Carbon Trading Complexity Putting Strains on Market Reputation

A series of criminal investigations and auditor suspensions in carbon trading markets threaten to give the process of trading pollution credits the same bad reputation as “collateral debt obligations” and other arcane financial instruments that helped trigger the Great Recession.

The problems also highlight a lack of personnel qualified to do the complex work of auditing carbon trading schemes effectively. A similar lack of understanding of various financial instruments is generally agreed to have contributed to the ’08 meltdown.

Who understands this stuff?

German carbon auditor TUEV SUED and Korea Energy Management Corporation (KEMCO) were both suspended last week (KEMCO’s was a partial suspension) by the Executive Board of the Clean Development Mechanism (CDM), the main overseeing body for carbon credit trading activity.

The Executive Board’s decisions specifically mentioned a lack of adequate training for personnel responsible for auditing carbon credit schemes.

Both firms are known as DOEs, or “designated operating entities.” From the Board’s report on TUEV SUED:

The Board agreed that three (3) months working experience in a technical area within a sectoral scope did not ensure confidence in the competence of the DOE personnel to undertake CDM related work as per the CDM accreditation standard

And on KEMCO:

The DOE had not demonstrated its compliance with the accreditation standard requirements regarding the qualification of personnel.

Tim Stumhofer, Program Associate at the Greenhouse Gas Management Institute, an organization that trains greenhouse gas accountants, said the suspensions go to the heart of what the institute believes the field desperately needs: an international accreditation process for the people dealing with greenhouse gas accounting.

“The underpinning issue here is you have a new market but you don’t have a systemic training program,” Stumhofer said. “You’re training people from the ground up in an emerging field.”

Complex financial instruments — to save the planet

In a carbon trade, one entity sells the ability to emit a certain amount of CO2 to another on an open market. That right to pollute could come from reductions in emissions at a factory, or from carbon captured by a forest.

But the trades are often complex. One recent deal involved the donation of 30 million compact florescent light bulbs from an Australian consulting firm to state governments in Mexico to hand out to households there. The Australian firm then acquires carbon-reduction credits from the energy efficiency improvements in Mexico when those bulbs are put to use.

Firms like TUEV SUED come in and audit such deals to make sure the carbon reductions claimed actually occurred. Needless to say, it’s no simple matter.

A sign of strength?

Stumhofer said the Executive Board’s moves, which includes the suspension of two other firms in 2009 and 2008, are actually a sign of the health of carbon markets, at least outside the US.

“We view the DOE suspensions as a plus. Yes, it slows down the market, it’s a clunky mechanism,” he said, but the frequent suspensions “actually show the market is maturing and functioning.”

Stumhofer pointed out that if there was an accreditation process on an individual level, whole firms would not have to be suspended because of the incompetence of a couple of employees.

In the States, Stumhofer admits the suspensions and other issues, including alleged Mafia involvement in one carbon-trading racket, create a “branding” problem for cap-and-trade here.

“For opponents of cap-and-trade it happens to be convenient that the markets are under fire,” he said. But “once you compare it to the alternatives it is the only way forward.”

BC (Ben) Upham is a freelance writer based in Los Angeles. He has written for the New York Times, and was a writer and editor for News Communications, Inc., a local paper consortium serving Manhattan. When he's not blogging on green issues -- and especially renewable energy -- he's hiking in the Angeles Mountains or hanging out at El Matador.