Carbon Trading Market Fraud

Back To  COMMODITIES FRAUDS

What is carbon trading?

The carbon credit trading market is designed to fight climate change by creating economic incentives for companies to reduce their carbon footprint. However, like other financial markets, this market is not immune to fraud. Carbon market trading fraud undermines the integrity of the trading system and the overall objective of reducing carbon emissions.

For carbon, there are two kinds of trading systems: (1) government-mandated systems, also known as compliance markets, and (2) voluntary carbon markets.

In compliance markets, a central authority allocates or sells a limited number of emissions permits that allows polluters to discharge a specific quantity of emissions over a set time. These emissions permits, or credits, represent a set quantity of emissions that are released into the environment. One carbon credit represents one metric tonne of carbon dioxide or its equivalent (CO2 or CO2e).

In compliance markets, polluters are required to hold permits equivalent to their emissions. They may also purchase permits from other companies to ensure they are compliant. In addition, the system may also allow polluters to generate offsets by removing emissions from the atmosphere, and to buy and sell these offsets. This market is called a cap-and-trade system. There are several compliance carbon markets, including the international program established by the Kyoto Protocol and the EU, Australia, British Columbia, and New Zealand emissions trading systems. While the US does not have a nation-wide carbon cap-and-trade system, California has one that is linked to the systems in Quebec and Ontario.

In addition to these compliance carbon markets, there are also voluntary carbon markets where companies can choose to buy carbon credits to offset their carbon emissions. Because these voluntary markets aren’t regulated by regulatory bodies, standards companies play an important role in vetting carbon offsets markets. Voluntary carbon markets currently represent less than 1% of pledged emissions reductions but they are growing significantly: voluntary carbon emissions and retirements of offsets more than tripled between 2017 and 2021.

There are several exchanges that trade in carbon credits and offsets for both the spot and futures markets, including the Chicago Mercantile Exchange, CTX Global, the European Energy Exchange, Global Carbon Credit Exchange gCCEx, Intercontinental Exchange, MexiCO2, NASDAQ OMX Commodities Europe, and Xpansiv.

What kinds of carbon trading market frauds can whistleblowers report?

While carbon trading market fraud can take various forms, common types of fraud include:

  1. Phantom Credits or Double Counting: This occurs when companies or individuals sell carbon credits that do not exist (“phantom credits”) or count a single carbon credit multiple times, either within the same market or across different markets (“double counting”). These schemes inflate the number of available carbon credits without actually reducing emissions.
  2. Fraudulent Projects and Data Manipulation: Companies may sell offsets based on projects claiming to reduce carbon emissions, such as reforestation or renewable energy initiatives, that either don’t exist or are greatly exaggerated. For example, entities may manipulate emissions data to qualify for more carbon credits than they are genuinely entitled to. This can involve falsifying emissions reports or tampering with monitoring equipment to underreport actual emissions.
  3. Market Manipulation: Fraudsters may engage in market manipulation practices, such as insider trading or price fixing, to artificially inflate or deflate the value of carbon credits for financial gain.

How can whistleblowers stop carbon trading market fraud?

In October 2024, the CFTC took its first enforcement action against fraud in the voluntary carbon credit market. The agency charged a carbon credit project developer and two executives with allegedly misrepresenting emissions reductions to secure unearned carbon credits. Whistleblowers play a crucial role in exposing frauds like this, helping ensure these markets operate with transparency and integrity. Some may be eligible to report such misconduct through the CFTC or SEC whistleblower award programs. If you're considering reporting, experienced counsel can guide you through the next steps. If you would like more information or would like to speak to an attorney at Whistleblower Partners, please contact us for a confidential consultation.

These descriptions of carbon trading market frauds are general in nature and do not constitute legal advice. Commodities violations are complex and ever-evolving. The attorneys at Whistleblower Partners understand the complicated, constantly changing legal landscape and are happy to discuss any potential matter further.

If you would like more information or would like to speak to an attorney at Whistleblower Partners, please contact us for a confidential consultation.