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The Muckraker

Update: Carbon Watch
Mark Schapiro | Update: Carbon Watch | September 27, 2010

Crime in the carbon markets

Undercover wildlife agents met financial sleuths for the first time last week in Lyon, France at a conference sponsored by Interpol intended to highlight the increasing complexity of environmental crimes and the tightening of environmental regulations in developing as well as developed countries. “Governments,” said Bakary Kante, in charge of the United Nations Environment Programme environmental law division, “should start preparing for an onslaught of environmental court cases.” Two hundred agents who will be investigating those cases came here from some thirty countries for the week-long conference to coordinate strategies around global environmental crime networks.

Inside the high security Interpol compound, located just blocks off the River Rhone, the only visual reminder of ‘the environment’ was a heap of discarded computer parts assembled like an art installation in a corner of the marble and stone atrium. Emile Lindemulder, a Criminal Intelligence Officer with the Interpol Environmental Crime Unit, assembled the e-waste heap as a reminder of one of the agency’s chief responsibilities: helping national police agencies to enforce a global treaty, the Basel Convention, which restricts the international trade in hazardous electronic waste, which contain highly toxic chemicals and minerals.

The world inside Interpol’s global headquarters seemed somehow inverted, with police talking like environmental ngo’s about the need for vigilance and intelligence sharing to establish liability for environmental abuses—albeit dispassionately, and with a ‘get the job done’ directness. “We have to prove, and prevent, murder in the future,” is how M.C. van Leeuwen, an investigator with the Netherlands National Police, put to me the unique challenges of environmental policing. Following the evidence to prove liability can be challenging, he said, and it gets down to some of the unique characteristics of environmental crime: A polluter’s fingerprints may have been laid down decades before, a system of corporate trap-doors—front companies, foreign registries and the like—tend to obscure liability, and the uncertainties surrounding the science of toxicology can make establishing clear cause and effect difficult.

Now Emile Lindemulder and others at the agency want to expand Interpol’s mandate into an entirely new terrain: criminality in the global carbon markets. Those markets, operating in countries subject to the emission restrictions of the Kyoto Protocol, have grown exponentially over the past five years, churning through more than $300 billion worth of transactions over the past five years. “When there’s this amount of money involved,” Lindemulder commented, “criminals get interested.” Wildlife and e-waste police were encouraged to meet financial fraud experts—including agents from British, German and other securities police agencies monitoring financial crimes. Lindemulder explained that police from traditional realms of environmental enforcement are now compelled to understand the complexities of global finance. “The carbon markets involve so many parties, so many new instruments and forms of vulnerability that we haven’t been aware of before.” (I was invited to present my findings at the gathering, published in Harpers Magazine and aired on PBS FRONTLINE/World, exposing the difficulties in measuring the veracity of carbon offset promises, and the many uncertainties involved in turning tropical forests into carbon offsets).

The complexity of the carbon markets, operating with ambiguous oversight, present an array of new opportunities for fraud, commented Peter Younger, a veteran with Interpol and now in charge of the agency’s enforcement of wildlife and forest protection in Africa. “You’re talking about an international financial trade mechanism and the question is still evolving, where does the liability lie? We’re still filling in our knowledge gap.” The carbon commodities being traded, he said, are unlike any others. “You’re obtaining not a physical entity or asset but a piece of paper.” He cited as an example the rapid growth of interest in tropical forests serving as ‘offsets’ to companies’ carbon emissions. In countries where matters of land ownership are often disputed and unclear, the possibility for fraud is considerable, he said. “In effect, you could be falsifying ownership in something you can see in order to sell something that you can’t. And then inserting that into the carbon markets and selling it to people.”

Such a scenario is not as far-fetched as it sounds. The Overseas Anti-Corruption Unit in the City of London Police force is currently investigating allegations that a London-based offset developer, Carbon Harvesting Company, may have improperly claimed access to the forests of Liberia in order to sell the carbon rights to European and other companies. In other instances, traders have generated hundreds of millions of euros in illicit profits by pocketing unpaid taxes—a case which revealed that ninety percent of the carbon trading houses in Denmark were fronts for tax fraud.

