Wanted: Independent Research to Assess Carbon Offsets


New York – A recent article in Harper’s Magazine on carbon trading casts doubt on the assessment mechanism used to measure and issue carbon offsets:

Carbon trading is now the fastest-growing commodities market on earth. Since 2005, when major greenhouse-gas polluters among the Kyoto signatories were issued caps on their emissions and permitted to buy credits to meet those caps, there have been more than $300 billion worth of carbon transactions. Major financial institutions such as Goldman Sachs, Barclays, and Citibank now host carbon-trading desks in London; traders who once speculated on oil and gas are betting on the most insidious side effects of our fossil fuel–based economy. Over the next decade, if President Obama and other advocates can institute a cap-and-trade system in the United States, the demand for carbon credits could explode into a $2 to $3 trillion market, according to the market-analysis firm Point Carbon.

The UN has a mechanism in place to verify that the offsets underlying the traded carbon credits actually take place:

Never before has the United Nations presided over the issuing of securities, and carbon offsets—authorized through the body’s Clean Development Mechanism (CDM)—are unlike any securities ever created: because such gases emerge not just from factories and automobiles but from felled trees, animal and agricultural waste, and innumerable other sources from every corner of the earth, the supply of promises to reduce greenhouse-gas emissions is potentially infinite. And unlike traditional commodities, which sometimes during the course of their market exchange must be delivered to someone in physical form, the carbon market is based on the lack of delivery of an invisible substance to no one. In an attempt to compensate for this intangibility, the United Nations has certified twenty-six firms worldwide—in U.N. lingo, Designated Operational Entities (DOEs)—to “validate” the promises of emissions reducers and then to “verify,” often years later, that those reductions actually occurred.

SGS is one of two companies that dominate the carbon-validation business. The other is Det Norske Veritas (DNV), a Norwegian firm whose primary business is shipping inspection. Other major players include the accounting firm Deloitte Touche Tohmatsu, the transportation-safety firm Lloyd’s Register, and TÜV SÜD, a German industrial-testing company. Much as large accountancies affirm the balance sheets of corporations, the DOEs are supposed to assess the credibility of emissions reducers by verifying the truth of their statements, in which they are required to predict their own future reductions of emissions.

Some of the issues relating to the measurement and integrity of the research process to measure carbon offsets are eerily familiar to those who have studied conflicts of interest in other areas:

In this highly specialized new industry, perhaps a thousand people really understand how onsite measurement of CDM projects works, and there is a serious potential for conflicts of interest. It is not uncommon for validators and verifiers to cross over to the far more lucrative business of developing carbon projects themselves—and then requesting audits from their former colleagues. Schneider points out that young university graduates entering the field commonly spend several years learning the ropes at DOEs and then “go to work for a carbon project developer, where they make three times the salary doing more interesting work.”

These developers—which partner with local businesses and governments to set up offset projects—are by and large funded or owned outright by multinational firms, particularly financial houses… Far from being independent third-party auditors, the DOEs get paid by these very developers and have to compete vigorously to win business. Plantar’s Fábio Marques told me the company routinely takes “various bids” of differing price from validators.

This is, fundamentally, a paid-for research system. The entire article is an interesting read, and raises the question of whether the UN or other authorities should be paying for independent verification of offsets.


About Author

Leave A Reply