Financial Services Authority: “Why you should be wary about investing in the carbon credit market”

The Financial Services Authority (FSA) in the UK has issued a new warning about the dangers of investors being duped by companies selling carbon credits.

The FSA has received many reports from people complaining or asking about firms promoting carbon credits in the UK. The FSA warning invites investors to, “Find out why you should be wary about investing in the carbon credit market.”

The FSA has nothing against carbon trading itself and notes that “there are many reputable firms operating in the sector”. The FSA’s warning is about “an increasing number of firms [that] are using dubious, high-pressure sales tactics and targeting vulnerable consumers”.

This is the second warning from the FSA about the risks of investing in carbon credits. In July 2011 complaints and queries about carbon credit trading schemes to the FSA grew ten-fold. The following month, the FSA issued a warning, pointing out that it “does not regulate the sale or trading of carbon credits”. Anyone can sell carbon credits, in other words and investors risk being ripped off:

“[I]t is often not made clear to investors that trading on these markets requires skill and experience.

“You may lose money on your investment by not being able to sell, or at least get a competitive rate, when trading a small volume of carbon credits.”

The companies selling carbon credits contact potential investors by phone, email or post. The FSA warns that,

“The caller may claim carbon credits are ‘the new big thing’ in commodity trading, industries now have to off-set their emissions, the government is focusing on green developments or that it is an ever growing market.”

REDD-Monitor collected the following three examples, more or less at random, from carbon traders’ websites. REDD-Monitor will leave it to you to decide whether these examples are the sort of dubious sales tactics that the FSA is warning about:

1. “Barclays has predicted rises in carbon credits prices of up to 42% by 2012 with other major financial institutions such as CityGroup, Merrill Lynch, Goldman Sachs and JP Morgan all having begun to trade this exiting new commodity.”

2. “Carbon is expected to become the world’s biggest commodity market, surpassing Oil in the next five years… There is no doubt that massive PROFITS will be made over the coming years.”

3. “Carbon offsetting is set to be one of the largest global industries, estimated to be worth $3 trillion by 2020, twice the size of the oil industry.”

Predictably, none of these websites point out that the price of carbon on the European Trading Scheme has crashed.

The FSA warns particularly about voluntary emissions reductions (VERs), which are increasingly being offered to UK investors. VERs “are often labelled as ’certified’”, the FSA notes,

“but this certification is voluntary and involves a wide range of bodies and different quality standards that are not recognised by any UK financial compensation scheme.

“Also keep in mind that the projects generating VERs are usually based overseas and the UK authorities have no way of controlling the quality or validity of the schemes.”

The FSA maintains a list of unauthorised firms and individuals that investors should be “especially wary of”. 12 of the firms on the list have the word carbon in their names.

It’s hardly surprising that the FSA is concerned about the trade in carbon credits in the UK. It involves the sale of an invented commodity. While the buyer gets a pile of carbon credits and the seller gets a pile of money, no carbon changes hands. When you buy a carbon credit, you have to believe that emissions reductions genuinely took place (and that you’re not paying for a scam like the CDM credits created from destroying HFC-23). Then you have to take it on trust that the emissions reductions will remain reduced (and that, in the case of REDD credits, an oil palm company didn’t move in and clear the forest, or any other forest anywhere else).

If you were looking for a scam to part gullible people from their money, what more could you possibly ask for?