Deep dive: Carbon credit fraud
A reflective look at two cases of carbon credit fraud in international carbon markets in 2024 and how this affects Southeast Asia in 2025
Today’s deep dive is into carbon credit fraud.
These few weeks, I was made aware of a new case of carbon credit fraud investigated by Deutsche Welle and ZDF, two major German media companies. More information here
This comes just two months after the high-profile indictment of Kenneth Newcombe, who faces 80 years behind bars for his complicity in carbon credit fraud related to solar cookstoves. (More information here)
In this new fiasco, Beijing Karbon, a Chinese firm, is suspected of being the mastermind behind carbon credit deals reaching a billion euros in value for many projects that were discovered by DW journalists to be fraudulent, as the buildings were built before the projects start instead of only after project approval was granted and key buildings like the headquarters of a local partner firm were missing when journalists tried to visit it. Many of the carbon credit projects in China are also in Xinjiang, in the deep northwest of China, which is difficult to access even for Chinese nationals due to sensitive security concerns. In general, data that is auditable, accurate, and high-fidelity is not easy to come by for projects situated in China, which makes it difficult to benchmark carbon outcomes or audit actual performance. (For example, forest growth and degradation usually requires satellite imagery to keep records of changes year-on-year, but this is hard to come by for Chinese projects.) The professionalism and persuasiveness of the paperwork for the carbon credit projects that were approved by the German authorities hints to potential collusion from major environmental auditing companies in Germany. This is all now under investigation by Dirk Messner, head of the Federal Environmental Agency in Germany.
What constitutes carbon credit fraud and what can be done to combat it?
In the case of Beijing Karbon, the funding was earmarked for new projects only and was not supposed to be able to cover projects that had already started operations. Also, carbon capture was supposed to reduce emissions to the order of thousands of tonnes per year, as opposed to flaring or being released into the atmosphere, which would increase global warming rates much more sharply.
Given that Singapore is setting up FAST-P, a US$500 million fund to speed up decarbonisation rates in the region, there will be many more carbon market transactions that will take place. It is thus of mounting importance that major market players can guard against fraud. More about FAST-P here
I will be addressing three questions that my readers may have when looking at this incident of carbon credit fraud in Germany and China. Contributions by a contact working in the carbon markets ecosystem will be italicised. They agreed to speak, under Chatham House rules, about the challenges that must be addressed to build trust and confidence in carbon markets as a climate solution.
What is a carbon credit?
Carbon credits refer to tradable certificates indicating the equivalent of one tonne of warming impact calibrated to the warming impact of one tonne of carbon dioxide has been avoided or removed from the atmosphere for a meaningfully material period of time. These gases may include an admixture of methane or nitrous oxides, rather than being purely consisting of one tonne of carbon dioxide. They can be used to back voluntary claims or to fulfil obligatory emissions targets. Some of these credits are traded as compensation for the emissions of an organisation, and are thus used as offsets. They can be bought and sold in carbon markets, and are used to reduce net emissions in situations where actual reduction of emissions can be difficult to pull off (e.g. planes in aviation industries inevitably emit gases that contribute to global warming).
How might we anticipate carbon markets will respond to the dual cases of Newcombe’s indictment and this new case of Beijing Karbon’s fraud?
A lot more due diligence will be demanded in future from investors who, as of now, may not be savvy enough yet to tell apart a bogus carbon credit from a high-integrity carbon credit. Given how high-profile Newcombe was when the solar cookstove scandal broke, it is possible that more checks and balances in terms of institutions and overseeing bodies will need to come into existence to balance out the fraudsters. The good side of the fallout from these two fraud cases is that carbon market players will become more sophisticated in their rigour in the process of verifying the integrity level of a carbon credit, especially when it concerns cross-border emissions like in the case of Beijing Karbon. Scientific knowledge that changes the basic assumptions embedded into predictive models of emissions has also increased the attractiveness of some types of forests because of their high potential to store carbon, for example in the miombo woodlands in Mozambique.
