Cap-and-trade critics had always warned that as soon as programs were introduced, there would be aggressive efforts to game and/or cheat the rules to make money. With these warnings reinforced by the EU scandal, California officials in early 2013 said they’d learned their lesson. Greenbiz.com reported that …

California, with the advantage of advanced warning, has taken the EU market’s lessons to heart. It has recognized the crucial need to tightly control — and extensively oversee — who can participate in the carbon market and how. With the help of the state Attorney General’s office, California has adopted more stringent rules than the EU ETS [Emissions Trading Scheme].

State tax credits for payments to indigenous communities?

Now, however, the Brown administration is pondering relaxing these rules by allowing companies to get pollution credits by paying for preservation of forest lands in Brazil.

The idea has been discussed for years but has picked up momentum of late. According to recent reports, state regulators are closer than ever to formally expanding the cap-and-trade program by allowing polluting industries to offset their carbon emissions by paying indigenous communities in the Amazon to preserve the rain forests in their region. 

This idea has won praise from environmental groups, who have long depicted preservation of the rain forests in the Amazon delta as a global priority. They call it a great way for Brown to burnish his environmental legacy.

The Western States Petroleum Association has also been supportive, saying industries need options to meet their commitments under AB32 and related laws.

Brazil’s huge corruption scandal bodes poorly for CA program

But the initial coverage of Brown’s trial balloon omitted mention of two key issues: Gaming and cheating of cap-and-trade programs remains a huge problem around the world, and Brazil has both a long history of corruption and a lack of transparency.

In early 2015, Foreign Policy magazine reported how the European Union’s program had become a “playground for gangsters, international crime syndicates, and even two-bit crooks — who stole hundreds of millions of dollars in pollution credits.”

In October, Forbes magazine reported on a slew of new scandals, starting with schemers in Russia and Ukraine being accused of using the EU cap-and-trade market to sells counterfeit credits for 600 million tons worth of carbon dioxide emissions. The account noted that the less sophisticated a nation’s law-enforcement system, the more likely cap-and-trade scams were to be — and that some of the world’s richest people and companies were taking advantage.

“The cap-and-trade system of emissions trading is very difficult to control and its effects are diluted. … It is precisely because I am a market practitioner that I know the flaws in the system,” Forbes quoted financier-investor George Soros as saying.

Meanwhile, in January, Transparency International reported that over the previous year, Brazil’s corruption problems were growing worse at a faster rate than in any nation on the planet. Agence France Presse reported last week that a scandal involving billions of dollars of missing revenue from state oil giant Petrobras continued to grow, with dozens of government and business leaders implicated.

Efforts to remove President Dilma Rousseff from office have been complicated by the fact it is hard to find many credible critics of Rousseff within the Brazilian government, given how many prominent Brazilian politicians are either directly tied to the scandal or indirectly tied through close political alliances.

According to Calmatters, state air board officials said they would look to avoid problems caused by Western nations’ cap-and-trade programs in another tropical nation: Nigeria. But the issues there involved indigenous communities being denied use of forest lands they relied on because of restrictions under new conservation agreements — not necessarily the problems that California could risk if it counts on Brazil as a partner in a cap-and-trade pact. 

On May 30, the U.S. EPA in Dallas ordered the Clean Harbors waste incineration facility in El Dorado, Ark., to pay a $39,900 penalty for manufacturing and using “16 regulated chemicals in excess of established reporting thresholds” in 2011. The EPA had previously fined Clean Harbors $581,236 for other violations of hazardous waste standards.

The day before the EPA’s latest fine, the air board had already issued a notice to industrial holders and traders of renewable energy certificates from Clean Harbors that their certificates could be invalidated because the facility may been noncompliant in 2011. CARB can invalidate credits for up to eight years after implementation of a pollution reduction project.

Offset credits are tradable energy commodities that represent one ton of avoided ozone emissions. California industries can buy them to meet air pollution reduction requirements in the Golden State — even if the avoided emissions are in another state. None of the questionable credits were issued under California’s cap-and-trade emissions reduction program.

Retiring refrigerators in Arkansas to comply with CA rules

The credits in question were issued for retiring old refrigerators that contained chlorofluorocarbons (also known as CFCs or Freon) that are believed to contribute to ozone depletion in the upper atmosphere. This kind of credit is called an Ozone Depleting Substance or ODS credit.

The ODS credits sell for $5 to $10 per ton. That means the California firms’ potentially invalidated credits cost from $6.5 million to $13 million. State holders of these credits include EOS Climate, Diversified Pure Chemical, Environmental Credit Corporation, Wilshire Standard Offsets and Pure Chemical Separation.

According to a chemicals and energy trade website, 87 percent of the 5.5 million ozone depletion credits issued by CARB were from the Clean Harbors facility. The 1.3 million credits now being reviewed are for the period that Clean Harbors was deemed potentially non-compliant.

In 2009, Clean Harbors was cited by the Arkansas Department of Environmental Quality for 47 violations of its operating permit.

Among the many problems: chemical clouds and leaks;  explosions and fires; mishandling of waste materials;  failure to respond to a hazardous waste emergency; failure to design, construct, maintain and operate the facility to minimize fire, explosions, releases of materials into the air, soil or water; failure to provide adequate liability insurance; and poor record-keeping.

In December 2012, neighboring residents of the Clean Harbors plant were subject to a voluntary evacuation due to a chemical fire.

Clean Harbors and client defend company’s record

Clean Harbors officials downplayed the actions of regulators. “We have compliantly destroyed hundreds of thousands of kilograms or chlorofluorocarbons at our state-of-the-art hazardous waste incineration facility,” a spokesperson said.

Jeff Cohen of EOS Climate, a San Francisco-based pollution credit brokerage firm that did business with Clean Harbors, also downplayed the penalties. He said the actions that led to the fines against the company had “no impact” on its ozone-reduction operations.

“I expect ARB will ultimately conclude that too and all the credits will remain valid,” Cohen said.

The state air board will issue a determination on whether the credits are acceptable 30 days after officials believe they have received all necessary information on the matter.