The UK’s new Minister of Environment, Lord Christopher Smith, gave a keynote address, where he stressed his government’s commitment to cooperate with international law enforcement to tighten oversight of global environmental agreements. That includes the Kyoto Protocol, governing greenhouse gas emissions, which gave birth to the now multi-billion dollar carbon markets. “As the price of carbon increases, we know that the more lucrative it becomes, the more criminals will be attracted to the market,” he commented after his speech. “Being here at Interpol suggests how we need to be way ahead of the criminals in thinking about what they’re likely to do—whether trafficking in endangered species, in ewaste, or what might happen in carbon trading as it becomes an increasingly valuable commodity.”


Natalia Viana | Update: Carbon Watch | July 26, 2010

US forest strategy boomerangs in Brazil

A recent ad campaign aimed at gaining Midwestern senators support for US climate change legislation has backfired in Brazil. The ad by the National Farmers Union and Avoided Deforestation Partners, an alliance of major environmental organizations and utilities, advocates for farm state senators to support U.S. emission limits by offering an incentive: the ability of companies to purchase emission offsets in the form of standing tropical forests, which sequester the potent greenhouse gas carbon dioxide. Thus, the coalition argued, the land would not be cleared for the cultivation of soybeans and other crops that compete with US agriculture. A report accompanying the ad, called “Farms here, Forests there” claims that US farmers could gain up to $221 billion between 2012 and 2030 from less foreign competition.

The report states “the expansion of pasture and plantation to previously forested land in nations such as Brazil, Argentina, Indonesia and Malaysia has contributed to these countries becoming lead producers and exporters of these commodities."

“If the forests are conserved,” the report states, “the land will not be converted to pasture or plantation…. [and] we can expect to see reduced production from these [tropical forest] countries as a result of restricted land use and higher production costs.”

A video created by Avoided Deforestation Partners goes further: “Did you know that saving forests can save American consumers billons…Did you know that saving forests can protect American jobs?" The video concludes: “No new technology is necessary, no new systems need to be invented."

The advertising campaign aimed to win support from conservative legislators for the inclusion of rainforest protection in US domestic climate legislation. Here in Brazil, however, it went seriously wrong. The ad landed in the middle of a debate in the Brazilian Congress, which is considering a proposal by the government to loosen restrictions on the development of the Amazon.

A coalition of major Brazilian environmental NGOs repudiated the claim that protecting the world’s forests would benefit US agriculture. The coalition, including the Instituto Socioambiental, Conservation International-Brazil, WWF-Brasil, Fundação SOS Mata Atlântica and Greenpeace-Brazil, charged that the Avoided Deforestation Partners' argument "ignores the Brazilian reality." According to data compiled by the University of São Paulo, Brazil has at least 61 million hectares (roughly 150 million acres) of low-productivity land, which “can be quickly converted into areas of agricultural expansion” without intrusions into the nation’s forests. "We could double our production of food without having to bring down new forest and still recovering those areas where reforestation is done needed for their potential to provide ecosystem services," it said. The statement also denounced use of the report by deforestation advocates in Brazil to support their assertion that preservationists were playing into the hands of foreign agricultural interests.

US environmental groups that are members of Avoided Deforestation Partners—including The Nature Conservancy, Conservation International, The National Wildlife Federation and the Environmental Defense Fund—later distanced themselves from the report, saying it “is based on the assumption, totally unfounded, that deforestation in tropical countries can be easily interrupted, and its conclusions are therefore also unrealistic."

The groups also cited “several scientific studies [that] show that to reduce deforestation it is necessary to increase the competitiveness of agricultural production outside the forest frontier. Large tropical countries have large under-utilized rural areas where agriculture could be increased without increasing deforestation." The statement came out a month after the report was released, right when then the debate was heating up in Brazil.

Hurriedly, AD Partners responded with a new report that claimed Brazil would actually benefit from forests protection, estimating that its gross revenues from a policy designed to link forest protection to global strategies against climate change—known as REDD (Reduced Emissions from Degradation and Deforestation)—could amount to as much as $306 billion by 2030.

But the harm had already been done. The news about the report came out in Brazil right in the middle of a heated debate in the Brazilian Congress about the revision of the National Forests Code, which would weaken existing forest protections. At the end of June a congressman from Mato Grosso, a soy producing state, Jorge Yanai, cited the report to discredit Brazilian environmentalists, asserting that they were actually driven toward conservation by foreign interests seeking to restrict Brazilian development.

