UK Financial Services Authority (FSA) warns against unregulated schemes which risk landing you with an overpriced and unsellable white elephant...
Carbon credit trading schemes are set to take over from landbanking as a major scam hitting unwary investors. This week the Financial Services Authority issued its first consumer alert on the schemes following an unprecedented 10-fold surge in complaints and queries in July. The watchdog warns that the schemes are unregulated, so anyone can sell them, and UK authorities have no way of controlling their quality or validity.
Investors risk ending up with an overpriced credit which is virtually unsellable – just like the almost worthless agricultural acreage that landbankers push with the promise of planning permission in the near future
At least one company that was selling land has moved its business model from persuading investors that land will soar in value to concentrating on carbon schemes.
Jonathan Phelan, head of the unauthorised business department at the FSA, says: "Since June, we've seen a significant rise in consumers reporting carbon credit trading schemes to the FSA. While carbon credit trading schemes don't automatically amount to investment schemes that require FSA authorisation, we are concerned that the majority of the firms being reported to us are using high pressure sales tactics and targeting vulnerable consumers with little or no knowledge of commodities and derivatives trading.
"We suspect that many of these firms are essentially overseas boiler rooms or landbanking firms simply selling a highly dubious new investment product and jumping upon the green/eco-friendly bandwagon. We strongly recommend that consumers seek advice from an FSA-authorised independent financial adviser before getting involved in the carbon credit trading market."
The first contact that investors receive from a carbon credit company is usually a cold call, although some use email or post, or take stands at investor exhibitions. And the initial appeal is to the investor's environmental concerns.
Like landbankers, most carbon credit companies use much the same sales scripts. This is a typical example: "Carbon credits are an obligation under the Kyoto agreement and have gone from zero to $550bn in just five years. No other market has been driven up so fast. This is a worldwide move to clean up the carbon footprint, there is massive legislation and firms have to adhere."
However, growth in a market is no guarantee of investment gains. While there may be extra demand, carbon credits are not limited in supply like commodities such as gold or cocoa. Potential victims are told industries have to offset emissions and that governments are focusing on green developments – so investors can reap rich rewards.
One route to parting you from your money is the rainforest land deal. A salesperson claims Amazonian forest land will turn into profitable and easy-to-trade carbon credits once it is certified as "rescued from loggers".
Earlier this year, one London firm was selling land in the Amazon at £1,000 an acre – though similar tracts feature on websites for less than £20 an acre. It claimed "every £7,500 investment will soon turn into £15,000 or £20,000"and said the high markup was due to "the cost of accreditation".
More frequently, carbon credit trading firms sell the "voluntary emission reduction" (VER) credit which they claim is a tradeable commodity, certified by the United Nations framework convention on climate change. Each credit represents one tonne of greenhouse gas carbon dioxide. Sellers often say their credits are cheaper than JP Morgan, the investment bank with a substantial interest in carbon trading schemes. But unlike standardised commodities such as gold, where each kilobar of gold is the same as the next, there is no uniformity in the VER market.
The FSA says: "VERs are often labelled as certified but this is voluntary, involving a wide range of bodies and different quality standards." In reality, VERs can be bought for as little as 30p, and can diminish in value as they age. Firms offsetting emissions tend to go for the latest VERs. The FSA also warns against statements that the VER is "government backed".
Some of the firms touting carbon credits say the Australian government will force big companies operating in Australia to buy credits at A$24 (about £15) a time next year. This will be a carbon tax, however, rather than a VER.
Potential investors are told their credits will be listed on the APX online registry. The FSA adds: "It is not often made clear to investors that this involves trading on over-the-counter markets which require experience and skill. You may lose money or not be able to sell at all."
Tony Levene: How I was cold-called
I was cold-called last week by a carbon credit trading company based in London, and faced the high pressure sales tactics the FSA is warning about.
The caller, who described himself as a "portfolio manager" told me the firm was an expert in carbon credits which, he claimed, was the world's fastest growing market. He sent me a glossy brochure, but when I received it, there was no mention of carbon credits. Instead it was focused entirely on landbanking, a previous speciality of the firm.
I was also contacted by a "senior spot trader" at the firm. He told me he could sell me carbon credits cheaper than JP Morgan because "we are not so greedy". He wanted me to invest £10,000 to £15,000.
He said: "Indigenous people would benefit from credits as a lot of energy would be sold back to the national grid", a claim dismissed by one expert as "nonsense in every sense of the word".
When asked about the sudden switch from landbanking, he told me the firm was staffed "with experienced people with backgrounds in stock markets and investment banking".
He promised to send carbon credit literature. But the next post brought yet another copy of the landbanking brochure. I think I'll duck this one!