Brief Overview of Carbon Credits
A generic term used to define a certificate or permit which represents the right to omit one tonne of carbon dioxide (CO2), carbon credits are fully tradable financial instruments. They are often sold to commercial and individual consumers who are interested in lowering their carbon footprint, on a voluntary basis. They can be traded privately, over the counter (OTC – through a broker), or within the carbon markets (spot markets) like any other stock.
Many different carbon credits are available. Here we outline just two common types of carbon credits:
- Voluntary Emission Reductions (VERs): Involve the offset or reduction of carbon in any way, such as through a forestry scheme or solar panel project. This type of carbon credit is increasingly being promoted to UK investors [1]
- Certified Emission Reductions (CERs): Governments and large corporate entities typically trade in CERs certificates and these are highly unlikely to be offered in small volumes to consumers [1].
Consumer Alert
Due to the many methods available for trading carbon credits and the many types of carbon credits available, the trading of carbon credits is also a major problem in terms of, regulation and quality control. According to the Financial Services Authority (FSA), the schemes are unregulated, so anybody can sell them. UK authorities have no way as a result of controlling their quality or validity [1]. Jonathan Phelan, of the FSA, says:
“Since June, we’ve seen a significant rise in consumers reporting carbon credit trading schemes to the FSA. While carbon credit trading schemes don’t automatically amount to investment schemes that require FSA authorisation, we are concerned that the majority of the firms being reported to us are using high pressure sales tactics and targeting vulnerable consumers with little or no knowledge of commodities and derivatives trading.
We suspect that many of these firms are essentially overseas boiler rooms or landbanking firms simply selling a highly dubious new investment product and jumping upon the green/eco-friendly bandwagon. We strongly recommend that consumers seek advice from an FSA-authorised independent financial adviser before getting involved in the carbon credit trading market [2].”
Don’t Get Caught Out
In order to protect yourself from carbon credit scheme scams, here we present to you the ways in which contact is made and the type of sales tactics used by sellers:
Point of Contact
The first point of contact is usually a cold call; although some use email or post. Unfortunately for us, some go to even more credible steps [1]. Word of mouth, through seminars or even stands at investor exhibitions may be used to portray the product and sell the goods [2].
Sales Tactics & Claims
The following claims are some of the tactics that have been used in order to entice would-be investors [1, 2]:
- Under obligation from the Kyoto Agreement.
- The “new big thing” in commodity trading.
- Government-backed initiative as the government is focusing on green developments.
- Investors in carbon credits will be able to earn larger profits than traditional investment products in this current economic climate.
- Purchasing Amazonian rainforest land will turn into profit and will also turn into easy-to-trade carbon credits, once it has been certified as rescued from loggers.
- For those operating in Australia: The Australian government will force big companies to buy credits at $24 a time next year.
- Your credits will be listed on the APX online registry – APX is a company that specialises in environmental markets – creating, validating, tracking and managing environmental commodities [3]. If you did want to trade with APX, do it directly.
Another problem faced by those who want to invest in carbon credits is that even if investors are able to obtain recognisable carbon credits; the trading of carbon credits (which is predominantly traded over the counter – OTC) requires experience and skill [1]. This will be made even more difficult if the volume of credits obtained is small, which is usually the case, especially if it is a cold call to an individual consumer. As a result, investors may end up losing money, or they may not be able to sell them at all.
How to protect yourself
VER certificates are increasing promoted to UK Companies because: the certificate is voluntary, and because it involves a range of bodies and quality standards not recognised by any financial compensation scheme [1]. As a result, although often labelled as ‘certified’, it is easy to see why such credits may be difficult to regulate and quality-check. With the promotion of VERs occurring from overseas bases, such as boiler rooms, this is the primary cause as to why the UK authorities have no way of controlling the quality and the validity of the scheme.
The FSA say that if the company promoting and operating the scheme is not authorised by them, you will not have access to the Financial Ombudsman Service, or the Financial Services Compensation Scheme [1]. Therefore, if things go wrong or you are unable to resell or trade credits, getting help may be difficult.
The Carbon Advice Group, a carbon credit trading organisation who have launched a new track and trace system (similar to APX), precisely designed it to combat “rogue operators” - a problem raised by the FSA. They suggest that investors should look for projects that satisfy the UN Clean Development Mechanism – Certified Emissions Reductions (CERs) – or an internationally recognised standard such as Verified Carbon Standard (VCS) or the Gold Standard [4]. Based on all of the above, it may be wiser to stay clear of VERs completely.
Do you think you have bought “worthless” carbon credits?
The FSA state that you should stop sending money to the firm or individuals concerned. If you have given them your bank account details, contact the bank immediately [1].
Contact the Consumer Helpline and provide as much information as you can about the details of your investment, the company involved, and especially their “firm reference number” if they claim to be authorised by the FSA [1].
If they do claim to be authorised by the FSA you may have a presentable case, or if they claim to be authorised under alternative schemes called “Collective Investment Schemes” or certain types of contracts called “futures”. See the FSA website for more details about whether or not the FSA can take action.
[2] http://www.guardian.co.uk/money/2011/aug/05/fsa-warning-carbon-credit-trading-schemes