His proposals include, among other things, an amnesty on anyone guilty of illegal logging before July 2008 and permission for small properties not to keep what's known as the legal reserve—the amount of forest on a farm or settlement that must be protected.

The current law obliges all farms to preserve legal reserves in different percentages according to the region. In the Amazon, for instance, legal reserves must occupy 80 percent of the land; in the cerrado (a Brazilian type of savannah), the legal reserve is 35 percent of the land; and in forests elsewhere in the country, 20 percent. The word that small farms won’t have such an obligation has already reportedly led farmers to split their properties into smaller units. The proposed changes to the Forest Code also include a reduction in the width of land to be preserved alongside water courses—from 30 meters to 15.

In early July, the proposed weakening of the rules governing forest protections was passed by a key committee in the Lower House. The bill is expected to be voted on by both the Brazilian House and Senate in the fall—but not until after the presidential elections in October.

Before the revised report from Avoided Deforestation Partners was published, Glenn Hurowitz, the Washington Director of Avoided Deforestation Partners, told me that the study had been misinterpreted. “The report didn't analyze the impact on Brazil, and it's unfortunate that it has been interpreted that way."

Brazilian environmental NGOs claim, however, that the original report's intention was too clear to be misunderstood. They claim it was based not only on a false assumption, but also on two misunderstandings by the US lobby group.

AD Partners believed that to convince US farmers to preserve forests you have to say they will benefit economically at the expense of competitors. This generated a dichotomy that no environmental groups in Brazil would embrace.

The other mistake, they say, was to assume that nobody else outside the US would care. While within the US, environmental and news organizations generally praised the report’s conclusions, outside the US it was seen as an outrage. It’s something nobody at the US lobby group had thought about—that the report would have an impact on countries with tropical forests. Thus far, it seems to have had a negative impact on Brazilian’s own struggle to conserve its forests.

Natalia Viana is an independent journalist based in Sao Paulo, Brazil. She writes for The Guardian and The Independent (UK), as well as several Brazilian publications, and as a reporter for PBS Frontline. She recently published a three-part series on the debate over forest preservation and U.S. policy in Brazil on the Brazilian internet magazine Opera Mundi.

From Climate Desk: Oil industry "reforms," despondent fishermen's wives and quantifying the oil spill

Digging deeper into the effects of the ongoing Gulf Oil Spill, PBS's Need to Know produced an infographic on quantifying how much crude has gushed into the ocean, showing low and high estimates. Mother Jones looks at crisis centers in St. Bernard parish, who are counseling wives of the fishermen impacted and often out of work; one worker called their trauma "BPTSD" (combining BP and Post Traumatic Stress Disorder). And for Need to Know, Jon Meacham interviews oil expert Lisa Margonelli from the TEDx Oil Spill Conference about the moral choice of offshore drilling. Finally, another MoJo reporter looks at the possibility of reforming the oil industry in an election year.

INFOGRAPHIC: How much oil are we talking about? | PBS Need to Know

Depression, abuse, suicide: fishermen's wives face post-spill trauma | Mother Jones

Not in my backyard? | PBS Need to Know

Congress' oil industry "reforms" = election-year greenwashing | Mother Jones

Mark Schapiro | Update: Carbon Watch | June 22, 2010

Tracking BP: The Climate Desk

As the fast-motion oil catastrophe unfolds in the Gulf, check out some great reporting from a new media consortium, The Climate Desk . The desk is an innovative cooperative approach to in-depth reporting into climate change and energy. Participants range across all media, including Mother Jones, The Atlantic, Wired, Slate, Grist, WNET’s news show Need to Know, and CIR. They sent a team down to the Gulf which is producing some insightful revelations, analysis and news. Here is some of the latest:

Conflict of Interest for Judge Who Decided Against Offshore Moratorium?

License to Drill: New Leases in the Gulf of Mexico

How Will Distributing Money from the $20 Billion Claims Fund Work?

Why Won’t BP Measure the Oil Spill?

Why Did BP Take the Risks That it Did?

Should I Boycott BP?

Uncharted Waters: The Spill and Human Health

How do you put a dollar value on something like a coral reef?

