in Jakarta

Chemicals companies and some carbon traders have been making big profits from the international trade in carbon - and a new wave of factories and traders are set to join them.

Projects to destroy a potent greenhouse gas known as HFC-23, a byproduct of the manufacture of refrigerants, make up the bulk of the carbon credits set to be issued under the Kyoto protocol.

However, funding HFC reductions through carbon credits has been found to be hugely inefficient. Michael Wara, formerly of Stanford University, published a study in the peer-review journal Nature showing ¬4.6bn ($6.3bn, £3.1bn) spent on carbon credits - by taxpayers in the rich world and companies seeking to offset emissions - would finance the installation of "scrubbers" at HFC plants costing a total ¬100m.

Companies can reap tens of millions of carbon credits because each tonne of HFC-23 is the equivalent of 11,700 tonnes of carbon dioxide.

The credits fetch up to ¬15 a tonne. But the supply of credits is drying up, as the United Nations - reacting to reports of big profits - has ruled that only HFC factories built before 2004 could qualify.

However, a Financial Time's investigation has uncovered a new wave of chemicals, fertiliser and explosives factories - and the brokers that trade in their credits - that are set to be the next big beneficiaries of the Kyoto protocol.

These companies produce gases known as nitrogen oxides (NOx), up to 310 times more powerful than carbon dioxide in their warming effect on the planet.

In 2005, hardly any NOx projects were registered under Kyoto. By September 2006, however, they ac-counted for about 11 per cent of the emissions credits set to be issued under the treaty's clean development mechanism.

This number is rising fast. The FT visited a company in Indonesia producing NOx that had at least four specialists vying to broker its credits. Multi Nitrotama Kimia, near Jakarta, chose Sindicatum over Mitsubishi, EcoSecurities and N.serve Environmental Services.

Hery Kusnanto, chief executive of MNK, said his motivation was environmental: "I didn't realise what impact nitrous oxide has on global warming until recently."

Rhodia, the French chemical company, said that 95 per cent of its emissions reductions had been achieved through NOx projects. It will have 11m-13m tonnes of carbon credits available to sell from this year until 2012, which Morgan Stanley estimated could be valued at up to ¬2.3bn. Philippe Rosier, president of Rhodia Energy, said the company had "several" more projects in the pipeline.

The profits from reducing NOx and trading the resulting carbon credits are less than those from HFC, partly because fewer credits are awarded per tonne of gas but also because more complex equipment is needed, which can make the plant as much as 10 per cent less efficient.

But the cost of the clean-up equipment has fallen. Yara International, a Norwegian company, said it could install equipment to cut NOx at nitric acid plants at a cost of between ¬1 and ¬5 per tonne of carbon dioxide reduction.

Mitchell Feierstein, head of emissions products at Cheyne Capital Management, said: "The US showed leadership years ago when it ruled NOx was a toxic pollutant that should be regulated. The rest of the world should follow by controlling these gases, not [creating] windfall profits."

Others argue that many governments lack the will, or ability, to regulate.

Liu Deshun, of Beijing's Tsinghua University, said without carbon trading "nobody in China would want . . . to destroy these emissions".

Additional reporting by Mure Dickie in Beijing

How to offset

* Analyse your carbon footprint: start with the electricity bills and include factors such as employee travel, equipment use and raw materials

* Reduce emissions first: offsetting should never be the first step in any carbon-neutral strategy. Instead, companies should seek to reduce their impact on the climate by wasting less energy and by examining their industrial processes

* Check the permits: if buying permits through the EU scheme, ensure they are from phase 2. In phase 1, from 2005 to 2007, there was a surplus of permits, which means buying and holding them may not result in emissions cuts

* Forestry: some studies question the benefits of tree-planting projects. For example, trees in temperate climates must grow to maturity, which can take 70 years, before they absorb their full quota of CO2, so buyers must be sure they will be safeguarded for that time

* Additionality: ask whether the emissions reductions would have happened anyway or whether the sale of carbon credits was essential to ensuring that the project took place

* Check the vintage: do the emissions reductions take place in the same year as the emissions you wish to offset?

* Verification: always ensure that projects are professionally verified

* Standards: check the emerging voluntary industry standards

* Registry: have your emissions credits entered in a registry to guard against double-counting

* Cost: carbon credits prices vary wildly. Expect to pay more for credits issued under the Kyoto protocol or for projects with added social benefits