Carbon credits offset emissions by planting trees, avoiding logging, or otherwise storing carbon, and have been hailed as a vital tool to fight the climate crisis and condemned as permission to pollute. Studies vary as to what percentage of carbon offsets do not live up to their climate claims, with some estimates ranging as high as ninety percent of rainforest carbon credits. In an industry where exaggeration and sales puffery are deeply rooted, much has been written about false claims in the carbon offset market. What is less well-known, however, is how fraudulent carbon offsets are not only a threat to the environment but also an emerging area of white collar crime.
The Commodity Futures Trading Commission (CFTC) previously issued a whistleblower alert for fraud and market manipulation in carbon credit markets, asking both market insiders and the public to report carbon credit crime. Although the CFTC has not historically regulated carbon credits, the agency has branched out, beginning enforcement against allegedly fraudulent carbon offsets. Although multiple agencies could potentially regulate fraudulent carbon credits, the CFTC is arguably among the best positioned to do so, and has historically been at the forefront of climate risk among U.S. regulators.
The CFTC whistleblower alert succinctly lays out several areas of white collar crime in carbon markets, including market manipulation – essentially, interfering with the market to artificially raise or lower the price of carbon credits – illusory or ghost credits, double counting, and fraud.
Fraud & Phantom Forests
The CFTC describes misrepresentation in carbon markets as “fraudulent statements relating to material terms of the carbon credit, including, but not limited to: quality, quantity, additionality, project type, methodology substantiating the emissions claim, environmental benefits, the permanence or duration, or the buffer pool.” Beginning with the buffer pool, this essentially serves as an insurance policy in case a forest fire or other unexpected disaster destroys part of a carbon credit project. Thus, lying about the size of the buffer pool could materially mislead investors. Similarly, additionality – whether a carbon credit project truly adds to emission reductions, or whether the benefits of a project would have happened anyway – is critical. Additionality can be a thorny calculus; if investors pay not to have a forest cut down, and the owner would have left the forest standing even without the money from carbon credits, emissions intended to be cancelled out by carbon credits were never truly offset. But determining whether a project is truly additional requires forecasting what will happen in the future, and what could have happened instead. Although this is not always possible, carbon credit projects that deliberately mislead investors about additionality – claiming a protected forest was about to be logged, for instance – could be committing fraud.
In addition to additionality, the methodology behind climate and environmental claims is key. Carbon credit projects that lie to investors about how they calculate emission reductions or make false claims related to biodiversity and social responsibility could also be committing commodities fraud. Furthermore, such fraud may raise rather than lower emissions. Given that CO2 emissions today may change the climate thousands of years into the future, carbon credit projects must be lasting to truly offset emissions. Airlines or other large commercial customers that claim fraudulent offsets cancel out atmospheric emissions create a social license to pollute, and a false belief in their customers that the emissions from their products are not contributing to climate change. Phantom forests – emission reductions that do not exist – actively make the climate crisis worse.
Timber Laundering
Beyond simply being misleading, carbon credit projects may also intersect with other organized crime. Similar to money laundering, timber laundering is a type of forestry crime in which illegally harvested wood is disguised as legally logged. Timber laundering takes many forms, including bribing officials for timber certifications, smuggling logs, or falsifying records to make it appear as though trees chopped down on protected land were part of a legal carbon credit scheme. In Brazil, carbon credit schemes were allegedly used to conceal illegal logging on protected land by falsely claiming illegal logs were harvested as part of a legal forest management plan.
Timber laundering may also overlap with other forestry crimes, like cattle laundering, or pretending that beef cattle grazed on illegally deforested land come from a legal supply chain. Given that over half of Amazonian deforestation is for cattle ranching, this is no small concern. Carbon credits can provide cover for a myriad of other illegal industries, driving deforestation while claiming to combat it.
Laundering logs from carbon credit projects could also be a form of fraud, as previously noted, by misleading investors regarding the climate benefits of the project. Rather than supporting sustainable timber, investors bankroll the clearing of protected land or, in some cases, violations of Indigenous sovereignty.
Indigenous Consultation
With proper consultation or under the authority of Indigenous nations, carbon credits can be transformative. As one example, California cap-and-trade revenue has empowered the Yurok to buy back more of their ancestral territory while helping meet climate goals. Yet, without responsible management, carbon credits can undermine rather than support tribal sovereignty. Carbon credit companies may also lie about the extent of Indigenous consultation. Survival International and other human rights organizations have long criticized carbon credits as land grabbing, creating new incentives to seize Indigenous land for profit. One community member in Kenya interviewed by Survival International described how “[t]hese people have sold our air” in response to a carbon credit project that was also found to be unlawful in court earlier this year.
In addition to violating land rights, misrepresenting the extent of Indigenous consultation can also be a form of fraud by misleading investors. For Meta and other large companies that factor in social responsibility, false statements regarding local cooperation or Indigenous consultation may materially influence the decision to buy carbon credits. For this reason, although this is an emerging area of law, commodities fraud claims or complaints to regulators like the CFTC may offer Indigenous nations a new avenue to challenge violations of their territory.
Does criticism of specific projects risk missing the forest for the trees? Although not all carbon credits are fraudulent, there are recurring problems across projects. More must be done to police the carbon credit market, but regulation by the CFTC and other agencies can be a meaningful step towards real climate contributions, not counterfeit credits. Ultimately, however, enforcement relies on consumers being able to spot possible red flags and knowing where to turn for justice. In the race to stop climate catastrophe, carbon credits remain a meaningful contribution, but should be better regulated to weed out fraud and be rooted in a robust human rights framework.