Uncharted Waters: The Spill and Human Health

Mark Schapiro | Update: Carbon Watch | June 15, 2010

Carbon carousel: European market a haven for tax fraud

Flying below the American radar, a tax scandal has been rocking the global carbon markets. Ironically, it is emanating from Copenhagen, the city that six months ago hosted the world's largest climate summit. But back in 2007, long before COP 15 arrived, the Danes began working behind the scenes to host a growing cadre of carbon brokerage firms, which have become central to trading the world's fastest growing commodity.

To make it easier for these financial firms to set up shop in the Danish capital, the Ministry of Finance decided to skip background checks on companies being vetted to trade on the country's national carbon exchange. According to a string of reports in the Danish newspaper Ekstra Bladet, all the government asked companies to provide was an email address. This laissez-faire attitude succeeded in channeling close to a third of all EU carbon trades through Denmark, and has since backfired badly.

The paper reported that one firm after another was little more than a front company for transacting complicated financial scams. In fact, more than 80 percent of the carbon trading firms registered on the Danish exchange closed down after the media probe began, according to a statement (pdf) by the country's Environment Minister, Lykke Friis.

The fraud is known as a "tax carousel." Danish-registered companies buy carbon credits from brokers in other European countries. This intra-European trading of credits to meet EU emissions standards (and the trades made by speculators betting on the price of these credits) are not taxed. But when the buyer and seller are trading in the same country, in this case Denmark, a value added tax, or VAT, is imposed.

In Denmark, VAT is a hefty 25 percent on each transaction -- one of the highest rates in Europe. But rather than turn the tax monies over to the Danish treasury, the traders packed up and disappeared. Three-quarters of the carbon traders registered in Denmark during the past year have either been dismantled by their owners or were shut down by the authorities.

According to a Reuters report, EuroPol estimates the scheme has so far cost treasuries in Denmark and other European countries some 5 billion euros (about US$7 billion) in lost revenues, while throwing into question the veracity of thousands of carbon trades.

Bo Elkjaer, the Danish reporter who broke the story, explained over email that his further investigations suggest the scandal is by no means confined to Denmark. Many of the same firms are suspected of running similar schemes in the Netherlands, Germany, Norway and the UK. EuroPol reports that after the governments of France, the UK, the Netherlands and Spain changed their tax codes to close the loophole, the volume of carbon trading in those countries collapsed by 90 percent.

Meanwhile, the media blitz has raised questions about the EU's new commissioner for climate action, Connie Hedegaard, who was Denmark's climate minister when many of the fraudulent deals were set in motion. Hedegaard said publicly that she knew nothing about the fraud before Mr. Elkjaer and his newspaper began reporting on the case last December.

In May, the Guardian reported that it had obtained a document from inside the Danish ministry drawing attention to the tax fraud problem, which Ms. Hedegaard had initialed back in August 2009. Since then, she has admitted she was aware of the problem but says that at the time she signed the report, she saw it as a tax issue and, therefore, not her responsibility.

EuroPol is in the middle of a full scale investigation into the scam, and hundreds of arrests have been made across Europe.

Elkjaer says the scandal highlights the vulnerability of a system based on trading an intangible asset. "It's just a computer certificate, moved from account to account in endless loops," he said. "A trade can be performed from a single laptop anywhere in the world. All it needs is an internet connection."

Sarah Terry-Cobo | Update: Carbon Watch | June 14, 2010

The American Power Act: cap and trade 2.0

On May 12, in the midst of the growing oil spill crisis in the Gulf of Mexico, Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) released the first draft of the American Power Act, without the support of Lindsey Graham (R-SC), originally a co-author of the bill.

Seen as the companion bill to the climate and energy bill authored by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA), the Senate version, for the first time, establishes greenhouse gas (GHG) emission limits on U.S. industry, namely utilities, petrochemicals and large manufacturers. To gain industry support, Kerry and Lieberman have tailored the pollution limits for each sector, rather than using a one-size-fits-all approach.

In an open letter published on the Grist and the Huffington Post websites, Kerry called the bill a good one but not a perfect one:

"...It's got to be an effort that makes my colleagues -- and that has to include Republicans so we can get to 60 -- comfortable about the jobs we're going to create and the protection for consumers and the national security benefits... And it has to address those pieces on their terms. The good news: I think we got that balance right." (Read more from Kerry and the public's response.)

What are the Targets? How do they Differ Between Bills?

