When a federal agency approves carbon instruments, surely they work? Unfortunately, the answer is often no. 

A recent investigation by ZDF's frontal exposed a troubling practice: German oil companies used fake projects from China to fulfill their climate obligations. Just one example of many: €80 million was paid for an alleged climate protection project in the Xinjiang province in China, which upon inspection turned out to be an abandoned chicken coop.

These were so-called Upstream Emission Reduction (UER) projects–separate from the voluntary carbon market (VCM) where CEEZER operates. This incident not only shows existing risks in current compliance programs but also highlights lessons for carbon credit procurement.

What are Upstream Emission Reduction (UER) projects?

The European Fuel Quality Directive (FQD) requires European fuel suppliers to reduce their fuel's greenhouse gas (GHG) intensity. Since 2020, companies in Germany and other member states can partially meet this obligation through the purchase of UER projects. These projects target emissions reduction activities that occur before the oil reaches refineries, such as 

• Flaring reduction of associated gases during oil production
• Energy efficiency improvements in oil production
• Use of renewable energy in oil production
• Modal shift for crude oil transport
• Efficiency improvements in international crude oil shipping

A UER certificate is generated for every kilogram of CO₂e saved in this way. Oil companies can use these certificates to fulfill their statutory GHG reduction quota. They can also sell the certificates to other mineral oil companies. In 2021, usage of upstream emission reductions (UER) were reported by fifteen Member States, together representing close to 5 million tCO2e. 

65 of such climate protection projects have been set up in China, according to calculations by ZDF’s frontal. According to their investigations, many existing plants in China were submitted to the German authorities as allegedly newly built UER projects, others without the knowledge and approval of the Chinese owners. The project sponsors include oil multinationals such as Shell, Rosneft and TotalEnergies. 

The German government recently announced plans to terminate the usage of UER projects within the framework of the emission reduction mandate already at the end of 2024, two years ahead of previous schedules. Following the report, associations have called for an immediate moratorium and effective sanctions.

Does that affect the integrity of projects in the voluntary carbon market?

UER projects are part of a so-called compliance scheme, where the rules are set by the government – in this case the European Union (EU). Crediting mechanisms, certification, and verification system differ significantly from projects in the VCM, which underlie different rules and methodologies. 

CEEZER operates in the VCM. Purchases of carbon credits in the VCM are not mandated by law but serve to help organizations take responsibility for ongoing emissions. While VCM credits come with their own risks, the certification and verification usually underlies public consultations and more public scrutiny, with monitoring reports usually being publicly available. Hence, the integrity of Chinese VCM credits is not affected by potential fraud in UER compliance schemes. That said, risk is always part of the equation in the VCM, especially in regions like China.

Why a change in the compliance markets is overdue

Compliance markets, despite government oversight, often have significant shortcomings. As seen with the Clean Development Mechanism (CDM) that was launched with the Kyoto Protocol by the UNFCCC, such schemes often rely on outdated and, by now, questionable methodologies for calculating emission reductions and might not reflect current scientific understanding. Additionally, the creation of methodologies at the state level can be subject to political influence and development goals beyond climate change mitigation. While that is a positive intent per se, there can be real trade-offs between climate impact and competing interests.

While the use certificate types like UERs is sanctioned by the German Environmental Agency (Bundesumweltamt) and allows certain industries to fulfill parts of their compliance quota, this does not speak for higher quality. Even government agencies themselves continue to invest in outdated compliance schemes to compensate for their own emissions because of the supposed security they offer. 

Voluntary markets, while unregulated and also risky, tend to allow for more frequent innovation. While far from perfect, they offer room for newer, often more permanent technologies in the form of carbon dioxide removal (CDR) certificates. The inclusion of permanent CDR in compliance schemes like the EU-ETS has long been on the policy agenda but progress is slow. A recent first step was the introduction of the Carbon Removal Certification Framework, that starts to define requirements but falls short of actually allowing removals to be used by companies  in compliance schemes. Speed is of the essence: Every year that passes without a strong backing, significant investment is funneled into less effective climate mitigation measures due to outdated government incentives.

How to avoid pitfalls in carbon credit procurement?

Buyers of certificates must be diligent and understand the inherent risks associated with various instruments. Just because a project falls under a government-approved compliance scheme does not automatically translate to a positive climate impact. Both compliance and VCM participants must prioritize robust methodologies, transparent monitoring, and a commitment to using the latest scientific data. 

For voluntary buyers, the UER scandal exposes the need for rigorous due diligence in carbon credit selection. CEEZER's white paper on carbon credit risk assessment emphasizes the importance of data-driven decision-making in the VCM to align with a company's sustainability strategy and risk appetite. 

The UER scandal further underscores the dangers of projects relying on counterfactuals and assumptions, especially those using outdated methodologies and inadequate monitoring, reporting, and verification (MRV). Similar to avoidance credits in the VCM, UERs depend on establishing a baseline scenario (a hypothetical situation without the project) to calculate emission reductions. While excellent projects in this category exist, such methodologies are inherently complex and prone to errors.

Furthermore, the involvement of the oil and gas industry in developing or implementing climate protection projects raises red flags. While state approval may offer a supposed layer of legitimacy, it does not guarantee quality or genuine climate impact.

Conclusion: Impactful climate action relies on data, not government backing

Impactful climate action is, unfortunately, not secured by compliance schemes. In a rapidly evolving market, governments and policy makers are in danger of falling behind. Policy timelines are often longer than the innovation rate would require. Impactful climate action, if in compliance or voluntary schemes, requires rigorous risk analysis and vetted data to ensure actual impact on the ground. Offering over 12.5 million data points and a rigorous vetting process, CEEZER helps global enterprises to back climate commitments with real impact. To reach climate targets, faster.