Negotiators from 12 government members (“Parties”) of the United Nations Framework Convention on Climate Change (UNFCCC) meet Oct. 5-9 to try to agree on the terms of several texts required for Parties to begin selling greenhouse gas emissions reduction credits to “Non-Parties,” mostly private investors. This is the last scheduled meeting of these negotiators (termed the “Article 6.4 Supervisory Body” or A6.4 SB) before the 29th Conference of the Parties (COP29), Nov. 11-22 in Baku, Azerbaijan.
Among the texts the A6.4 SB will negotiate is the Sustainable Development Tool (SD Tool), which sets the terms for emissions reduction project developers to show how they will protect the environment and the people living within the project boundaries (respectively, “environmental safeguards” and “social safeguards”). Because there is no agreement among Parties even on a goal of how and how much to finance greenhouse gas reductions and adaption to climate change, the A6.4 SB is under great pressure to reach agreement to start the Article 6.4 carbon trading “mechanism” under the assumption that carbon credit trades will make a significant contribution to fulfilling climate finance needs.
A May 2024 study estimated at $8.5 trillion the annual global finance currently required to reduce emissions to achieve UNFCCC Paris Agreement global warming objectives. The most optimistic econometric study, by Bloomberg NEF, projects the global voluntary carbon market to scale up to $1 trillion annually in transaction value by 2037. The study assumes a VCM “right rules” scenario and credits derived from the technological and economic success of carbon dioxide removal technologies. A small portion of the transactions sales would remain in the countries hosting land-based emissions reduction projects.
IATP calls for UNFCCC criteria and capacity to investigate carbon market corruption
IATP has commented on three drafts of the SD Tool, most recently on Sept. 30. Much of that letter focused on how to ensure that there would be well-qualified personnel to implement the environmental and social safeguards. However, we also reiterated earlier comments that the SD Tool still lacked criteria that Parties could use to combat carbon market related corruption. There is an abundant literature of academic and journalistic investigation of project developer emissions reduction misrepresentation, human and land rights violations, and safeguard implementation failures.
The A6.4 carbon trading mechanism is unlikely to succeed economically, much less environmentally and socially, if corruption persists, e.g. as documented by a January 2024 study on the “pervasive” over crediting by projects claiming to reduce emissions through the installation of new cookstoves. An article about the study stated, “The overestimation undermines efforts to counteract carbon emissions to slow climate change, since companies use these offsets to meet climate targets and to sell products labeled as ‘carbon neutral’ instead of making real reductions in greenhouse gas emissions. It also undermines trust in the carbon market, and therefore the market's ability to support the long-term financing of efficient stoves.”
The use of “high efficiency, biomass fired cookstove activity” (Goal 5, page 33) in an emissions reduction project area is one of the SD Tool means by which offset project developers can present evidence that the projects contribute to achieving UN Sustainable Development Goals. Now, a case of cookstove derived credit fraud looms over the A6.4 AB SD Tool negotiations in Baku.
The first U.S. criminal charges filed in a case of alleged carbon market corruption
On Oct. 2, the U.S. Department of Justice (DOJ) announced criminal charges as a result of its investigation into “CQC Impact Investors LLC (“CQC”)” for emissions reduction data manipulation and sale of fraudulent greenhouse gas emissions reduction credits (termed “Voluntary Credit Units” [VCUs] in the indictment), among other charges. The DOJ charged CQC officials with “fraudulently obtaining carbon credits worth tens of millions of dollars and fraudulently securing an investment of over $100 million.” The VCUs were derived from 27 projects intended to reduce emissions by installing high-efficiency biomass fired cookstoves in Malawi, Zambia and in Southeast Asia. According to the Washington Post, “oil giants B.P. and Shell” were among the buyers of the CQC fraudulent credits. Corporations usually buy the credits to claim that they are offsetting or “neutralizing” their own emissions.
One former CQC executive has pled guilty to the charges and is cooperating with DOJ prosecutors, but they will not criminally charge CQC itself, allowing it to continue to operate in the carbon trading business. DOJ declined to criminally charge CQC because of, among other reasons, its “full and proactive cooperation” in the investigation and because of CQC’s “agreement to cancel or void a number of VCUs equal to the number of VCUs that CQC improperly obtained through the fraudulent scheme.”
