Are 'Carbon Cowboys' Running Amok With Cap and Trade Speculation?
On the island nation of Vanuatu in the South Pacific, 20,000 acres of deforested land are supposedly being converted to a plantation with millions of super carbon-absorbing trees.
The company behind the scheme, Eco2 Forests, has been pitching its plan as a moneymaker for investors, with cash coming in almost immediately through the selling of carbon credits for the CO2 those trees would one day sequester. It's already claiming conspicuous success in sprouting its special "Kiri" tree in faraway places.
From November 2009 through January 2010, Eco2 -- which launched last July and boasts offices in Australia and California -- released a flurry of news aimed at investors: executive appointments, new headquarters in Sacramento, tree plantings and a flashy web site that contains several pages on how to invest directly with the company.
The biggest announcement, though, was a "multi-million dollar carbon credit deal" with a Colorado company, which appears from public records and interviews to be operated by executives from Eco2.
That connection raises serious questions about both firms -- and more generally, of the transparency in the nascent forestry carbon market.
On Jan. 4, 2010, Eco2 announced a deal with CarbonX Trade, which it described as a subsidiary of Lakewood, Colo.-based Green Ventures Future Fund. According to the press release from Eco2, which was carried on several news sites, including CNN/Money.com, CarbonX Trade agreed to buy 375,000 carbon credits, priced at $10 each, from the yet-to-exist Vanuatu project and an Eco2 eastern Australia project.
The money would begin flowing to Eco2 as early as April 2010, the company said. It called the deal "significant."
The "announcement serves to re-affirm the support the company is receiving in working its way through delivering its Global Forestry Plan," Eco2 said.
"We feel that many of our investors have joined us because they believe in what we are doing from an economic level and an environmental level as well."
The deal grabbed attention. In a speech in January forecasting the year ahead for climate policy, Jonathan Lash, president of the World Resources Institute (WRI), mentioned the Eco2-CarbonX Trade pact. He said the world can expect to see "the rapid emergence" of such private forestry deals "as the opportunity of reforestation becomes more real."
If true, there may be cause for concern.
CarbonX Trade and Green Ventures Future Fund appear in the business division files of the Colorado Secretary of State, a SolveClimate investigation found. Both were established in April 2009. And both are in "good standing."
The listing, however, gives the business address for the twin firms as a private home in Lakewood, Colo., owned by a man named Frank Tavella who said he did the paperwork for setting up the carbon-credit buyers but was wary to reveal anything more.
The head of CarbonX Trade, he told SolveClimate, is Australian Martin Tindall, who is also the president and self-described "ecoimagineer" of Eco2, "responsible for creating the vision of the Global Forestry Plan for Eco2 Forests."
Eco2 is CarbonX Trade's only client, Tavella said.
The companies' web sites reveal more evidence of a connection.
According to Network Solutions, which lists web site registrations, the domain name carbonxtrade.us was registered on March 21, 2009, by Tindall. The dot-com, dot-net, dot-info and dot-org constructions of the name were registered on the same day by Domains by Proxy, Inc., a company that shields the identity of the real owner.
Some months later, Tindall registered the eco2forests.com domain.
Tindall declined immediate comment. After repeated attempts to speak with him, he wrote in an email that he "consulted for Green Ventures Future Fund and helped them develop their online and distribution plan as part of their setup of CarbonX Trade."
Tindall described CarbonX Trade as "the carbon credit retail and wholesale distribution agent for ECO2 Forests." In a follow-up email, he said that Tavella is the "current president" of the two carbon credit retailers but sought to keep his identity confidential until the traders made their own announcements.
Jennifer Weiss, communications director for the Climate Action Reserve, a California non-profit group that verifies and tracks carbon offset projects, said no one in her office had heard of Eco2.
When asked if a company can purchase its own offsets, Weiss responded, "I could possibly see a company developing an offset project and then using the credits generated to offset its own emissions. Although," she added, "if it took investigating to turn up this information, it doesn't sound very open."
Rolf Skar, a forest campaigner for Greenpeace, said "this is the phenomenon that people are calling the carbon cowboys."
'Wild, Wild West'
The forestry credit market is set to boom as carbon regulation increases, especially in the U.S.
"If the U.S. really plays big time in this stuff," said Skar, "it's going to be the largest new financial market we’ve seen in a very long time."
