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In what appears to be the biggest case of fraud in the global carbon offset market so far, the US authorities have indicted former executives of one Washington-based C-Quest Capital over manipulating data from emissions-reduction projects to secure carbon credits worth tens of millions of dollars and an investment of US $170 million.
For the uninitiated, carbon credits are issued against activities that either avoid greenhouse gas (GHG) emissions (such as by using an efficient cookstove or lighting system) or remove GHGs from the atmosphere (for instance, by planting trees). Each carbon credit represents 1 tonne of carbon dioxide or the equivalent GHGs (CO2e) avoided or removed, which is then bought by businesses that wish to offset their emissions or meet climate goals. While carbon credits are traded in compliance markets, so far established only by some national and regional governments, a global voluntary carbon market along with its supporting industry ecosystem has flourished in recent years in the absence of an internationally negotiated agreement to govern the space in accordance with the Paris climate treaty, in force since 2016.
C-Quest generated and traded carbon credits in this voluntary carbon market (VCM) through projects like installing cookstoves in rural Africa and Southeast Asia, among other places. The company on its website claims that its cookstoves are “thermally efficient” and “clean”, which reduce people’s exposure to toxic smoke, while ensuring “climate change mitigation” through the avoidance of carbon emissions and other GHGs.
The indictment report of the US Attorney’s Office, however, alleges that former executives of the company obtained carbon credits by using “manipulated” and “misleading” data. “They then sold those credits to unsuspecting buyers in the multi-billion-dollar global market for carbon credits. The alleged actions of the defendants and their co-conspirators risked undermining the integrity of that market, which is an important part of the fight against climate change,” said US Attorney Damina William. Prosecutors have announced criminal charges against Kenneth Newcom be, founder and former chief executive officer of C-Quest, and Tridip Goswami, who headed its carbon and sustainability accounting team. Jason Steele, C-Quest’s former chief operating officer was also accused of the fraud but has pleaded guilty. Goswami and Newcombe have denied any wrongdoing. “I haven’t received any notices. I was a mere employee and the decision-makers were different. I do not think there was any data manipulation,” Goswami tells Down To Earth (DTE).
“This case serves as a powerful reminder of how carbon credits potentially represent nothing more than hot air,” Gregory Trencher, associate professor at Kyoto University in Japan, tells DTE. Trencher, whose research focuses on decarbonisation and energy policy, further says carbon market strongly contrasts with other commodity markets (which trade in raw or primary products) such as energy, minerals, and grains, where quality and quantity can be easily verified. Carbon credits, on the other hand, are intangible. Thus, the potential for fraud, exaggeration, (accidental) inaccuracy and miscalculation is extremely high, he adds.
The potential for fraud is particularly high in VCM, which, according to a 2024 article in Colorado Law Review, is not only highly unregulated but is also plagued by conflicts of interest and lack of transparency. Main players in this market, states the article, are the project developers (entities that develop emissions-reduction projects like planting trees or distributing clean cookstoves), verification and validation bodies or VVBs (third-party entities that assess claims made by project developers) and standard setting bodies (groups of non-profits and business leaders that define project standards, certify offsets, and host registries that maintain information about credits issued, traded and retired or removed from circulation after a company uses it for offsetting emissions). Verra and Gold Standard are the two leading standard setters in VCM. “The problem lies in the fact that each of the players in this game—the project developer, the standard setter, and the VVB—has incentives to overstate offset claims,” states the Colorado Law Review article. For instance, standard setters’ fees depend on how many offsets they certify. VVBs that audit projects are hired and paid for by the project developers. And these conflicts of interest appear to have played a role in the case of C-Quest.
In 2020, Newcombe, who was on the Board of Directors of Verra, which certifies C-Quest’s projects, proposed that the standard setter adopt a new methodology for calculating emissions reductions from cookstove projects. As per the indictment report, Newcombe was in favour of the new methodology “because he believed it would allow CQC [C-Quest] to generate more VCUs [credits].” It probably did. According to “Voluntary Carbon Market Dev-eloper Overview” for 2022-23 and 2023-24, in 2022, C-Quest ranked 11 among the top 25 developers operating in household devices and cookstoves space of VCM. A year later, it rose to the top, registering 354 per cent year-on-year growth in credits issued and 42 per cent growth in projects. The indictment report suggests that from about 2021, through 2023, the former executives used the new methodology to manipulate data related to emissions reduction and obtain credits.
While the methodology involved several inputs, the number of carbon credits that the project developer would receive largely depended on two variables. One, the amount of fuel used on the new cookstove (known as “ByNew”), which is the methodology used to calculate the fuel saved per stove by comparing with the traditional one and then estimate the emissions avoided. Two, the percentage of stoves installed during the project that were still operational (“p” value), which the methodology used to determine the number of stoves for which emission reductions could be claimed. Under the methodology, both the values were to be determined through surveys, which allegedly allowed the former executives of C-Quest to fudge data.
