Auditing Carbon Credits: Can Companies Fake Their Green Initiatives?

 

In this era when corporate sustainability has become a buzzword, businesses everywhere are promising to limit their carbon output. One of their best-known weapons is carbon credits — a scheme that allows companies to "offset" their greenhouse gas emissions by funding eco-friendly projects. But just like every other scheme, it comes with its own set of cons. There have been many instances of carbon credit fraud, misreporting, and manipulation, which have made people question if the initiatives work or if it's just greenwashing.

In this blog, we will discuss some ways in which businesses have been faking their green initiatives, the challenges auditors face in verifying carbon credits, real-life fraud cases, and auditing's future in this realm.

Carbon Credits Defined and Why They’re So Hard to Audit

Carbon credits are a tradable permit enabling companies to emit a certain amount of CO₂. If they emit less than permitted, they can sell the excess as carbon offsets. The catch?

• ·       Most firms exaggerate or misreport their offset claims.
• ·       Some carbon credit initiatives fail to achieve the reductions they advertise.
• ·       There are no uniform practices for auditors to check the validity of these offsets.

Let us understand this in detail with a case study.

Case Study: Volkswagen's Dieselgate Scandal

In this case Volkswagen AG had installed diesels with hidden software that allowed the engines to qualify for emissions tests that they had designed (Hotten, 2015).

• ·       They sold vehicles as 'eco-friendly' while polluting up to 40 times the legal limit.
• ·       They did seem compliant in laws because VW had bought carbon credits — while systematically cheating on emission tests.

This example clearly illustrates how companies make claims of greenwashing and why green credit audit is crucial.

    Source: AI generated

How Companies Fake Carbon Credit Initiatives

Some of the ways corporations misuse carbon credits are:

1. Double Counting of Carbon Credits

Companies claim the same carbon credit multiple times — either by different companies in different reports or by selling credits that have already been claimed.

Example: A company finances a reforestation project in one nation and sells the same credits twice in two markets (Rathi, 2021).

2. Investing in “Phantom” Carbon Reduction Projects

Some companies fund projects that exist only on paper or would have happened even without funding.

Example: Previously, the California Air Resources Board (CARB) had given out carbon credits to forest protection programs that never could have faced threats of being chopped down (Elgin et al., 2020).

3. Misleading Carbon Offsetting Claims

Some companies are applying carbon offsets but continuing to pollute at the same or even higher rates—obscuring the sustainability story.

Example: Shell and BP both faced criticism that both companies are the largest programme sellers in the world used to offset carbon emissions, while they open up fossil fuel drilling ventures simultaneously (Ambrose, 2021).

4. Using Low-Quality or Non-Permanent Offsets

Some carbon credits depend on reforestation projects, but if those forests get destroyed or harvested, the offset does not mean anything.

Example: California fire incinerated millions of dollars' worth of carbon credits in 2020, showing issues with nature-based offsets (Meyer, 2021).

Challenges in Auditing Carbon Credits

Auditing carbon credits is a challenging process due to:

• ·        No Global Standards — Each nation is unique, and that poses problems in defining an audit.
• ·     Hard to Track Emissions Reductions — Future environmental impact is frequently unverifiable with offsets.
• ·      Problems With Third-Party Verification – Many independent certifiers show bias, or have poor verification processes.
• ·      No Real-time Audit of Carbon Offsets — Unlike for financial transactions, it is difficult to track the carbon offsets in real-time.

     Source: AI generated

The Future of Carbon Credit Auditing: Is tech the solution?

1. 1.     Transparency in Carbon Tracking with Blockchain

Blockchain technology can make sure that every carbon credit is tracked and verified, and double counting and fraud are not possible.

Example: IBM and Energy Web (Jopson, 2022) are developing blockchain-based carbon credit verification systems

1. 2.     AI and Satellite Monitoring for Real-Time Verification

Satellite tracking with AI is able to assess deforestation, industrial emissions and air quality in real time, and authenticate carbon credit projects.

Example: Companies like Sylvera use AI to authenticate the genuineness of carbon credit projects (Kollewe, 2022).

1. 3.     Stricter Regulatory Frameworks

Financial regulators and governments are setting stricter guidelines for the authentication of carbon credits.

Example: One rule proposing that specified publicly traded firms be required to report data about carbon credits is under consideration by the SEC (U.S. Securities and Exchange Commission) (Flitter, 2022).

          

        Source: AI generated

Conclusion: Can Carbon Credit Audits Be Truly Reliable?

Carbon credits would be useful in supporting global sustainability efforts, but without proper transparency and auditing, fraud and scams can easily take place. To prevent fraud:

• ·       Stricter regulations and standardized audits must be implemented globally.
• ·       Audit procedures need to incorporate blockchain and AI.
• ·       Companies should focus on genuine emission reductions instead of just offsetting pollution with credits.

Forensic accountants play a critical role in keeping companies accountable on their sustainability declarations. Without robust audits, carbon credits risk degenerating into one more tool of corporate fraud and not an actual solution for climate change.

 

 

References

• Ambrose, J. (2021). "Big Oil’s Green Pledge: Why BP and Shell’s Carbon Offsets are Under Fire." The Guardian.
• Elgin, B., Shankleman, J., & Warren, H. (2020). "The Secret Lie of Carbon Offsets." Bloomberg Green.
• Flitter, E. (2022). "SEC Plans Crackdown on Carbon Credit Disclosures." The New York Times.
• Hotten, R. (2015). "Volkswagen: The Scandal Explained." BBC News.
• Jopson, B. (2022). "How Blockchain is Changing Carbon Credit Auditing." Financial Times.