The headlines about fraud in Europe’s carbon credit trading system (2010: “Fraud Besets E.U. Carbon Trade System,” 2009: “Europol: $7.4 Billion Lost from Carbon Trading Fraud in Europe“) seem to confirm what some critics of carbon credit trading have been saying all along (2007: “Carbon Trading Open Invitation To Fraud,” 2007: “The greenhouse gas emission trading scam“). Are these news stories proof that the critics are right? Are carbon credit markets inherently susceptible to fraud?
Victor Flatt, at Flatt Out Environment, says no, these stories are just show the growing pains associated with a new market.
The fraud perpetrated on the EU exchange was basic garden variety thievery. Criminals got access to an asset (carbon credits) and stole them. This could (and has) happened with many assets, and is a risk of electronic records and trading. … The one way that this can be attributed as uniquely related to the carbon market is that the entire trading system is new, and new systems present more opportunities for thievery, rent-seeking, and fraud. It seems clear that the security protocols on some of the EU country registries were not sufficiently strong or that market participants were not educated enough about the protocols of the exchanges to protect their security information from “phishing.” Luckily, the amounts in play were relatively small, they were quickly discovered, and this will provide lessons for future security upgrades.
Market manipulation can be achieved without fraud, and whether or not the European market is susceptible to manipulation is not revealed by the above complaints. Again, so far at least, the RGGI markets have not shown evidence of market manipulation. (The RGGI design team did go to some lengths to design a market that would be difficult to manipulate.)
Of course, since these trading markets are essentially created by legislative action, they could be revised by legislative action. The temptation to jump in and “fix” the market will rise any time enough legislators think that the prevailing carbon credit price is too high or too low. Existing pollution credit trading programs in the U.S. have escaped such meddling mostly by being too small to be of much interest. Also, they seemed to work so well that few people wanted to mess with them. Carbon credit trading won’t be “too small to be of much interest,” so its best protection from after-the-fact legislative meddling will be to work so well than few people will want to mess with it.
That and, of course, continuing public support for the underlying science of climate change that is motivating efforts to control greenhouse gas emissions in the first place.