Investigations by the US authorities showed that the original ByNew values for a project in Malawi, for instance, was 2.35 kg per stove per day. Since a higher ByNew value represents higher emission reduction and thus more carbon credits, the former executives inflated the values to 3.66 kg per stove per day. Similarly, a loophole in the methodology allowed them to alter the p-value; surveyors could inflate the sample size in case they found missing or broken stoves in the original sample. “This practice was explicit in CQC’s non-public training manual, which stated: ‘Additional households should be surveyed to compensate or cover up for households where any one or both project stoves were not found operational’,” says the indictment report.
During a parallel investigation, the US Securities and Exchange Commission found C-Quest manipulated thermal efficiency of its cookstoves that failed to meet the minimum standard of 25 per cent.
Usually standard setting bodies depend on VVBs for cross-checking information provided by the project developer. Most of the projects that have come under scrutiny were audited by one VVB Carbon Check, based in Noida, India. Vikas Singh, executive director of Carbon Check, did not respond to DTE’s email regarding the verification process, The case came to light in 2023, after employees of C-Quest reported data discrepancies to the company’s Board of Directors, which then initiated an investigation into the projects and informed US regulatory authorities and Verra of its former executives’ wrongdoings. In June, Verra put 27 projects, most of them in Africa, on hold and initiated a review. As of October 17, it has announced the results of 22 projects, which shows C-Quest was issued over 5 million excess credits. To compensate for these, Verra has “cancelled” 5,004,915 carbon credits of C-Quest. When DTE approached Verra to understand if the excess credits issued between 2021 and 2023 had been bought and then retired, it declined to comment, saying, “this is now subject of a criminal investigation”.
This is not the first time VCM has been the subject of controversy. In 2023, DTE in collaboration with the Centre for Science and Environment (CSE), Delhi, conducted an investigation into the workings of VCM in India (see ‘Discredited’, Down To Earth, October 1-15, 2023). The investigation revealed that a massive number of projects was being implemented under the household and community category, largely through the distribution of cookstoves and biogas. DTE-CSE visited two cookstove projects—one being implemented by Greenway Grameen Infra (registered with Gold Standard) and the other by EnKing International (now EKI Energy, registered with Verra). The team found glaring gaps in project design and implementation, which could have allowed the developers to mint more carbon credits than they deserved. For instance, both the projects estimated reduction in emissions, assuming that the target population was primarily dependent on non-renewable biomass and ignoring that many possessed LPG connections and also used it. Both the companies assumed a 100 per cent usage rate but on ground, DTE-CSE found irregular use of improved cookstoves.
Researchers attribute such over-crediting to poor methodologies used in VCM. Assessment by DTE shows that companies, such as EKI Energy followed the methodology of Verra—VMR0006, version 1.1—that allowed C-Quest to manipulate offset data. Could they have taken advantage of the loopholes to overestimate carbon credits? “Many methodologies being used in the VCM are more convenient for the companies than they are accurate in calculating emission reductions and credits,” says Daniel M Kammen, professor of energy at the University of California, Berkeley, US. This is particularly true for cookstoves—one of the fastest growing project types. Kammen and two other researchers from the university have analysed credits obtained through five cookstove methodologies, and found that the project sample is over-credited 9.2 times. “Over-crediting is mostly from exaggerated estimates of stove adoption and use, underestimates of the continued use of the original stove and high estimates of the impact of fuel collection on forest biomass,” the researchers state in the study, published in Nature Sustainability on January 23. For example, Verra’s clean development mechanism-era methodology, AMS-II-G, which was used by Greenway Grameen at projects visited by DTE-CSE in 2023, requires surveyors to simply ask if households used the improved stove in the last week or month.
If users replied “yes”, credits would be issued assuming that they used the stove 100 per cent of the time for the entire monitoring period. Then, there is recall bias as households can struggle remembering stove use over the past year. The researchers find AMS-II-G–firewood to be the most over-credited project type, while Gold Standard’s Metered methodology that tracks stoves and fuel through metres, was the best performing one, overvaluing credits by 1.5.
Another variable that allows over-crediting is the fraction of non-renewable biomass (fNRB), which represent the proportion of wood harvested unsustainably, before it regrows in the area. A value of 0.3, for example, suggests that 30 per cent of the biomass is harvested faster than it regrows, while 70 per cent is harvested sustainably. This parameter, however, cannot be directly measured, and hence experts use modelling. The Nature Sustainability study notes that projects have opted to use older or default values to calculate fNRB instead of newer ones that have existed for eight years. This results in 2.3 times over-crediting.
A study led by Trencher and published in Nature Communications on August 10, analysed carbon offsets of 20 companies that re-tired most offsets from VCM over 2020 to 2023, and found that companies also prefer sourcing low-quality cheap offsets; 87 per cent carry a high risk of not providing real or additional emissions reductions. The findings provide evidence that the VCM is not supporting effective climate mitigation, says the study.
The C-Quest case shows that carbon credit claims are fast coming under scanner. “Over the past two years, US Commodity Futures Trading Commission (CFTC) has developed guidelines for VCM. This is their first enforcement action in VCM,” says Axel Michaelowa, Switzerland-based senior founding partner of Perspectives, a think-tank, adding, “We should see whether this [case] would change the behaviour of what I would call the carbon cowboys.”
This was first published in the 16-30 November, 2024 print edition of Down To Earth