Experts say it could unleash a wave of hundreds of billions of dollars.
"It is like a gold rush," said Skar. That is why "we're seeing so many strange characters coming out of the woodwork — people who never worked on forestry issues before, entrepreneurs all getting in on it early."
The premise behind forestry trading is that trees suck carbon from the air, making them a tradable "offset" for greenhouse gas emissions. Cap-and-trade schemes put a limit on industrial emissions, so companies must cut their pollution or offset it elsewhere through private carbon-reduction projects.
Companies operating in the 184 nations that signed the 1997 Kyoto Protocol, can buy and sell credits through the UN’s regulated Clean Development Mechanism (CDM). While projects that keep forests standing were excluded from the CDM for the first commitment period of Kyoto, efforts to replant trees was covered.
But in the U.S., which did not ratify Kyoto, all action takes place on the voluntary market, where there is no single standard to which projects are certified.
"What we're left with is dozens and dozens of competing certifying companies and certification systems with wildly different quality, oversight and costs," Skar said.
"It's essentially the wild, wild west," said Andrea Johnson, the forest campaigns director for the non-governmental Environmental Investigation Agency. "Everybody is kind of auditing themselves to a large extent. There is no one system."
Because these projects can be in far off lands that are tough to track, it can be hard to know what's real and what's hype, other than trusting what the company says, said Jutta Kill, head of the climate and forests campaign for UK-based FERN.
The lack of transparency "leaves a lot of room for fraud," Kill added, "or at least very dodgy behavior."
Eco, Take 2?
While Eco2 officially came into existence last year, it appears to be the founders' second go at forestry.
Of the four executives that currently run Eco2, three are executives or board members of a nearly identical company, Save the World Technologies, Inc (SWTG).
Tindall is listed as Save the World CEO.
SWTG was founded in 1996, a year before the Kyoto agreement. It is headquartered in Queensland, Australia, and Boulder, Colo. Eco2 appears to follow the firm's business plan.
Like Eco2, SWTG is a publicly traded company and claims successful reforestation projects under its "Global Forestry Plan," using the special strain of Kiri tree that supposedly absorbs 10 times the carbon compared to a traditional plantation.
Further, in July 2009, SWTG announced what appears to be the same "multi-million dollar" agreement for the sale of carbon credits with "a US-based Green Venture Fund," which the release didn't name.
Just like Eco2, the deal was touted as a surefire signal of the company's gains:
"This deal, at such an early stage of our company's growth, confirms the amazing confidence in our business model and the Global Forestry Plan from investors and the business community," said Save the World CEO Martin Tindall.
"This contract will pave the way for us to secure land for our forests and begin planting as early as 2010, confident in the fact we have already secured a large portion of our cash flow for each project."
SWTG said then that it was hunting for investors. Today, the SWTG web site redirects to Eco2.
Notably, there is no mention of SWTG in the bios of the Eco2 executives on the web site, despite their involvement. However, in its updated financial disclosure to the U.S. Securities and Exchange Commission (SEC), Eco2 describes the leadership overlap with SWTG, including Tindall, as a "potential conflict of interest."
"Each of these officers intends to resign his position with Save the World as of Dec. 31, 2009," it said.
When asked about the connection, Tindall said in an email that the company is leaving the tree business in part because of the "baggage" created by the SWTG founders. Tindall said he will remain acting president until a settlement with shareholders is hashed out.
Further raising eyebrows, SWTG has a link with a similarly named company that was sued by the SEC in 2001 for stock fraud, Save the World Air, a Nevada firm, also headquartered in Australia. The company promotes the "Zero Emission Fuel Saver," a magnetic tailpipe reduction device that claims to reduce diesel and gasoline emissions.
Accused in the lawsuit was CEO Jeffrey Allan Muller. According to the 2001 SEC complaint, "He also is the president and CEO of another company called Save the World Technologies."
The SEC said that Save the World Air and Muller "engaged in a fraudulent scheme to manipulate the market for stock in STWA, a public company." To do so, they "used press releases, Internet postings, an elaborate Internet web site, and televised media events to disseminate false and materially misleading information about STWA's product and commercial prospects," the complaint said. Those actions artificially pumped up the price and trading volume of STWA stock.
