UNEP: Corruption Threatens Carbon Trade

Corruption has become a serious threat to the sustainability of climate control mechanisms, especially cap-and-trade systems, according to the latest bulletin from the United Nations Environmental Program (UNEP).

Corruption limits the overall reliability and effectiveness of environmental programs, the bulletin read, as “actors prioritize private benefits at the expense of socially optimal outcomes.”

While high levels of corruption can be linked to increased deforestation, air pollution, reduced water access, and damage to biodiversity, emissions trade schemes such as cap-and-trade systems seem particularly vulnerable to exploitation.

Cap-and-trade systems are one proposed method to limit greenhouse gas emissions. Under such plans, limits, or caps, are placed on annual greenhouse emissions. Each entity, be it a nation or a company, is given an emission limit. If an entity goes over that limit, it must either buy carbon credits from others who have stayed below their limit, or pay a fine. In theory, this scheme rewards those who stay below the greenhouse gas emission limit. In practice, it is a system rife with corruption.

The European Union, which boasts the largest cap-and-trade system in the world, has been repeatedly damaged by corruption, which has included the re-sale and misreporting of used carbon offsets, and “sophisticated computer hacking” which led to thefts from national carbon emission registries. While both can be purchased and traded, carbon offsets are different than carbon credits in that offsets represent tangible projects ranging from forestry and land use change, whereas credits are similar to a currency, each credit worth a set amount of carbon emission. An entity can therefore obtain carbon credits in exchange for funding an offset program, as well as buy them on the open market. 

But the biggest threat is value-added tax fraud. In 2010, authorities uncovered VAT fraud in carbon trading which amounted to an estimated $6.45 billion in losses. In this form of VAT fraud, known as carousel fraud, the carbon credit trader sells the carbon credit to a buyer, charges a VAT, and then keeps the taxes meant for the government. The trader then quickly disappears. Rampant carousel fraud led to a restructuring of the carbon trade system’s tax structure, but not before a deflation of 90 percent in the carbon market caused a temporary cessation of carbon trade, the UNEP bulletin said.

As regional climate control frameworks such as Europe’s carbon trading system, and the global Reducing Emissions from Deforestation and Forest Degradation (REDD+) initiative become more popular, the success of climate control will depend heavily on the ability of these systems to effectively limit and counter corruption.

Public trust in the ability of these institutions to counter climate change could be seriously hampered by continued corruption, the agency said, noting that climate control discussions occur “against the backdrop of a protracted global financial crisis,” which means that every dollar lost to corruption has a greater impact.