Germany cracks down on Chinese eco-fraud in deepening scandal

German authorities have rejected 18 million euros ($20 million) worth of carbon credits after discovering “irregularities” in projects in China meant to reduce emissions.

The initiatives, which were led by major international corporations and audited by European firms, allowed German companies to report lower emissions by funding efforts to reduce pollution during oil and gas production. These certificates, known as upstream emission reductions or UER credits, in turn help businesses comply with European Union rules for reducing greenhouse gases. The idea is that by avoiding emissions elsewhere on the planet, companies can improve their own carbon footprint.

But credits for avoided emissions have come under intense scrutiny in recent years after many projects were shown to have exaggerated their green claims. Countries globally have considered incorporating offsets into more regulated carbon markets, but experts warn such a move risks stamping out bad-quality credits.

The malpractices identified by Germany’s Federal Environment Agency followed an investigation launched earlier this year and affect eight different projects in China, it said in a statement on Friday. Authorities rejected 215,000 UER carbon credits linked to those projects, which were previously authorized, and will continue to investigate similar initiatives.

“No new UER certificates from these projects will be released to the market,” said Dirk Messner, the agency’s president. “The Federal Environment Agency will continue its investigative work at full speed, based on the findings now available from China.”

UERs are currently trading at around €85 per tonne of carbon dioxide equivalent, according to Argus Media, and have reached peak prices of €440 per tonne as early as 2022.

The whistleblower allegations in January helped trigger the agency’s probe, which will look at 13 more projects in addition to those it has already disqualified. Globally, there are 75 UER projects, most of which are in China.

The agency’s statement hinted at some of the difficulties the market faces in detecting fraud, including that remote assessments using satellite imagery and desktop reviews of reports are often insufficient.

The agency has hired an international law firm, which is now physically visiting sites on the ground in China. However, only five of the 21 projects it reviews gave agency representatives unrestricted access during inspection visits.

“For us, the refusal to conduct on-site inspections is a very strong indication that the project sponsors are either not prepared to meet their obligations or do not have the necessary control over the projects,” Messner said. “We will ensure that only legitimate UER certificates for new projects are introduced to the market.”

The probe identified “serious legal and technical inconsistencies” in seven of the eight projects, which are operated by “large, international companies,” the agency said. The eighth project was disqualified for starting prematurely and not according to the rules.

In parallel, the Berlin prosecutor is investigating 17 general managers or employees of the verification bodies responsible for the verification of EBU projects on suspicion of “joint commercial fraud”.

Photo: Exit labels cover empty unleaded petrol and diesel pumps at a gas station in Erlensee, Germany. Photographer: Alex Kraus/Bloomberg

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