In 2005, a U.S. District Court in New York fined Muller $7.6 million.
For its part, Eco2 has been publicly traded under the ticker ECOF since September for around 30 cents a share.
While there is no clear evidence of wrongdoing, Eco2's filings to the SEC reveal a firm that is in need of cash and is a potential risk for investors.
In an updated financial disclosure document filed in December, the company said its operations are dependent upon its ability to raise "significant amounts of capital," but "there is no assurance that such capital can be raised, or be raised on favorable terms to the Company or its existing shareholders." Generating cash from carbon credits is a "high priority," Eco2 said. "These revenues will be crucial to sustain the Company's operations until the harvest revenues are realized."
In its quarterly report to the SEC in September, Eco2 was more direct: "The company's cash and available credit are not sufficient to support its operations for the next year."
As a main investment push, Eco2 says it is seeking property owners with land suitable for the establishment of Kiri tree plantations that can churn out commercial-scale timber.
The biggest project to date is the 31-square-mile reforestation project on the 781-square-mile, malaria-infested Malakula Island of Vanuatu. The Ministry of Lands of Vanuatu told SolveClimate that there is a record of the deal, though it has not been officially completed.
The company states that it has 350,000 acres of land under evaluation for future projects worldwide, including in the U.S.
The Eco2 advantage, says the firm, is its fast-growing strain of Kiri tree.
"Seven years is incredibly quick," said FERN's Jutta Kill, who said she had never heard of the Kiri tree.
If Eco2 claims to generate carbon credits that quickly, it means one thing: They're growing tree plantations of non-native trees "rather than a forest," said Kill.
"A forest is a living thing that provides a lot -- from water to clean air to a lot of and timber," she said, "whereas a plantation speaks of timbers in straight rows and not much else."
Eco2 says its trees will result in "renewable resource lumber." The company says Kiri can be cut down and used for sustainable housing developments and for traditional production of pulp and paper in just three years.
That, said Kill, raises the question, "Where is the carbon stored after the tree is cut?"
Fred Stolle, a program manager for WRI's Forest Landscape Objective, said a fast-growing species is not a strong selling point for carbon reduction.
"Every pulp and paper company in the world has fast-growing timber species," Stolle said. Even if "it might be some super-duper tree that has more carbon in it, if you cut it down and use it for paper and pulping, then you still get some emissions of carbon."
"And if you use it for firewood, of course you burn the whole thing. I don't see any reason why that form of business should get carbon credits," he said.
The other major key to Eco2's model is selling carbon credits before the trees exist, a common practice. This "changes the business model dramatically," Eco2 Forests said in a statement directed at potential investors.
The company can create "a positive cash flow years before a single tree is harvested," Eco2 said, "and all done while creating a positive environmental outcome."
But according to Kill, forward selling is risky for investors and local communities.
"A lot of those trees will not grow as planned. A fire may sweep through them, a storm might sweep through them, there might be an insect infestation, there might be trouble with the locals who haven't been informed and trees get cut down," she said.
For example, Kill said, in Uganda, local communities were shut out of an area where they grow food to allow for a new forest offset project. They retaliated, cutting down half a million trees that were supposed to store carbon.
In Ecuador, a poorly informed community signed a contract to grow pine trees for carbon offset dollars. When the lot was destroyed by fire, they were left with a legal obligation to pay the damages.
Interpol: 'Fraud Already Uncovered'
The worldwide carbon market for forests is ripe for corruption, experts say.
"We consider that the carbon trading market is vulnerable to fraud on a number of fronts," said Peter Younger, environment crimes specialist of Interpol, the world's largest policing agency.
"UK cases involving VAT fraud have already been uncovered," he told SolveClimate. "And we are aware of two other significant investigations involving forgery of land deeds to claim ownership of remote forest and subsequent acquisition and sale of carbon credits."
The UK is hardly alone.
In 2007, carbon offsets were donated by forestry startup KlimaFa to the Vatican from a 36-acre plantation the company was growing in Hungary. The land was to be renamed the Vatican Climate Forest. The deal landed KlimaFa loads of favorable press. And the donation prompted the Vatican to declare that it would become the world's first carbon-neutral state.
"A few months ago, we got confirmation that not a single tree was ever planted," Kill said.