The Senate bill's reductions targets are nearly identical to those in the House version, but how and when industries must meet those targets is vastly more complex. Regulated sectors must reduce their GHG emissions 17 percent (compared with 2005 levels) by 2020 and 83 percent by 2050. However, the targets in both bills are less than what other industrialized countries have committed to under the Kyoto Protocol, where reduction targets are set against 1990 levels.

Cap and Trade 2.0

Both the Senate and House bills aim to create a regulated carbon market, although the Senate version has added a "dividend," or rebate, approach to the cap and trade market at the heart of both proposals and already established in Europe. The dividend approach returns a portion of revenues generated by trading some of the pollution permits back to consumers in the form of energy rebates.

Sectors participating in this new market include electric utilities, petrochemical refiners, and manufacturing and heavy industry. Each sector has a deadline for entering the market: utilities start at the beginning of 2013, while natural gas providers and heavy industry enter in 2016.

Petrochemical refineries and importers will also be regulated starting in 2016 but will not be allowed to trade pollution credits on a carbon exchange. Instead, they must purchase fixed-price allowances each quarter, which cannot be traded or sold. The Environmental Protection Agency (EPA) will buy and sell these allowances from a strategic reserve in order to stabilize the price for the permits. Any allowances that the industry does not purchase will be rolled over to the next quarter's auction.

The Senate bill would only allow regulated entities to purchase these pollution permits, in this case, the big three -- utilities, petrochemicals and large manufacturers. A handful of small polluters are also allowed to purchase allowances, including consumers using heating oil or propane to heat their homes. The aim of restricting the market only to heavy polluters is to keep out speculators looking to profit from the market, rather than reduce pollution levels.

When regulations begin in 2013, many of the pollution allowances will be given away for free, and the rest auctioned. Again, to help prevent price volatility, the bill establishes a "price collar" of how much these pollution credits can be traded between industries, with a floor of $12 and a ceiling of $25 per ton of carbon. The EPA can buy and sell allowances to help stabilize the price of pollution permits within that price range.

In the first year of the program, there will be 4.722 billion pollution allowances issued (1 allowance equals 1 ton of carbon). Each entity must hold an allowance for each ton of GHGs emitted during the previous year, except for emissions from "renewable biomass" sources, such as wood chips. If a utility polluted more in 2013 than the year before, it will need to bid for additional allowances on the market.

What Others Have Said About the Bill

The next challenge will be to parse the complex matrix of pollution allowances and how they will create reductions over time.

So far, the bill has gained some support -- however cautious -- from energy policy analysts, who note it is "better than nothing," and a good place to start.

In an analysis of the pollution allowances, Brookings Institution staffer and co-director of economic studies, Ted Gayer cautioned that giving away allowances for free "misses an opportunity to substantially lower the overall cost of a cap-and-trade program." By his estimate, if all pollution permits were auctioned, it would generate $60 to $80 billion annually in the beginning of the program, and in the next couple of decades, could generate up to $100 billion annually. This revenue, he argues, could be used to help close the federal budget deficit.

Joseph Romm, left-leaning blogger at Climate Progress and a former Clinton administration official, said that while the bill "is worth settling for," and could go further, it could reasonably pass: "As I've said many times, the APA meets key criteria for the kind of bill one could reasonably expect Congress to enact right now, which I enumerated in What to look for in the bipartisan climate and clean energy jobs bill."

David Brooks, the conservative columnist for the New York Times also wrote about the potential benefits of the bill in his April 29 column:

"The bill, like all politically plausible bills these days, is larded with special-interest provisions and public giveaways to defuse opposition and win votes. But it does perform a few essential tasks. To boost innovation, it raises the price on carbon and devotes some of that money (though not nearly enough) to research and development. In addition, it establishes a predictable price for carbon."

The next challenge will be to parse the complex matrix of pollution allowances and how they will create reductions over time. Many experts call the reductions "modest," but say the passage of U.S. legislation is key to negotiating a post-Kyoto treaty at the next round of U.N. climate talks in Cancun at the end of this year.

For a detailed comparison of climate bills in the current Congress, read this analysis (pdf) by the World Resources Institute senior climate and energy associate, John Larsen.

CIR Staff | Update: Carbon Watch | April 20, 2010

Carbon Watch nominated for Webby Award

We are happy to announce that "Carbon Watch" has been nominated for Best News & Politics Series in the 14th Annual Webby Awards.

Hailed as the "Internet's highest honor" by the New York Times, The Webby Awards is the leading international award honoring excellence on the Internet.

