Carbon Credit Due Diligence

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Carbon Credit Due Diligence

Carbon credits were created as a tool intended to reduce carbon dioxide emissions. All parties to the Kyoto Protocol receive these carbon credits, which are redirected to final operators. They are used to compensate for the emissions of carbon dioxide or deemed equivalent emissions.

A carbon credit represents a certificate which entitles the right to emit one ton of carbon dioxide or the mass of another greenhouse gas, normed to how much global warming a given type of gas produces in relations to a ton of CO2. In simple terms the more a business emits the more credit they must possess. Carbon credit is both allocated under the Kyoto Protocol but can also be created though a project that removes carbon from the atmosphere if it captures carbon from an existing process.

So what types of fraud might a carbon buyer / trader / investor see?

  • Manipulation of measurements to claim more carbon credits from a project than were actually obtained;
  • Sale of carbon credits that either do not exist or belong to someone else;
  • False or misleading claims with respect to the environmental or financial benefits of carbon market investments;
  • Exploitation of weak regulations in the carbon market to commit financial crimes, such as money laundering, securities fraud or tax fraud.

These events in carbon credit fraud are similar to many other opaque markets. There is a good deal of chicanery that can occur when an item, or good, or service is not well understood. Many investors need to rely on trust and that is most of the time not enough.

When looking closer at carbon credit one needs to know where and specifically from which date they came from. In each case the investor / buyer needs to know the following:

  • Assess the project’s history
    • Review the projects past and future plans
    • Review the registration process
    • Review the host’s government approval
    • Review the emission reductions and look for a third party sign off
    • Have reviewed Project Design Document in detail
  • Review conditions of financing and clouds on carbon credits
    • Insure full value for carbon credit when traded or sold

There have been many Carbon Credit frauds in many countries. There is a master data base for registering as a Carbon Credit Trader. All you have to do is register with the United Nations global carbon registry in Bonn, Germany and you have a start. Two of the largest types of fraud we have seen in Carbon Credit trading are that neither the company nor fund was registered.   It should have been an easy and necessary check but no one bothered to look.

If you do not understand something, that is OK, but proceeding with ignorance is not. Find someone who is knowledgable you can ask the questions,  you need to have answered.

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