Calif. fraud, secrecy should give us pause about cap-and-trade

You’ve probably never heard of Anne Sholtz, but the former California environmental executive has helpfully illuminated one of the least-discussed failings in proposals to have government build a market where companies can buy and sell government permits to emit carbon dioxide.

The Los Angeles suburbanite ran an outfit called the Automated Credit Exchange during cap-and-trade’s Wild West days. With a flair for symbolism, her Internet-based brokering site opened for business on Earth Day 1995. The company provided a place where companies could buy and sell “pollution credits” under a California program called the Regional Clean Air Incentives Market — RECLAIM.

As a co-creator of RECLAIM, Ms. Sholtz was uniquely positioned to profit from it. So, when the program was up and operating, she used counterfeit documents and fraudulent pollution credits to make at least $12.5 million before she got caught.

What happened in California is especially relevant in the context of the pending U.S. House bill to create the same sort of market on a national scale. It seems clear that not much thought was given to the possibility that people with questionable intentions could manipulate this well-intentioned system to reduce air pollution. Now the case is drawing new attention because it looks like the Environmental Protection Agency may not understand how to stop a vastly more destructive, Bernie Madoff version of Ms. Sholtz from taking advantage if the nationwide cap-and-trade system is approved.

What happened in California is instructive. The few available documents show that Ms. Sholtz’s knowledge of trading pollution credits helped bilk a New York-based company that traded in energy credits. That firm, AG Clean Air, bought $12.5 million worth of her credits after Sholtz told the company that Mobil Corp. would need them for use at a Southern California refinery. Ms. Sholtz sent faxes and e-mails to AG Clean Air that purported to document non-existent negotiations between her and Mobil, including a purchase and sale agreement with a phony signature.

The con ran from 1999 to 2001, and went undetected by the EPA. The unraveling began only after a local air quality board started getting complaints from companies that had dealt with Ms. Sholtz. A year later, her firm closed and went into bankruptcy. Two years later, she was arrested by federal agents.

Judicial handling of the case since then has been curiously sporadic and largely secret. In January of 2005, she was indicted on six counts of wire fraud, then pleaded guilty to one count in April. For reasons that remain a mystery — the court file remains sealed by order of a federal judge — she was not sentenced right away. Three more years would pass without noticeable activity before Ms. Sholtz drew a year of home confinement, handed down in a closed proceeding. The transcript is still off-limits.

I am concerned with all the secrecy, and wonder if it has to do with the difficulties that EPA and other federal authorities had in preventing, investigating and prosecuting environmental fraud in cases like this one. I also wonder, since EPA seems to have overlooked this multi-million-dollar scheme, how the agency plans to ensure the integrity of a national cap-and-trade market that would dwarf the one that Ms. Sholtz created and plundered.

Congress has very limited information concerning the case so, along with Rep. Greg Walden (R-Ore.), I have asked the EPA to answer some questions about its role:

• When and how did the EPA come to learn about the allegations against Ms. Sholtz of potential criminal misconduct?

• How many EPA criminal investigators were involved in investigating the Sholtz case?

• Does EPA have sufficient authority and resources to detect further fraud in the California program?

• Are there any other filed EPA criminal cases involving emissions trading programs?

• There was a three-year gap between Sholtz’s guilty plea in 2005 and her sentencing in 2008. Why?

• Finally, why were so many of the documents arising from the criminal proceeding, including the sentencing hearing transcript, placed under seal? Does the government plan to request that the documents be unsealed? If not, how can these documents be unsealed?

I think Congress needs to take a hard look at what went so wrong before we follow California’s lead and make the same mistakes.

A Los Angeles Times headline from 2001 captured the essence of the problem: “RECLAIM program has become too pricey for some — Environmentalists have little sympathy.” Now jump ahead to 2009. Last week’s Heritage Foundation analysis estimated that the House cap-and-trade plan will raise a family’s annual energy bill by $1,500, half from increasing the electric bill for a family of four by $754 a year, and it’s sure hard to detect much sympathy among supporters.

If the House bill also inadvertently creates a way for swindlers to steal money on a national scale under the guise of saving the planet, the amount of economic harm it could do rises from merely startling to almost inconceivable.

Barton is the ranking member of the House Energy and Commerce Committee.