Even in the CDM, which has the highest "gold standard" of carbon offsets, fraud is rampant, Skar said. In September 2009, SGS UK, the world's largest certifier of carbon offset credits, was suspended by the UN for rubber-stamping offsets that no one had vetted.
While concerned, Younger said Interpol is "only just beginning to look at" illegal carbon trading, as it already is "considerably busy dealing with other current illegal trade issues."
"Other than a couple of agencies dealing with 'one off' cases, I’m not aware that anyone is specifically looking at this from a global perspective," he said.
U.S. To Be 'Much Worse'
"In the U.S., it could be much worse," said Skar.
The cap-and-trade system included in the House-passed Waxman-Markey American Clean Energy and Security (ACES) bill last year would allow for two billion tons of offsets. Technically, under a bill like that, "all of the U.S. emission cuts could be satisfied by offsets," Skar said. "It would be a total game-changer."
As of now, passing a U.S. climate law appears to be on the Congressional back burner, with the Democrats' recent loss of their 60-vote supermajority in the U.S. Senate and the overall inertia on the issue following the failed Copenhagen talks.
But the fight is far from over.
Some of the country's largest utilities and some industry groups are ramping up calls for a mandatory trading system for carbon. With that, they want loads of offsets and relaxed standards.
Traders are also lobbying hard, said Skar. The reason is that in a mandatory system "the price jumps."
If the U.S. adopts a cap-and-trade system, it "would then retroactively let a lot of those voluntary offsets into the new system, and the price would just skyrocket — triple or quadruple overnight," he said. "That's why there are so many carbon cowboys trying to get in early. They are not really concerned with the quality of their product; they are more concerned that they get in."
Global carbon trading has become the classic speculative market, said Kill, where people trade only for the purpose of profiting.
"There's a lot more middlemen -- dedicated carbon funds that buy the carbon credits from the project and then trade them amongst each other and sell them to people who eventually need them," she said.
"That is where a lot of money is being made."
The system is helped by the fact that there is little time and money for quality control. Kyoto nations trading to stay within emissions limits or companies buying offsets for PR purposes in the voluntary market are not always diligent in checking the validity of projects.
"Every time you spend a dollar trying to verify your carbon offsets, that's a dollar less that you're making," said Skar. "So there’s a built-in financial incentive not to look too closely at these offsets."
"If I wanted to make a quick buck, this might be a smart way to go," he said. A company, for instance, can churn out a ton of offsets, and there's almost no way to ensure that each offset is only sold once.
Not All Bad
"It's very difficult to say where exactly is the line between incorrect reporting for your benefit and outright fraudulent behavior," said Kill. "But I wouldn't go as far as saying it's all fraud — by any stretch."
Most analysts agree that proper certification determines whether a carbon offset project is legitimate.
A company should be able to say who has certified or audited the project. "It needs to be a third party," said Johnson of the Environmental Investigation Agency. If it does not have that, that's a "huge red flag," she said.
Projects registered with the Climate Action Reserve, for instance, have to be independently verified by a third party, said Weiss.
"For forest projects, verifications with site visits must occur when the project is started," she said. For reforestation projects, as in the case of the Eco2 plant, "follow up site visits must happen every six years."
Tindall said Eco2's Vanuatu project is not registered with any of the verification protocols. "We have commitment from Vanuatu's climate change agency to work with us on CDM," he said.
When asked if a forestry offset project can still be credible without verification, Weiss said,
"The Climate Action Reserve advocates for offset projects to be real, additional, verifiable, transparent and enforceable. If a project met these criteria," she said, "it could be considered credible."
What About Climate Change?
Groups pushing for carbon offsets say they lead to increased investment in renewable energy and forestry projects.
But for many environmental advocates, carbon trading adds no value to fighting climate change.
"There are a lot of cases where carbon offset projects exaggerate the reductions that they think they will be able to make," said Kill, even in the regulated CDM market. And in the voluntary market, private companies have no obligation from anybody to ensure consumer protection."
"We're moving to a situation where the carbon market is really decoupled from the original objective from which it was set up," she said.
When it comes to forestry, manipulation is not difficult.
"People like forests," said Kill, "and there's this notion of what could possibly be wrong with planting a tree. And of course there could be a lot wrong with planting the wrong tree in the wrong place."