China's emissions fraud cases signal challenges in carbon market rollout

China's Ministry of Ecology and Environment has disclosed cases of negligence and fraud by four third-party emissions consultants that were in charge of assessing whether power companies were measuring and reporting accurate emissions data for the national compliance carbon market.

The cases range from inefficiency and incompetence to active involvement in falsifying emissions data and coal sampling, and underscore the challenges in rolling out a national carbon market on a scale that has not been previously attempted globally.

China's national compliance carbon market, launched July 16 last year, currently covers only the power sector that alone accounts for 40% of the nation's CO2 emissions, and is set to cover a total of eight industrial sectors in coming years.

The hurdles involved in putting a price on carbon in the world's second-largest economy by introducing standardized measurement reporting and verification systems across fragmented industries is a herculean task that dwarfs even the early days of the EU Emissions Trading System, which faced similar difficulties.

On March 14, China's environment ministry published details of false emissions reporting and negligence by four private consultants -- Zhongtan Nengtou Tech Co., SinoCarbon Innovation & Investment Co., Qingdao Xinuo Renewable Co., and the Liaoning Dongmei Testing and Analysis Research Institute.

The ministry in a statement said it has asked the respective provincial environment ministries to further investigate these companies and all the power companies involved.

The first company named was Beijing-based consultancy Zhongtan Nengtou Tech, which the ministry said tampered with data, forged coal quality test reports and advised power companies to submit fake coal samples, along with conducting poor quality emissions reporting.

Zhongtan Nengtou Tech tampered with inspection reports for emission-controlled enterprises like Inner Mongolia Erdos High-tech Materials Co. and advised companies to submit false coal samples for inspection, the ministry said.

In its consulting contract with clients, the consultancy promised that carbon emission allowances for power plants could be turned from losses to profits, and allowances could be used to enrich the company, the ministry said.

"Zhongtan Nengtou clearly knew some companies did not keep their monthly coal samples used in 2019-2020, but it still advised these companies to prepare fake coal samples for carbon content measurement," it said. China carbon market's first compliance period (July 16-Dec. 31, 2021) required companies to pay for surplus historical emissions in 2019-2020.

The carbon emission report prepared by the consultant falsely reported data such as coal burning, heat supply and electricity purchased from third parties, and some projects had multiple sets of production data reports and coal quality inspection reports with different values, the ministry said.

Poor quality reports

The second company named by the ministry was SinoCarbon Innovation & Investment Co., which it said did not perform its duties properly, and whose verification work "went through the motions."

Sinocarbon's processes did not comply with regulations, the signed personnel did not conduct the actual verification, and the overall quality of reports was poor, the ministry said. The consultant "turned a blind eye" to obvious problems in the emissions report, such as fraudulent tests and statistical errors.

Some companies changed their reported emissions using different calculations and SinoCarbon failed to verify the source documents and data integrity, the ministry said.

The third consultancy was Shandong province based Qingdao Xinuo Renewable Co., whose verification procedures the ministry said were not compliant with government guidelines, leading to inaccurate results.

"During the on-site verification, it mainly walked around and took pictures, and did not verify important documents such as environmental impact assessment and pollution discharge permits," the ministry said.

Qingdao Xinuo also "turned a blind eye" to obvious problems in the carbon emission reports of companies such as falsified test reports, and treated the workflow as "a mere formality," it added.

"In the absence of original coal quality inspection records, the content of the report was fabricated to indicate that the original records have been verified," the ministry said, adding that the content of its inspection report was "obviously inconsistent with the actual situation of the enterprise."

Fabrication claims

The fourth consultant, Liaoning Dongmei Testing and Analysis Research Institute, was suspected of fabricating testing reports, the ministry said.

Liaoning Dongmei "issued falsely dated elemental carbon content test reports on a monthly basis for a number of emission control companies that centrally submit coal samples for inspection, and tampered with the date of sample collection and test date," the ministry said.

Its "internal quality control system is lacking, and it is difficult to verify the compliance of the coal quality analysis process and the authenticity of the results," it added.

SinoCarbon on March 14 issued a statement saying its verification work was impacted by COVID-19 quarantine regulations, resulting in negligence and non-compliance, and that it was deceived by companies that provided falsified source documents.

The other three companies did not respond to queries.