As a nominee, we are also eligible to win a Webby People's Voice Award, which is voted online by the global Web community.

The voting closes April 29th, so FRONTLINE/World fans please cast your vote for us here.

Thanks for your support from all at the Carbon Watch team.

Carbon Watch is a joint project with Frontline/World and the Center for Investigative Reporting.

Mark Schapiro | Update: Carbon Watch | April 13, 2010

Miscounting carbon

The treacherous nature of measuring the veracity of carbon offsets was highlighted once again late last month when the United Nations suspended the firm TuvSud, responsible for nearly one quarter of the carbon offsets on the market today. The German company is one of twenty-six companies the UN has permitted to act as what it calls 'validators' of the offset system, charged with affirming that promises to reduce emissions in a developing country project--wind power, solar energy, methane reduction, etc--actually deliver the promised reductions. On March 26, the UN removed the company's ability to continue validating those projects--creating overnight uncertainty in the markets over the veracity of the projects it had been hired to validate. Such offsets based in developing countries are expected to account for at least a third of Europe's anticipated emission reductions by 2012, according to recent estimates by the European Environment Agency.

At the time of its suspension, TuvSud was the second biggest validator in the world, responsible for more than 1,200 projects over the past eight years. The UN's Executive Board cited the company's willingness to approve projects despite concerns over their actual emission reduction potential--a quality known as additionality--and the lack of technical experience of personnel assigned to the task. Some of the company's approved projects have been highly controversial, such as the Xioxai dam in China--which has led to the eviction of 7,500 people from their homes, according to the International Rivers Network. Credits from that project have been used by major European companies such as the giant German utility RWE.

The action comes on the heels of two other suspensions of validation firms for similar reasons, and which together represented more than half of the carbon offset market, as I wrote about recently in Harper's. Those two validators, the Norwegian company DNV and the Swiss company SGS, have since been reinstated. But the latest suspension means that two-thirds of the offset projects now available to industries operating under the emission reduction requirements of the Kyoto Protocol were, according to a database compiled by the UN Environment Program, validated by firms who's methodologies, skill levels and measurements have been called into question by the United Nations, which is charged with overseeing the offset market.

I also found that the United Nations does not have the power to pull those questionable credits off the market--which means that European industries are still using them to meet their emission limits. The credits bearing TuvSud's stamp of approval prior to its suspension, like those of DNV and SGS prior to their suspension, are still available for purchase by industries seeking to use offsets to continue emitting greenhouse gases at home--though they may leave the mistaken impression, due to faulty measurements, of more emission reductions than have actually occurred.

CIR Staff | Update: Carbon Watch | April 13, 2010

Carbon Watch nominated for Webby Award

A collaboration between the Center for Investigative Reporting and PBS Frontline/World, Carbon Watch, has been nominated for 2010 Webby and Webby People's Voice Awards.

The Webby Awards is the leading international award honoring excellence on the Internet. The Webby People's Voice Award is the winner that the online public votes for. Go here to vote for Carbon Watch in the News & Politics: Series category. Voting goes until April 29 and the winners are announced on May 4th.

Mark Schapiro | Update: Carbon Watch | April 2, 2010

The new deal makers of the Amazon

A century ago, if you made the long journey from the United States to the port town of Manaus, gateway to the Amazon, it would most likely have been in search of rubber. This city of around 2 million, set along the Rio Negro, and surrounded in every direction by hundreds of miles of jungle, is where the rubber deals were cut: European and American businessmen gathered in this rough frontier town to buy the raw sap that drips from rubber trees. Many millions of dollars passed through here during the rubber boom of the 19th and early 20th century.

On a reporting trip to Manaus earlier this month, I came across a curious legacy of the town's historical past -- the Teatro d'Amazonas, otherwise known as the Manaus Opera House. Built by the rubber barons in 1896 on an elevated tree shaded plaza, it was meant to feed a yearning for the high arts back home. Construction materials for the theater -- the Carrera marble, the ornate iron-grill work, the heavy cloth curtains -- arrived by sea on a three-month journey from Europe.

Fans of Werner Herzog may recall that the tormented Fitzcarraldo, in the movie of the same name, made a foray to this opera house during his crazed attempt to transport a steamship up-river, hoping to catch a performance of the legendary Enrico Caruso. "Everything in that movie was true," commented Grace, a young Brazilian university student, who was our guide, "except Caruso never sang here."