Kenneth Newcombe, the CQC founder and former CEO, has denied the charges. According to the indictment, the three indicted CQC officials “submitted false and misleading data to Issuer-1, tricking Issuer-1 into giving CQC VCUs for emission reductions that, according to Issuer-1’s methodology for calculating such reductions, had not in fact been achieved.” We know that Verra, the world’s largest VCU certifier, is “Issuer 1” because Verra released a statement in June, when CQC and U.S. officials informed Verra of the cookstove emissions data fraud. The statement said that Newcombe had resigned as a Verra board member in December 2023 and that Verra “will conduct an independent review of the implicated C-Quest [CQC] cookstove projects and will be suspending these projects until this review is concluded.”
Relevance of the U.S. carbon market corruption case to the UNFCCC negotiations
Despite the DOJ’s decision not to criminally charge CQC, policy questions relevant to the SD Tool and its use by project developers, such as CQC, remain. In the language of the A6.4 SB documents, VCU certifiers, such as Verra, are called Designated Operational Entities (DOEs), who apply for accreditation to the Supervisory Board and whose continuing accreditation is subject to review according to the terms of the “Accreditation mechanism standard,” which is currently in effect. The DOEs approve the validation of emissions reduction project designs and separately, to avoid a conflict of interest, verify the emissions reductions achieved from the projects. The DOEs also review and approve SD Tool plans submitted by project developers to manage environmental and social safeguards.
However, CQC managed to deceive Verra from at least 2021 to 2023, according to the DOJ indictment. How did CQC deceive Verra, which has the resources to double check credit quality claims and emissions reduction reports made by the project developers, for at least three years? According to the “Accreditation mechanism standard,” DOEs validate project designs and verify project emissions achieved to enable the Designated National Authorities (DNAs) of the UNFCCC Parties to issue credits for sale to the private sector. (At dispute in the Article 6.4 negotiations is whether unauthorized credits should be allowed to be sold.)
DOEs, under current Accreditation mechanism terms, can only approve projects or not, but they do not have prosecutorial powers to investigate fraud and other forms of VCU corruption. The DNA’s role is not stipulated in the SD Tool or the “Accreditation mechanism standard.” However, as we contended in our Sept. 30 letter to the Supervisory Body, if it finalizes the text of the SD Tool without the means for the DNAs to investigate cases of potential corruption in the projects and issuances of emissions reduction credits, the SB will be setting the terms for a race to the bottom of carbon credit quality and continued stagnation in the voluntary carbon markets.
Separately the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) announced civil charges against the same CQC executives. According to a CFTC press release, “The CQC order finds from in or after 2019 to at least Dec. 2023, CQC engaged in a deceptive scheme relating to projects it developed purportedly intended to reduce carbon emissions, such as by installing more efficient cookstoves or LED light bulbs in sub-Saharan Africa, Asia, and Central America. Based on information CQC reported to at least one carbon credit registry and third-party reviewers, among others, CQC sought and received issuances of carbon credits that CQC could and did sell to other participants in the voluntary carbon credit market.”
This announcement suggests that the CFTC has more evidence of carbon market fraud than DOJ, i.e., evidence beyond the 27 cookstove projects that Verra is currently reviewing. But the CFTC, like DOJ, is asking the court to levy severe penalties against Mr. Newcombe, while allowing CQC to continue operating, subject to compliance with certain conditions, including payment of a $1 million penalty. The CFTC announced the formation of its Environmental Market Fraud Task Force in June 2023. Most CFTC enforcement investigations begin with whistleblower tips.
Learning from the U.S. case of carbon market fraud
These DOJ criminal charges and the civil charges from two U.S. regulatory agencies point to the critical need to include rules, administrative mechanisms and adequate resources to prevent and, if justified by the evidence, prosecute fraud and other forms of corruption in the trading of carbon market credits. Governments may wish to fast track agreement on Article 6.4 at COP29 to enable them to sell emissions reduction credits to the private sector. However, if COP29 negotiators want to sustain these sales and investment in emissions reduction projects, they must not ignore the lessons of voluntary carbon market corruption. If governments are not willing or able to directly finance emissions reductions and adaptation to climate change, they must at least make sure that indirect climate finance derived from selling carbon credits is not imperiled by a failure to include the SD Tool means to detect potential cases of corruption and punish bad carbon market actors.
