Offset Credit ‘Recycling’ Causing Waves in Carbon Markets

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A major scandal has erupted over the practice of ‘recycling’ offset credits, known as certified emission reductions (CERs), which has resulted in the temporary suspension of trading in two major carbon exchanges, whilst the surrendering of credits within the EU Emissions Trading Scheme (EU ETS) has been terminated until August. The price of offset credits has crashed from 11EU to 1.50EU.

‘Recycling’ credits occurs when a government, to whom offset credits have been surrendered by polluting companies to meet carbon caps, sells on the offset credits instead of ‘retiring’ them (i.e. rendering them used and thus obsolete). The scandal broke after it was found that ‘recycled’ credits had ‘leaked’ back into the EU Emissions Trading Scheme. It was revealed that the Hungarian government had sold two million used offset credits to Hungarian Energy Power, who then sold them on to Microdyne LTD, a UK-based trading house. A source at Microdyne LTD admitted that the traders knew the credits had already been used in the EU Emissions Trading Scheme: “I can confirm that Microdyne was aware these carbon credits were already surrendered. Also our client…knew about it.” It has further been revealed, by the Hungarian environment minister Jozsef Molnar, that Deutsche Bank “made a bid for 1.743 million CERs” from the Hungarian government. This chain is just the tip of the iceberg; with credits sold and re-sold, packaged and re-packaged, the trail they leave can be complex creating a lack of transparency perfect for facilitating carbon trading’s inherent potential for corruption. The used Hungarian credits, bought by multiple companies, were put onto the Bluenext carbon exchange – where people unwittingly bought them and tried to use them within the EU Emissions Trading Scheme.

The Hungarian government looks set to have made $20 million from selling the 2 million used CERs it received for free from its companies and businesses. UN figures reveal that 10 other countries within the EU Emissions Trading Scheme, including Germany, Spain, the Netherlands, Italy, Poland and the Czech Republic, have as yet failed to ‘retire’ the 62 million offset credits they hold between them. It is obvious why these used credits are sold, but why are they bought if they are useless within the EU Emissions Trading Scheme? This question points to the structural flaw at the heart of this scandal, one which too few proponents are willing to criticise. Whilst the used CERs are not allowed to be re-surrendered within the EU Emissions Trading Scheme, it is perfectly legal for them to be used outside of the EU Emissions Trading Scheme – in other emissions trading schemes – if cheaper emission rights, Assigned Amount Units (AAUs), are surrendered in their place. The used Hungarian CERs were initially intended for Japanese companies participating in their domestic, voluntary emissions trading system, where the use of ‘recycled’ CERs to comply with domestic emissions caps is legal. This grants a money-making opportunity for Japanese companies, who can buy these cheaper, used offset credits to replace more expensive ‘unused’ offset credits sold to the EU market. Polluting companies make a profit through trading offset credits, and find a cheap way to wriggle out of making any real carbon emission cuts themselves. Point Carbon, the carbon trading analysts, predict that Japanese companies will hold around 300 million CERs by 2012, all of which could potentially be sold and replaced by cheaper, CERs already used once in the EU.

This example not only highlights the corrupt practices of certain governments, corporations and emissions traders, but another way in which carbon trading and offset systems such as the EU Emissions Trading Scheme (EU ETS), set up out of the Kyoto Protocol, have such corruption written into them. The International Emissions Trading Association (IETA) has been fire fighting with attempts to create ‘bad apple’ causation behind the scandal, including a Guardian article practically made up only of the statements of IETA’s CEO Henry Derwent (www.guardian.co.uk/environment/2010/mar/17/carbon-traders-recycled-credits), proclaiming how the used CERs should not be traded back into the EU ETS and offering absurdly feeble suggestions such as a ‘due diligence’ letter to be attached to recycled credits. It is interesting that the perpetrators of ‘recycling’ CERs are repeatedly depicted as ‘eastern’ European governments in a tone which suggests this is an inherently de-legitimating geography, denoting a government which is ‘corrupt’ anyway not a system which builds the opportunities for it in. Little mention is made of Germany’s 23,271,741 ‘un-retired’ CER credits.

However, very few voices point out that the entire concept of re-selling offset credits, to countries in the EU or not, highlights the absurdity of the supposed ‘equivalence’ of CO2 cuts and the idea that emissions reductions can be displaced at all. How is it possible that one project supposedly preventing (a set amount of) emissions in the global south can be used many times over (and above that amount) as an excuse by disparate emissions sources in the global north to continue polluting? Surely if the ‘equivalence’ of CO2 is so sacred and precise, the allowance of such practices would never have been written into the Kyoto Protocol in the first place? The proponents of carbon trading and offsetting pride themselves on offering a mechanism which delivers the cheapest way to ‘cut carbon’. The latest scandal is perfect evidence of this mechanism in action.