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CFTC Targets Carbon Credit Fraud

Date Published
Aug 17, 2023

As recently as June 2023, the Commodity Futures Trading Commission announced an increased push for whistleblowers to report violations of the Commodity Exchange Act in the carbon futures market. Reporting carbon credit fraud to the CFTC is one powerful way to protect the planet, as well as your own interests as a whistleblower eligible for a possible reward.

Carbon Credits Explained

A carbon credit is a kind of futures commodity contract. One carbon credit, also called a carbon offset, is the equivalent of one ton of carbon dioxide or other greenhouse gas reduced or avoided from emission into the atmosphere. Theoretically, businesses may purchase carbon offset credits that allow them to emit carbon dioxide at certain regulated levels in exchange for the credit. This system effectively monetizes carbon emissions, putting a price tag on pollution.

How Do Carbon Credits Work?

Under the cap and trade program, businesses are doubly incentivized to lower their emissions levels. Releasing carbon dioxide into the atmosphere becomes costly for businesses, as they must pay for carbon offsets in order to continue to operate with existing infrastructure.

Additionally, leftover carbon credits become commodities that they can sell to other businesses, creating a profit motive to lower their own emissions even more. Businesses can also buy, sell, and trade investments in projects and technology with a negative carbon footprint, such as forestry initiatives, as part of the carbon credit market.

Carbon Allowance vs. Offset

Carbon offsets and carbon allowances are often referred to interchangeably in the futures market, but they represent different kinds of investments. A carbon allowance is essentially permission to pollute. Carbon allowances are regulated at certain levels, and they are able to be sold if unused by a company.

Meanwhile, carbon offset contracts are investments in projects that have a negative carbon impact on the environment. For instance, a carbon offset project might be existing forest preservation, the planting of new trees, or investments in wind or solar energies.

Both a carbon allowance and a carbon offset represent the same amount of one ton of carbon avoided or released into the atmosphere. For this reason, the sale and trade of either can help have a positive impact on the environment. The difference lies purely in the method of carbon reduction.

Who Issues Carbon Credits?

Many carbon credit offset investments are overseen and issued by independent bodies. Unfortunately, many of these companies have recently fallen under question for overpromising and under-delivering.

For instance, new research into Verra, a world leader in carbon offset certifications, finds that as many as 94% of their carbon credits may have no benefit to the environment at all. Their rainforest offset credits, one of their most popular certifications, have been especially called into question as possible “phantom credits” by peer-reviewed studies. Verra’s carbon offsets have been purchased by leading companies such as Disney, Salesforce, Gucci, Shell, and more. Verra is a market leader that has issued more than 1 billion in carbon credits, and approves nearly three quarters of all voluntary carbon offsets. The effects of possible carbon offset fraud from Verra are still being fully understood and investigated.

Carbon credit companies are not the only ones involved in the buying, selling, and trade of carbon offsets. Some states, such as the state of California, are actively involved in the issuing of carbon credits. Additionally, many governing and regulatory bodies such as the U.S. government, the United Kingdom, the European Union, and more may be involved in implementing carbon markets as part of the Paris Agreement. This international accord set targets to limit global heating to at most 2 degrees Celsius above pre-industrial levels.

How Much Is Carbon Credit Worth?

Carbon credit pricing, like all commodities’ value, varies based on market fluctuations and is subject to the forces of supply and demand. Estimates from The Taskforce on Scaling Voluntary Carbon Markets, sponsored by the Institute of International Finance and McKinsey, predict significant and steady growth in the carbon credit market.

Economic forecasts project that the carbon credit market may be worth more than $50 billion by 2030. Data from the New York Mercantile Exchange shows that Global Emissions Offset CBL futures were trading at $7.53 a ton on Jan. 25, 2022. Meanwhile, offset contracts expiring in July 2025 were at $8.89, and predicted to rise above $9 by late 2025, according to Bloomberg analysis.

Carbon Credit Certification Process

Carbon credits only work when the methodology in place to reduce or avoid emissions is legitimate. Otherwise, carbon offsets are valueless, and may even contribute to global heating by allowing companies more freedom to pollute. Like all financial schemes, there is incentive for bad actors to attempt to take advantage of the system by inflating claims or attempting to entice investors into empty scams. When they do so in the carbon credit market, everyone loses, not only investors. Carbon credit scams devalue a growing financial arena, mislead consumers about the ecological impact of their choices, and worsen the climate crisis.

Evaluation Criteria

Carbon certification standards are evaluated by third-party registries, but companies should do internal assessments and follow up on reports to ensure that carbon credits are doing what is promised.

