Green fraud: tackling abuse in environmental schemes

29.05.2024

Joshua Reddaway from the UK National Audit Office’s Fraud & Propriety team explores the challenge of fraud, error and abuse in net zero and environmental initiatives.

How can public sector auditors help stop green fraud from being a scandal?

Green initiatives are certainly susceptible to fraud. This is partly because governments are spending more on green initiatives. We all know fraudsters are opportunistic and will follow money, wherever it goes. They also tend to like the sort of payments associated with green initiatives – grants you apply for, incentive payments and tax reliefs. And because environmental impacts can be harder to define, environmental benefits can be purposefully overstated and negative impacts understated. 

Here at the UK National Audit Office we’ve looked at the risk of green fraud in a number of schemes over the years. Let me share three examples.

Packaging Recycling Obligations

Reducing waste and using resources more efficiently are long-standing policy objectives in the UK.

Back in 1997, the government introduced packaging recycling obligations to implement an EU Directive that required member states to meet minimum targets for recovery and recycling of packaging by companies that met a certain threshold. The UK regulations established a market-based system for incentivising the recycling of packaging waste – requiring companies to demonstrate that they have recycled a certain amount of packaging by obtaining ‘recovery evidence notes’ from companies recycling or exporting waste for recycling abroad.

Non-compliance could arise in a number of areas. For example, the system relies on obligated companies self-registering for oversight by the Environment Agency and self-reporting the amount of packaging material they have recycled or exported.

Our 2018 report found that the Environment Agency was unable to determine whether its controls to prevent abuse of the system were effective or proportionate because it did not have a sufficient understanding of the true extent of fraud and error. We also pointed out that the Environment Agency was not targeting its compliance inspections on exporters it had identified as being at high-risk of non-compliance.

We recommended that the Agency refine its approach to compliance and improve its approach to identifying problems and stopping them once they arise. The Environment Agency subsequently undertook more targeted enforcement interventions. The Agency estimated this prevented more fraudulent or erroneous revenue – which was worth an additional £37m over the three years after our report, compared to the £6m it prevented in 2017.

Renewable Heat Incentive (RHI) Scheme

The RHI scheme gives payments to households and businesses to encourage the use of renewable and low-carbon heat. By the time the scheme winds down in 2040-41, RHI payments which at the time we reported in 2018 were expected to total around £23 billion.

There are various ways that RHI may be subject to non-compliance, costing the taxpayer hugely and reducing the environmental benefits. For example, the heat generated from scheme investment could be used for the wrong purpose, an unsustainable fuel source may be used, or the amount of heat produced may be inaccurately measured.

We found that Ofgem – the scheme administrator – didn’t have a reliable estimate of the financial impact of non-compliance, and so was unable to determine the effectiveness of the actions it took to tackle non-compliance.

Following our audit, Ofgem tightened up its measurement and published an estimate of the level of abuse in the scheme every year in its accounts. These improvements led to better assessment of the effectiveness of its non-compliance activity and helped it to drive down overpayments.

In 2018-19 the then Department for Business, Energy and Industrial Strategy reported that around 4% of RHI payments for that year were lost due to error – some £32.5 million. By 2022-23 the department reported that the error rate was down to 0.7% of payments or £7.2 million.

Biodiversity net gain

Biodiversity net gain was introduced in February 2024 as a statutory requirement for developers’ planning applications to improve biodiversity of their developments by 10%. Developers can achieve this net gain either on-site, off-site or by purchasing biodiversity credits.

Our recent report found that the Department for Environment, Food & Rural Affairs (Defra)  launched the policy despite significant risks around  compliance. It wants the accountability for biodiversity net gains to be monitored by the local bodies who make the agreements with developers and landowners. But there is serious doubt about whether local authorities will be able to do this effectively. They have few resources and the pilot showed governance gaps, which risked making on-site gains unenforceable. On top of this, there is also a national shortage of bio-diversity inspectors.

Crucially, Defra doesn’t have access to the information it will need to know if the policy is working. Without this government won’t know whether developments are understating the damage they do to biodiversity, or whether the proposed biodiversity enhancements will actually be delivered.

Conclusion: what should we do about the risk of green fraud?

As governments around the world strive to reach net zero they are investing in schemes and technology to lower carbon emissions and protect the environment.

Worldwide, public sector auditors have a vital role to play in maintaining public confidence in these environmental policies by providing assurance that they are being delivered wisely and in a way that minimises the risk of abuse.

Auditors already have the skills and techniques needed to audit the fraud and error risks presented by these schemes – and can helpfully point to the governance and techniques necessary to ensure that these risks are managed. In practice, this means applying the standard fraud risk management cycle:

• assessing fraud risk
• designing proportionate controls
• measuring and reporting on levels of abuse
• evaluating the effectiveness of controls and enhancing them against new risks.

Find out more on the NAO’s work on fraud and error at: https://www.nao.org.uk/topics/money-and-tax/