INTERPOL WARNS OF CARBON MARKET VULNERABILITIES

Tamar Hallerman
GHG Monitor
8/23/13

Carbon trading markets across the world are at risk of being exploited by criminals, according to the international police organization Interpol. The intangible nature of cap-and-trade systems makes them vulnerable to manipulation through methods like securities fraud, insider trading, embezzlement, money laundering and cybercrime, according to the Lyon, France-based group in a law enforcement guide published earlier this month. “The relative immaturity of the carbon market, coupled with the intangible nature of the commodity itself, leaves the carbon market particularly susceptible to crimes that would typically be incapable of penetrating other commodity markets,” the report states.

Interpol does not single out any specific carbon markets in the report, but instead looks at larger vulnerabilities present more generally across many of the world’s carbon markets—collectively valued at roughly $176 billion—and makes recommendations for how national authorities could police the schemes. The report recommends that authorities boost efforts to raise awareness among law enforcement about criminal threats to the system while simultaneously strengthening the government institutions responsible for regulating and policing the carbon markets. Interpol also suggests upping communication, internet security and transparency of financial transactions, as well as rooting out any loopholes to ensure that regulations are consistent between different jurisdictions. “It is imperative that the carbon trading markets remain secure from fraud, not just to protect financial investment, but also because the global environment depends upon it,” said Andrew Lauterback, senior criminal enforcement counsel at the U.S. Environmental Protection Agency and chair of the Interpol Environmental Crime Committee, in a statement.

History of Hacking

The report, which was compiled with input from partners like EPA and its Canadian, Norwegian and Dutch counterparts, said it aims to avoid the fraud that has been detected multiple times under the European Union’s Emissions Trading Scheme in recent years. Eight carbon credit trading companies operating under the ETS were recently shut down for malpractice, and the Interpol guide said it aims to generate an international law enforcement response to those crimes. “Carbon as an intangible asset leads to a separation between ownership of the investment project and the rights to trade the emissions that are offset. This makes tracing the origin of carbon credits more difficult than for other credits derived from physical commodities,” the report states. “When trading across international jurisdictions, monitoring capacity is often diluted, making the illegal recycling, double-counting and sale of non-existent or stolen carbon credits much more viable.”