There are six common evaluation criteria for understanding and assessing the legitimacy of carbon offsets:

  • Additionality: Would the project have been created regardless of the investment in carbon offsets? If so, it does not meet the standard of additionality. For instance, investing in alternative energy such as wind may be considered a carbon offset. However, if a wind farm was already set to be constructed regardless of a company’s investment, then the company should not claim the wind farm as an offset.
  • Overestimation: Overestimation is a very real risk in the carbon offset market, because projections are derived from calculating what would have happened, if not for the investment. Many REDD+ (Reduced Emissions from Deforestation and Forest Degradation in Developing Countries) credits are subject to overestimation because they may project too high rates of deforestation as a baseline. This leads to inflated rates of carbon credits being claimed, when in actuality the offset delivered was much smaller. Some of Verra’s REDD+ credits are thought to have been inflated in value by as much as 950%.
  • Permanence: A complete guarantee of permanence is impossible, but a timeframe for carbon dioxide sequestration is necessary for legitimacy. Reforestation efforts, for instance, should not be counted as carbon offsets if the amount of forest planted is set to be logged within a known timeframe. Additionally, natural disasters such as forest fires may release more carbon into the atmosphere, leading to reversals of investments.
  • Exclusivity: Once credits are purchased, they are considered retired. Otherwise, the reduction that they created can be double-counted by companies.
  • Leakage: Because carbon reduction is a global project, results worldwide must be taken into account when measuring carbon offset efficacy. If a project reduces carbon dioxide emissions in Brazil but results in increased strip mining and pollution in India, it is not a valid offset. On an even smaller level, if one area of forest is protected, but logging simply moves on to the next plot of land, no carbon offset can be claimed.
  • Social & environmental harm: Social and environmental harm can be difficult to quantify, but is necessary, as often carbon futures contracts involve investments in other regions or natural areas of the world. Projects must be sensitive to local cultures and customs. Doing so can make carbon offsets more competitive in the market by helping local economies as well as the environment. Failing to account for social effects, on the other hand, can cause more harm than good.

Carbon Registry

Over-crediting is a large concern in the carbon offset market today. In a study that examined nearly 300 active carbon offset projects, or approximately 11% of the existing market share, researchers report that baseline setting is one of the most concerning areas of fraud in the offset market.

The study in the journal Frontiers in Forests and Global Change gives an example of recently logged land being marketed aggressively to carbon project developers. Project developers can then report a low baseline carbon stocking due to the recent harvesting, but the project overestimates its benefits to investors, as the land would not have been so stripped back had it not been intentionally sold.

Are Carbon Offsets Legitimate?

Not all carbon offsets are scams, although a disconcerting amount are. Carbon offsets can be legitimate investments that offer financial as well as positive returns for the environment. However, when companies misrepresent their potential, sell phantom credits, double-count offsets or more, they take advantage of the public trust and undo the good that carbon offsets can create.

If you have concerns about the legitimacy of your carbon offset investment, hiring an expert in detecting and prosecuting commodities fraud can help. The team at Tycko & Zavareei LLP has years of experience in following up on whistleblower claims and protecting those who come forward. Blowing the whistle can help protect your company’s reputation, your own employment prospects, indigenous communities, as well as the greater ecological good. In addition, becoming a whistleblower may be able to earn you a portion of total recovery from a successful settlement, as well as prevent employer discrimination and retaliation.

Green Fraud: Defined

Environmental fraud covers many different kinds of behaviors that skirt regulations and cause harm to earth and its atmosphere. In doing so, green fraud also harms the people, plants, and animals who share the planet.

There are many ways to prosecute environmental fraud, but one often overlooked method is by using the full extent of existing regulatory statutes. Many federal and state statutes that protect investments and consumers can also be used to protect the environment. When scam artists misappropriate taxpayer funds, renege on government contracts, misrepresent green investments, or sell phantom futures contracts, they can be held accountable by a qui tam lawyer. Blowing the whistle via a law firm can disincentivize future scams, hold polluters accountable, recover lost and stolen money, and protect those who come forward against retaliation.

Are Carbon Credits Greenwashing?

Greenwashing is an all-too common marketing scam that allows companies to present themselves as more ecologically friendly than they really are. When carbon credits work as they are meant to, they are not greenwashing, because a company is investing genuine resources into reducing their carbon footprint.

However, carbon credit scams are one of the easiest ways for companies to greenwash their public image and mislead consumers. Many consumers and investors attempt to spend their money on products and services that take into account their overall environmental impact. Companies that utilize empty carbon credits, or claim that carbon credits are more effective than they really are, are taking advantage of consumers’ good intentions.

Is Net Zero Actually Possible?

Experts are divided as to whether “net zero” is a viable carbon emissions goal. Technically speaking, “net zero” refers to a company reducing the same amount of carbon as it expels into the atmosphere, thus making “zero” impact on the environment. Whether net zero is possible with current emissions levels though is doubtful. Many environmental scientists advocate instead for reducing overall emission levels, as opposed to seeking untested or unproven ways to try to offset current extraction and pollution levels. Critics even point to carbon offsets as encouraging a culture of continued pollution and waste, while intentionally misleading consumers into believing their money is making a difference.

