Recently, the cover of Harper's Magazine featured a story on how easy it is to perpetrate carbon trading and emissions offset fraud. The article, by prominent investigative journalist Mark Schapiro, takes a hard look at ongoing practices in carbon markets and the rising tide of fraud that is tarnishing the sector. The fraud is hardly a surprise. Any asset market comprised of buying and selling non-physical, hard-to-measure goods is a con man's dream. This has set the stage for the coming carbon market meltdown – an event that will eclipse in severity and destructiveness the sub-prime real estate crash that plunged the world into its deepest recession in 80 years.
There is a relatively quick, easy and permanent fix. That is to put in place a global carbon emissions measurement network. For roughly $5 billion, the world could put in place such a network that would let governments and market makers actually measure GHG emissions down to a granularity of 10 kilometers. Such a network would allow for verification that local carbon offset programs are working as advertised and would make a market built on the buying and selling of tiny molecules in the air a rock-solid, quantifiable asset class.
Sounds expensive? Actually, that amount for a global carbon measurement network is insanely cheap. By some estimates, the global carbon market will hit $3.5 trillion in annual trading value in the next 20 years. Without a credible verification system in place, then global carbon markets will be subject to continuous shocks as any hint of fraud or malfeasance roils the sector. A group of large investment banks could quite easily underwrite the full cost of such a monitoring network without even batting an eye. And they should. A rock solid insurance policy is certainly worth an investment of less than five percent of one year's projected trading volume in global carbon markets.
The idea of a global carbon measurement network is quite technologically feasible. Researchers at Boston University, Penn State University, and the Max Planck Institute, and many other top-notch institutions are using advanced spectroscopic measurement techniques to do precisely these sorts of measurements. The Chinese Meteorological Administration is currently gearing up for its first phase of precisely such a measurement network. In Europe and India, groups are gearing up with proposals to connect existing GHG measurement stations and add new ones to build out a comprehensive measurement effort. And the state of California is in the process of building its own emissions measurement network for methane.
The private sector, likewise, is taking an interest in the area. Cisco System, the enormous network equipment player (which could actually fund a network like this quite easily) is a partner in a new effort called Planetary Skin that aims to build out a sensor network to gauge the environmental health of the world. And in Japan, cell phone giant NTT DoCoMo has plans to build out a country-wide network of air quality and emissions measurement stations housed on communications towers. So lots of players are already moving in the direction of creating a GHG measurement system that allows for true market fidelity and trust.
That said, there is a clear need for speed. Schapiro is hardly alone in expressing these concerns. In the fall of 2009, the United Nations shut down one of the world's most prominent carbon offset trading and verification companies after it was unable to cleanly verify $100 billion in carbon offsets it had given the gold stamp of approval. These types of carbon market sleight of hand even reach down the retail level with enterprising traders buying and selling small batches of carbon credits and reselling them in ways that take advantage of the structure of the European Value-Added-Tax.
As a steady media drumbeat of carbon fraud grows louder, public and government skepticism of carbon markets continues to increase. Meanwhile, the technology sector continues to offer false promises such as carbon accounting and carbon inventory measurement as solutions to this problem. These technologies, primarily based on human estimates guided by complex software programs, can provide a false sense of security that is equally as damaging as carbon fraud. A software program can't measure what's coming out of a smokestack. And humans will always underestimate or underreport emissions. We've seen this time and again in self-reported emissions systems for benzene, sulfur hexaflouride, and other anthropogenic compounds.
And here's a final thought. If a $400 billion plunge in the market of the U.S. real estate market tipped us into an enormous recession, what would happen if a $3 trillion global carbon market crashed to nearly zero? Would such a plunge perhaps trigger an even deeper economic downturn? We can buy an insurance policy for a cool $5 billion. Sounds like a good investment to me.
Michael Woelk is the CEO of Picarro, Inc., a maker of greenhouse gas detection and measurement equipment based in Sunnyvale whose customers include the National Oceanic and Atmospheric Administration, the Chinese Meteorological Administration, the World Meteorological Organization. and the California Air Resources Board.