Carbon markets are no stranger to fraud but Newcombe’s case in particular stood out also because Newcombe was on the board of Verra, which is the leading registry in the voluntary carbon market. The Beijing Karbon scandal adds another case study to why many major global parties are leery about investing in China, as the scale of the projects and investments can be great, and there are risks that can occur and go unnoticed until it’s too late. This is caused by the missing physical or data access needed to do due diligence on the project level rather than at the level of nation-states or project methodology, or according to accreditations.
The shift towards increasing demand for integrity from stakeholders will mean more complexity for the market, which increases friction, which is not ideal because capital will be hindered in flowing towards the most impactful climate solutions. There will also be a proliferation of compliance schemes in addition to working at project levels.
The way that buyers suss out high-integrity projects is likely to become more sophisticated over time, in both being able to discern between compliance eligibility (e.g. qualifying for CORSIA, the Carbon Offsetting and Reduction Scheme for International Aviation) and project-level assessments, which have more granular resolution. Other signifiers of due diligence such as ratings by third party ratings agencies or developer track records will become more widely used as proxies for quality. In addition to CORSIA, there is also Article 6 for which trading is still in their infancy, with each country having different criteria for assessing eligible projects. More on Singapore’s criteria here
Carbon markets in Southeast Asia, until the last few years, have been dominated by Japanese investment in the Joint Crediting Mechanism (JCM), which has been present in Asia and Africa. Yet, there will be a lot more money invested in carbon credits in the short run. Furthermore, the linguistic diversity of Southeast Asia also makes it harder for auditing companies to go on the ground and find out what’s going on in the project sites that have been approved. How can we as citizens and consumers guard against being deceived by carbon credit fraud?
It is difficult to estimate the effect of financial incentives counterbalanced by quality initiatives and global trends towards more regulation. As Southeast Asia looks to unlock the potential of carbon credits, it will be critical to avoid the mistakes in other markets and the past, to crack down on offset fraud. This is not just in service of market confidence and liquidity, but also to ensure that the benefits to the environment and communities will be realised.
The money going into carbon credits will not only come from private enterprise, but governments as well. There are many nations keen on raising funds for their own climate transitions (host centres) as well as those interested in unlocking carbon trading as a way to reach their nationally determined contribution targets (buyer centres, such as Singapore).
Going beyond CORSIA eligibility to look at data from individual projects will be a stronger guarantor of quality in time to come. For citizens and consumers, I would recommend looking beyond broad labels to recognise that not all labelled projects are equal, not all project types are equal, and not all projects within a project type are equal. For example, soil organic carbon projects have been recently proven to be tricky to rely on for carbon removal, as per recent breakthroughs in soil science – humus, which was thought to store carbon deep underground for a long time, turns out to be easily broken down by microbes in the soil. Cookstoves leading to avoided emissions are also quite hard to measure as there have been projects where old (more polluting) and new cookstoves become used simultaneously instead of old cook stoves being retired from use. Engineered solutions are easier to quantify, as well as nature based solutions that can be measured more accurately using newer techniques.
In other words, it’s important to not take things at face value. Ask more about the basis on which projects have been selected when looking at purchasing potential credits. For corporate and national buyers, speak to independent third party agencies and do your homework on how they make their money – they should not be going through conflicts of interest, e.g. getting paid by developers to rate their projects. Learn what to look out and ask for, for different countries and project types. For example, detailed financial documentation can help establish additionality, clear rules and processes to engage local communities can help avoid local dispossession and disenfranchisement (see how this has not gone well in southwest Cambodia). Also, policies by governments can have strong impacts on the viability of carbon credit projects. In Borneo in Indonesia, this has most recently manifested in Rimba Raya, a reserve the size of Las Vegas, which had its permit cancelled by the Indonesian government. Finally, it’s important to think about how to protect your own reputation and investment in the event that a project runs into controversies or under-delivers.
Do you have a topic that you’d like covered on this newsletter? Contact me at asiya@posteo.sg to pitch an interview topic or article idea and we can get in touch!