Ultimately, carbon credits that are backed up by real data can be a helpful step on the road to reduce emissions. They incentivize companies to divest from fossil fuels by making them bear the cost of their emissions through their own business models, making releasing carbon more expensive over time. On their own, though, carbon offsets are no silver bullet to combat global heating and climate change.

Carbon Credits Fraud

Carbon credits fraud is reportable to the Commodity Futures Trading Commission (CFTC), a regulatory arm of the federal government. A whistleblower who brings credible, original information that helps aid in a case involving sanctions of at least $1 million can receive a percentage of the award as thanks for their honesty.

If you need help bringing your information to the attention of the CFTC, contact a whistleblower lawyer. You can report carbon credits fraud anonymously through a law firm and protect your claim to a possible reward. If information has been previously shared, however, it becomes ineligible for a reward. The following are some common methods by which carbon credits fraud occurs. If you have information about any of the following, speak to a commodities fraud lawyer at once.

Financial Misstatement

Investors have the right to know how their money is truly being spent, just as companies have the obligation to report their outcomes honestly. Financial misstatement is no more acceptable in the carbon credits market than it is in other commodity futures trading.

Overestimated Emission Reductions

Faulty estimation practices can lead to companies radically overpromising on their emissions reductions. Most often overestimation fraud is perpetrated by carbon credits certifiers who wrongfully calculate the good done by their futures contract. Other kinds of false statements may involve misrepresenting factors such as the quality, quantity, additionality, project type, methodology substantiating the emissions claim, environmental benefits, permanence or duration of the reduction, or the buffer pool.

Double Counting Carbon Credits

Once carbon credits are sold, they must be deregistered to avoid double counting. If a company sells a carbon credit after using it to meet its own emissions goals, it commits carbon credit fraud by double counting. The value of the credit has already been absorbed by its first use.

Ghost Credits Fraud

The sale and trade of ghost credits may be a means to an end, or they may be the extent of the carbon offsets scam themselves. Ghost credits, or illusory credits, can be sold to create the illusion of market activity, and to attempt to manipulate pricing. They may also be sold to investors without any real value attached. Ghost credits in the carbon offset market most often occur in the spot market, where immediate sales and purchases take place. They represent carbon offsets without any real reduction of emissions.

Manipulation of Tokenized Carbon Markets

Exchange of carbon offsets via new blockchain technologies can further muddy the waters, requiring an experienced commodities attorney to successfully investigate and prosecute a case. Each token on the tokenized carbon market represents a certain amount of carbon or other greenhouse gas reduction. However, deceptive practices may involve obscuring true outcomes, ignoring the ecological footprint of blockchain technology, and other dishonest practices to entice investors into scams.

“Wash Trading” and Other Deceptive Practices in Carbon Markets Futures Contracts

Wash trading, or the exchange of identical financial instruments, is only one method by which scam artists create the illusion of genuine market activity. Other similar violations include price manipulation schemes, pump and dump practices, and more.

Common Carbon Credit Schemes

Combating carbon credit schemes is possible. A dedicated carbon credit fraud attorney will have experience illustrating how false claims are made, and following up on your whistleblower disclosure with the full power of the law. Legitimate carbon offsets have the potential to offer an effective path forward towards reducing dangerous emissions in the atmosphere. Fighting for accurate information in the carbon credits market is vital in order for this economic tool to function as it was intended.

Airline Carbon Fraud

Buying carbon offsets for flights has become more popular, as research shows that passenger air travel is the highest and fastest source of individual greenhouse gas emissions. The EPA reports that US commercial airplane and large business jet activity accounts for 10% of total US transportation emissions, as well as 3% of the national total greenhouse gas production. For this reason, investing in airline carbon offsets seem appealing to many businesses and consumers, but the benefits they offer may be misleading.

A 2021 paper published by the University of Queensland and University of Surrey reported that at least 44% of airlines’ carbon offset claims are fraudulent. The study examined 37 different airlines’ communications on carbon offsets, and even found that some companies, namely Air Canada and Swiss Airlines, offered 100% misleading carbon credit programs. The CEO of United Airlines, Scott Kirby, lashed out at the airline industry’s greenwashing at a conference in July 2023, saying that most carbon offsets currently offered by airlines “are either forests that were never going to be cut down or trees that were going to be planted anyway.”

Airlines should be held accountable for this kind of widespread false marketing, as well as propagating fake investments in carbon offsets. If you have new information that can lead to a disclosure, you may be able to bring a claim under the CFTC Whistleblower Program or the False Claims Act.

