The Scoop
In January, when a scandal was brewing in Germany over its domestic carbon market, oil and gas giant Shell received a message on its online whistleblower portal: a Chinese emissions-reduction heating project on an oilfield it was involved in was actually a chicken farm.
“I hope you will fulfill your due diligence and investigate the allegations,” the complaint, a copy of which was shared with Semafor, reads. The document also made reference to at least three other such cases.
Now, the company whose CEO made that anonymous whistleblower complaint has declared itself insolvent. It was, it says, a victim of a multibillion-euro, transcontinental scandal that has roiled Germany for months: Biofuels suppliers allege dozens of emissions-reduction projects abroad were faked or overstated their success. The controversy has focused criticism on Germany’s regulators and big energy companies, while eroding already-threadbare trust in efforts to reduce the energy sector’s emissions.
“How does fraud like this, at such a scale, happen,” Zoltan Elek, the whistleblower whose company Landwärme supplies biomethane to big companies including Shell, said in an interview. “This is not small scale, someone selling you a bad used car.”
German authorities have in recent weeks begun to take action: The federal environment minister said last month that the country may be “dealing with a case of serious environmental crime.” In July, officials suspended all emissions-reduction projects in China, and are accepting no new projects anywhere. One senior government official has been suspended, German broadcaster ZDF reported, the environment agency has filed a criminal complaint with the Berlin public prosecutor’s office, and police have searched the offices of audit firms responsible for verifying projects.
For Elek, that action is coming too little, too late. Shell in particular, he says, has not done enough to probe the scandal, to take action by dismissing or disciplining staff, and to make amends, which he says should include some financial restitution for companies such as his that suffered reduced demand for its products. Frustrated by the response — or lack thereof — from major companies and German authorities, he says he is discussing banding together with others in the industry to increase political pressure and demand officials more aggressively investigate the legitimacy of projects underlying the credits. One industry lobby group says inadequate verification by regulators and auditors has led to lost income of €4.5 billion, or about $5 billion.
“It is possibly one of the biggest fraud cases in the German oil industry,” ZDF said.
Shell declined to answer specific questions about the whistleblower complaint or any of the projects in which it was involved. A spokeswoman for Shell said “the Federal Environment Agency is currently investigating the allegations mentioned,” and that the company “always acts in accordance with the relevant laws and regulations.” She said Shell “conducts its own due diligence on a voluntary basis,” but did not provide details of how or when due diligence is carried out. The company auditing the project identified by Landwärme as a chicken farm, meanwhile, denied it behaved inappropriately, telling Die Welt a typo was to blame for incorrect coordinates being supplied.
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The months-long scandal unfolding in Germany concerns the market for Upstream Emission Reduction (UER) credits. Businesses can purchase UER credits — generated by third-party oil and gas companies when they take steps to save emissions before fossil fuels enter a refinery or storage facility, such as by avoiding flaring of gas during drilling — to offset up to 1.2% of their government-mandated emissions limit.
Because emissions do not respect national boundaries, UER projects can be located anywhere so long as they are verified and audited. Initial projects were established in Azerbaijan and Nigeria, though most are now in China. UER projects were estimated to have saved 1.9 million tonnes of carbon dioxide-equivalent in 2022, Argus Media reported.
But as skepticism grows about carbon-credit programs, the German system faces public questions. The scandal erupted into public consciousness thanks to an initial report in Handelsblatt in December, followed by reporting in German media by outlets including ZDF which indicated that as many as half of all UER projects in China are believed to be problematic. Some seem not to exist at all, while others may have misrepresented their benefits. In other cases, the benefits of genuine emissions-reductions projects may have been marketed to UER credit buyers without the knowledge of those behind the projects themselves.
Like other oil and gas companies with operations in Germany, Shell participated in the UER market to offset the emissions from its refining businesses. In the case of the chicken farm, in which it was a lead partner, the project was described as a set of heating systems in northeast China but geolocation data directed investigators elsewhere.
The impact of the scandal, if true, would be two-fold: Fake UER credits would lower overall demand for the use of biofuels or other such products made by companies such as Landwärme. And a flood of faked credits would tank their market price, which plummeted from about €400 per tonne of CO2 equivalent in Dec. 2022 to around €65 per tonne the following year, according to Argus.
Prashant’s view
The UER scandal has received little global attention because it’s complex and bound up in German regulations. But it bodes poorly for efforts to build trust in carbon markets and the regulators that police them.
In fact, if anything, the UER scandal is more troubling than previous ones because those largely involved the voluntary carbon market. The German controversy concerns a more tightly regulated adjacent system known as the compliance market, where participants have legal emissions-cutting obligations.
The role of any single company to police potential fraud is complex. To be sure, caveat emptor should apply in markets so laden with controversy; and Shell was warned at least as early as January of this year that several of the projects it was involved in were not providing the emissions benefits claimed, well before German authorities began any public investigations. Shell, as a lead partner on several UER projects including the one Landwärme identified, also had particular insight into their credibility and accuracy. So it’s not surprising that players who allege they were hurt by such apparently nonexistent UER projects want to increase political pressure on both the authorities and major companies in the market to win some kind of restitution for income they say was lost.
Yet as Shell’s spokeswoman notes, the projects it was involved in were “checked by the authorities in several steps.” The notion underpinning any well-regulated market is that buyers can trust that the products they are buying are legitimate. “The UER controversy does not represent a systemic problem of carbon markets, it’s a systemic failing of regulators,” Axel Michaelowa, a carbon markets expert and senior founding partner at the research firm Perspectives, told me.
And that’s where this particular scandal paints a worrying picture.
In the longer term, the controversy points to the difficulty of transnational verification, particularly in countries that are either not as transparent nor as easily accessible as parts of western Europe. If nonexistent projects can be spun up in the UER market, how confident can companies subject to the European Union’s forthcoming Carbon Border Adjustment Mechanism — which will hit products with import penalties if they are made via higher-emitting processes than those used in the EU — be that the certificates they obtain are trustworthy?
Consider also green hydrogen, a widely touted and renewably produced alternative to fossil fuels for industrial processes: It’s impossible to tell simply by examining the hydrogen how it was produced, so how can buyers and users of green hydrogen be certain it was made with lower-carbon processes if it came from more opaque or less regulated markets?
“The problem is of how to resolve trust in the system — on the political side, but also between business partners,” Elek told me. “The trustworthiness… is one of the things which has to be looked at very strongly.”
Room for Disagreement
Carbon markets experts argue that the blame falls less on the market itself and more on the regulator: “A carbon market is fine if the rules are implemented in a stringent manner… and is not just a mirage in the desert,” Michaelowa said. The idea of a carbon market is not itself flawed, he argued, and noted that among compliance markets, there are several examples of well-run ones: “The EU Emissions Trading Scheme is good,” he said. “We have penalties. We have low non-compliance rates. The same is true in California, the same is true in the northeast of the US. There are a number of carbon markets that have not had relevant problems.”
Notable
- Among the numerous German outlets that have cataloged the scandal as it has progressed, ZDF’s May report stands out for investigating the scandal and summarizing its consequences for ordinary Germans.