Why businesses shouldn't let carbon fraud halt U.S. cap and trade

At first glance, all the news about fraud and fraud investigations in the EU carbon market might seem to give companies a good reason to oppose carbon trading. Last month’s Deutsche Bank raids and arrests -- part of European carbon-trading-fraud investigations -- came after six men already had been convicted of carbon-trading tax evasion through Deutsche Bank in 2011. In June, three others were jailed for carbon fraud in the United Kingdom. This recent spate caps a flurry of anti-carbon-fraud activity in 2009 and 2010, when European law enforcement raided hundreds of offices and arrested more than 100 suspected fraudsters. And the accusations and investigations continue.

But given the U.S. trends on climate regulation and the current political climate, it would be a mistake for industry to seize on the criminal activity as a reason to oppose consideration of a cap-and-trade approach. A closer examination shows that this criminal behavior either doesn’t have the potential to distort core cap-and-trade pricing or can be prevented from doing so. Moreover, in the current climate, cap and trade may well be Industry’s best bet for reducing the burden and cost of greenhouse-gas (GHG) regulations over the next four years.  

The results of the 2012 election guarantee that Congress will remain paralyzed and, consequently, that the president and his executive agencies -- including the Environmental Protection Agency, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission -- will remain firmly in control of U.S. Climate policy. Based on climate mentions in President Obama’s election night speech and his track record during the first term, companies can reasonably expect that the president will continue the drum beat of ever-increasingly complex and costly GHG regulations during his second term. 

Why fraud shouldn’t end carbon trading

Criminal activity in the EU carbon market falls into two basic categories:  1) run-of-the-mill criminal behavior found in any market setting and not unique to the carbon market and 2) schemes based on fraudulent misstatement of carbon emissions or projected carbon emission savings. The run-of-the-mill criminal behavior – sales-tax schemes and theft of carbon assets through Internet phishing schemes -- are asset-theft schemes that don’t impact the ability of the carbon market to set a price on carbon. While the defrauded parties certainly suffer injury, these schemes no more justify abandonment of a carbon market than did the Madoff Ponzi scheme justify the closing of the stock market.  

While the second broad category of criminal behavior, fraudulent emissions representations, could distort the carbon-market-pricing signal, this activity can be effectively addressed with current technology and traditional regulatory-enforcement tools. Cloud-based technology systems, some of which have been deployed for more than a decade (such as those provided by my company, Enviance), have dramatically enhanced every emitter’s ability to accurately and cost-effectively account for its GHG emissions, virtually in real-time. These systems are accessible via the Internet and don’t require the purchase of hardware or software. Moreover, they can be purchased on a subscription basis, allowing the company to purchase exactly the amount of computing needed to manage the challenge.

By using such systems to set a standard of accuracy, regulators could drive more accurate emissions tracking, achieve better compliance reporting and, most importantly, reduce the chance that false emissions data could distort pricing. These well-established cloud-based systems mainly function today as environmental-compliance-management systems. But in a cap-and-trade world, their ability to dramatically reduce fraudulent emissions representations also can provide a critical financial-reporting safeguard to protect the integrity of carbon pricing, which companies will use to formulate their carbon abatement strategies.

With the launch of the first carbon auction under California’s cap-and-trade program in November, the emergence of a federal cap-and-trade program and the need for systems that protect the carbon-pricing signal may not be far off. As the eighth-largest economy in the world and as home to one in nine Americans, California’s experience with cap and trade will shape -- and may ultimately decide -- the future of federal cap and trade. California collected $290 million dollars in the November auction and projects that billions will be raised over the next several years. If California succeeds in using the billions in projected carbon-auction funds to simultaneously reduce GHG while protecting the California economy, the nation will have a compelling model on which to base a market-based alternative to command-and-control GHG regulation. 

All of the signs -- including the seemingly inevitable, growing regulatory pressure on GHG, technology advancements in GHG-emissions tracking and the launch of California cap and trade -- suggest that our nation will seriously consider a national cap-and-trade program within the next four years. Companies should recognize that a cap and trade is likely to be Industry’s least-worst solution to the carbon-containment challenge. And because the criminal conduct in the EU carbon market is either irrelevant to the pricing signal in the carbon market or preventable, it shouldn’t be allowed to sabotage the market-based cap-and-trade approach to GHG.

Thief businessman photo by Minerva Studio via Shutterstock.