Meat Industry Carbon Fraud

The meat industry accounts for close to a whopping 60% of greenhouse gas emissions from food production worldwide. This is more than double the entire amount of US emissions, and close to 35% of all global emissions, according to researchers. Because of its oversized footprint, the meat industry falls under close scrutiny when it comes to carbon offset programs.

In one recent example, JBS, the world’s biggest meat and food-processing company, was investigated by the SEC for the sale of $3.2 billion in “green bonds” to investors. Watchdog groups argue that the deforestation caused by its suppliers has already caused the company to renege on its carbon offset promise. If indicted, the Brazilian meat giant will be ordered to pay sanctions for misleading investors.

Fashion Industry Carbon Fraud

Fast fashion has come under fire in recent years for dangerous working conditions, false labeling, and enormous carbon emissions caused by production and shipping. Carbon-balanced shipping is one promise of carbon market investment, but without proper oversight, fashion companies may be able to cheat their way out of appropriate offsets.

Additionally, poor supply chain tracking often leads to clothing labeled “organic” or “sustainably sourced” not being the real thing. The Cotton Egypt Association estimates that approximately 90% of goods sold labeled “Egyptian cotton” were fake in 2016. Likewise, in 2020 the Global Organic Textile Standard admitted that around a sixth of India’s total production of cotton was wrongfully labeled as organic.

Consumers make a choice to invest in products that they believe will do the least harm to the environment. When companies miscertify their products, they mislead consumers as well as cause damage to the environment. If you are able to report on fashion industry carbon fraud, you may be able to correct supply chain inaccuracies that can have positive effects worldwide.

Carbon Credit Fraud Cases

The CFTC, Department of Justice, as well as state regulators have investigated carbon credit fraud cases over the years, and have indicated as recently as June 2023 that they are actively seeking more. Some recent carbon credit fraud cases include:

  • Delta: The popular airline has faced investigation as well as a class action suit in California over their promotion that they were “carbon neutral since 2020.” One of Delta’s largest carbon offset projects, payments made to the Los Cocos II Wind Farm in the Dominican Republic, were found to fail the additionality test, as the wind farm was already successfully operating with or without Delta’s investment.
  • Goldman Sachs: The SEC ordered Goldman Sachs Asset Management (GSAM) to pay a $4 million penalty after accusations emerged that it had misrepresented two of its mutual funds as well as marketed fraudulent ESG (Environmental, Social, and Governance) investments.
  • BNY Mellon Investment Adviser, Inc.: The SEC ordered the financial firm to pay $1.5 million as a penalty under allegations that its ESG investments had not undergone quality review, and that the company did not appropriately describe its carbon credits offerings to investors.
  • Carbon credits telemarketing scheme: In a case involving civil and criminal prosecution, Christopher Wright and Steven Hooper were sentenced to a collective 94 months in prison and ordered to pay over $30 million in restitution for a telemarketing carbon credits scheme inducing elderly victims into paying for fraudulent carbon offsets.

About the CFTC’s Whistleblower Program

Carbon credit regulation is the responsibility of the CFTC. The CFTC’s Whistleblower Program rewards honesty and protects whistleblowers. It penalizes companies that misrepresent their offerings, and can be used to enforce honesty and transparency in the carbon credits market. In cases that involve at least $1 million in sanctions, CFTC whistleblower rewards may be available.

Who Can Be a CFTC Whistleblower?

If you have previously undisclosed and unreported information about carbon credits fraud, you may be able to become a CFTC whistleblower. You may be an employee of the company committing fraud, a competitor in the field, or simply a third party with insider information. You do not have to work directly for the company that is perpetrating fraud in order to report on it. You also do not have to be a US citizen.

Why Report Carbon Credit Fraud

Reporting carbon credit fraud can earn you compensation for your information. Becoming a whistleblower can also ensure that there is legal protection to you available if your employer discriminates against you because of your disclosure. If you do not report your knowledge and your employer fires, demotes, harasses, passes over you for promotion, or otherwise retaliates against you because of what you know, you may not be able to take legal action to protect yourself. If you have blown the whistle, however, and any of these events occur, you may be able to sue for up to double back pay, front pay, reinstatement, legal fees, and more.

Finally, reporting carbon credit fraud holds businesses and individuals accountable for the destruction they cause. Carbon emissions contributing to climate change are currently the greatest existential threat facing all of us and the planet we call home. Falsely claiming to have a positive impact through carbon offsets distracts from the real work that needs to be done, while taking advantage of attempts to help address the crisis. It contributes to moral fatigue and burnout while allowing companies who cause environmental damage in the first place to profit doubly from it.

Get Help from Carbon Credit Fraud Lawyers

No one is above the law. Reporting carbon credit and carbon futures fraud through a CFTC whistleblower claim is one powerful way to hold companies accountable for the harm they cause. For a confidential case evaluation from our experts, contact the law firm of Tycko & Zavareei LLP.

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