One hundred years later, European and American prospectors have returned, not to extract the sap from trees, nor to cut them down for their fine timber, but in search of a very 21st-century commodity: carbon. The rapid destruction of the rainforest during the last two decades has made Brazil the world's fourth largest greenhouse gas emitter. The pollution caused by this deforestation makes up 20 percent of the world's total CO2 emissions.

As Jeffrey Horowitz told Carbon Watch recently, "We want to make the forests worth more alive than dead." Horowitz leads a coalition of industry and environmental groups in the U.S. looking at how such partnerships can slow deforestation by putting a value on the remaining forests.

To that end, big energy producers and suppliers like American Electric Power, General Motors, Chevron, Duke Energy, and Pacific Gas & Electric have already put their legislative weight behind the concept of offsetting their emissions at home by investing in forests abroad and agreeing not to cut them down -- a practice known as "avoided deforestation."

Many of these companies are now scouring the Amazon in search of forests to preserve, even though it's unclear what these "offsets" will be worth until the U.S. Congress passes climate change legislation that will set industry emissions limits and what options are available to meet them. The Waxman-Markey bill passed the House last June, but this and other climate measures have been languishing in Congress ever since.

Nevertheless, gearing up to serve all this market potential is a growing cadre of carbon brokers and developers.

During my first trip to the Amazon, I learned that scores of developers (at least two of them American, Veticom and New Carbon Finance) had approached Brazilian landowners about developing carbon-offset programs. Brazil's director of the Amazon Conservation Team, Vasco van Roosmalen, told me that in the first three months of 2010 he had been flooded with calls from a coalition of indigenous groups requesting consultations about how to respond to such queries, and about the status of REDD, the U.N. framework by which all this stored carbon is to be measured, certified and eventually transacted.

Given this new premium on trees, Brazil has been cracking down on illegal loggers and getting serious about enforcing its deforestation laws. Last year, the government announced deforestation rates had fallen by nearly 50 percent from the dramatic losses recorded between 2000 and 2005. Brazil is also by far the most sophisticated nation for both monitoring and enforcement when compared with other heavily forested countries such as Indonesia, Papua New Guinea and the Congo. This means Brazilian forest credits will likely be far more expensive than those in other countries, creating a bifurcated universe of forest carbon credits of varying levels of credibility.

In December, USDA Secretary Tom Vilsack told Carbon Watch that the U.S. had pledged $1 billion to a $3.5 billion global fund over the next 10 years to help Indonesia, Papua New Guinea, the Congo, Costa Rica and others complete the inventories and monitoring that are the essential first steps to enabling U.S. firms to legitimately begin using these forests against their emissions.

But those preparations face major challenges, first among them establishing clear ownership of forest lands.

Even in Brasilia, Brazil's geometrically planned capital in the middle of the alto plano, land titles remain unclear. Contracts are what is known as buyer-seller deals: property is passed from one to the other without any reference to who actually owns it. And if that's the case in the modern grid city of Brasilia, then consider the sprawling Amazon. In some Amazonian states like Para, there are roughly six times as many land claims as there is land.

Which begs the question: Who owns the rights to the carbon credits? Or more precisely, who's entitled to make money from them? When it comes to doing business, who, exactly, do you pay?

In Brazil, there's already a lot of tension over these questions. The federal government would like all forest deals to be conducted through a coordinated national conservation plan; state governments have expressed their desire to pursue forest deals autonomously; while indigenous leaders assert that much of the forests are their ancestral homes to which they have the rights.

A study conducted last year by the international law firm Baker & McKenzie for the Brazilian government concluded that existing provisions in the country's constitution give the indigenous a firm legal standing to claim the funds generated from carbon credits on their land. It's a finding that promises to further complicate an already complex calculus.

In a broadcast story airing in May, FRONTLINE and CIR will be looking at how this new trading frontier is playing out in real time on the ground in Brazil. In the meantime, we will be posting developments on Carbon Watch as we go.

Over the next year, FRONTLINE/World and CIR will report on key issues of
climate change in a joint project–Carbon Watch–focusing on the multi-billion-dollar carbon trading market. We'll look at which proposals to reduce emissions by 2020 really add up; at the hidden interests behind these solutions; and the new industry players.