Don't trust cold-callers flogging carbon credits

Find out how to avoid this nasty new scam.

There is no need for me to apologise for writing about cold callers flogging carbon credits for a second week in a row on this blog.

With the perpetrators of two big share boiler room scams put behind bars over the past month, regulators tell me that the “just under the legal radar” carbon credit scams are emerging fast as the biggest rip-off for investors. They're poised to overtake landbank rackets as many outfits flogging dodgy land move into carbon.

The easiest course is to slam the phone down whenever you're cold called as you can usually tell an investment scam from the hubbub of voices in the background, there's that unmistakeable boiler room noise.

How carbon credit scams work

But it's also essential to know how they work – to counter their stories – if only to convince others not to buy into this racket. There are scores of firms out there eager to take your money – to sell you a carbon credit worth 30p for £6 to £8. Yet despite the variety of companies, they all use similar lines as one seller – let's call him Jimmy – told me.

“I don't know much about this except what's on my script. I've only been doing this three weeks as this firm was only set up in mid-September. I used to be an estate agent but houses weren't selling,” he confessed.

I asked Jimmy to consider his potential victims – often elderly and trusting. He admitted he did not target the young as “they don't have money”.

One storyline is “UBS, the biggest Swiss bank says that European Union carbon prices may almost triple by as early as 2013.”

Ignoring that UBS managed to let a “delta” trader lose over $2bn, I found the source for this statement - a Bloomberg article written just over 12 months ago. And it has lots of  “conditional” words such as “may” or “could”. But leaving that aside, Bloomberg is discussing “EU carbon permit prices” - see this Wikipedia entry for an explanation of this difficult subject. These are often called “compliance” permits.

What Jimmy and his mates are selling is something quite different – voluntary carbon credits issued by companies mainly outside the EU. This is similar to selling pears because the price of plums has risen or may rise.

Jimmy and friends also quote JP Morgan and other big investment banks such as Goldman Sachs and Barclays Capital as “pushing the boundaries of the carbon market.” But assuming this to be true, there is no evidence that they are trading voluntary credits (technically voluntary emission reductions (VERS) . And even if they were, the FSA alert on carbon cold callers warns that this is no market for small investors as trading is virtually impossible. Banks can, of course, trade a variety of instruments such as credit derivative swaps or volatility futures which are off-limits to someone with the £5,000 to £10,000 that Jimmy and pals suggest investing.

Gold standard?

Jimmy says his emissions are “gold standard” and verified by the United Nations. The FSA says there are a multitude of organisations putting their stamp on carbon credits – all with different standards.

Carbon firms themselves are well aware of all this and seek to distance themselves from their sales staff. One says: “We provide no assurance that the voluntary market will follow or index European or other compliance markets.” In other words, whatever happens to the UBS view, it won't happen to VERs.

One firm warns that if its sales person promises a short term profit, you should not buy. Well, this is totally unregulated so you are left with the morals of the wild west. Another says that any returns promised as “a projection only”. So what you're told could well be fantasy, not fact.

Now if you ignore all that, can you push aside the warning that one firm carries in its terms and conditions that “it might be difficult or impossible to obtain the market process for VERs as they are often transacted ‘over the counter’ and as such values may vary from reseller to reseller”.

Another admits that: “VERs are illiquid in comparison to the EU Compliance market. There may be a big difference between the buying and selling prices of VERs.”

This is a polite way of saying you may be stuck with an unsellable and possibly worthless asset – just like the strip of farm land you get from those landbankers who overnight changed into “carbon experts”.

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