How a Lincoln City man defrauded Oregon’s carbon credit program, swindled $1.8 million

Oregon’s Clean Fuels Program was created to reduce greenhouse gas emissions from fossil fuel suppliers, with a goal for companies to scale back emissions by at least 37% by 2035. These companies can purchase carbon credits, which are awarded to clean fuel providers by the Department of Environmental Quality, to counterbalance their emissions. One Lincoln City man found a way to swindle the system. Merlin Thompson defrauded the DEQ carbon credit system and sold credits he did not earn for nearly $2 million. Alex Baumhardt is a reporter for the Oregon Capital Chronicle and has been following this story. She joins us now

Note: The following transcript was created by a computer and edited by a volunteer.

Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. Oregon’s Clean Fuels Program was launched six years ago to reduce greenhouse gas emissions from fossil fuel suppliers. These companies can purchase carbon credits to counterbalance their emissions, but according to the Oregon Department of Environmental Quality, one Oregon man found a way to swindle this system, taking in nearly $2 million in fraudulent credits. Alex Baumhardt wrote about this story for the Oregon Capital Chronicle and she joins us now. Welcome back to Think Out Loud.

Alex Baumhardt: Hi, thanks for having me.

Miller: Thanks for joining us. How are carbon credits in this clean fuels program supposed to work?

Baumhardt: The carbon credits are an incentive to grow infrastructure for clean fuels. So the one arm of the clean fuels program is getting these fossil fuel suppliers to reduce their emissions. The other arm is rewarding companies like those that are installing electric vehicle chargers, for every ton of carbon dioxide they keep out of the atmosphere. So one ton of carbon dioxide equals one credit that they can then sell to those fossil fuel companies to show them lowering their emissions. And this last year, one credit was worth about $120 on average. So if you’re selling tens of thousands of these, you stand to make some good money.

Miller: And what role do carbon credit brokers play in this?

Baumhardt: They’re sort of like real estate agents, they’re connecting buyers and sellers. So a company in Oregon that’s installing electric vehicle chargers doesn’t have to go looking for these big companies and these big companies don’t have to go looking for these smaller state companies.

Miller: Alright, so that’s the way everything is supposed to work. Let’s turn to this case of alleged fraud, starting with the alleged perpetrator. What is Merlin Thompson’s background?

Baumhardt: Merlin Thompson, he’s the founder and CEO of Thompson Technical Services or TTS, which is the company we’re talking about. They install and fix electric vehicle charging stations. And he founded the company in 2021, so it’s all pretty young. Before that, he was a computer repair guy, mostly worked for himself, independent contractor. And in the years leading up to starting TTS and having his own company, he was repairing electric vehicle chargers for other bigger companies. So in Oregon, there’s bigger companies that operate out here like Pearce Renewables and ABB. And he would get sent out to go fix their machines.

Miller: So how did the fraud actually work according to records that you’ve been able to look into or interviews that you did yourself?

Baumhardt: Yeah, it’s not super sophisticated. The whole arc of this really takes place over a single year. So in early 2021, Merlin and his wife actually declared bankruptcy. A few months after that, he registers this company, TTS, and when he was servicing those machines for other companies, he’s sort of learning about the carbon credit markets and how much money can be made. I mean, this program in Oregon, it’s like six years old, and it’s generated more than half a billion dollars in sales for these companies that are generating the credits. So there’s money to be made. He’s going to start his own business.

He brings on his nephew, James, who had recently gotten out of the Air Force. He was an airplane mechanic and the two of them are running this. James is learning to service the machines. He didn’t have that type of background, but he’s learning on the job. They’re bringing on new employees. By the fall of 2021, they’ve got like five employees, solely servicing other machines. Merlin’s waiting to get into the DEQ Clean Fuels Program, which he does in December 2021. He fills out a two page form and essentially attests that he agrees to the parameters of the program and he will participate lawfully and honestly. He gets approved in December 2021.

In January, he connects with this company in California that will sell him or rather provide him the E.V. chargers that he needs on credit, but they can’t get them to him until April. So he asks for the registration numbers, so he can at least register the machines with the DEQ, goes online into his account, puts in the numbers and waits. The machines never get to Oregon until April, but in June he submits data to DEQ that says, “Nope, those three machines that are in Sheridan at the Valley Market have admitted 15 million kilowatt hours of electricity, of charge, between January and March.”

So three machines that on a computer look registered and working were never actually plugged in and it’s all automated. So you submit the kilowatt hour charge, generate 16,000 credits in the Clean Fuels Program and you get to work selling them.

Miller: Who is actually being defrauded here? I mean, is it the state, is it the middleman? Is it the globe? Because these are not emissions that have actually been prevented. It’s all just fake numbers on paper. How do we think about what the fraud actually is?

Baumhardt: It’s worth noting there hasn’t been an incident like this in DEQ’s history, with this program, where somebody’s reporting fraudulent data, let alone so much, but ultimately sort of everybody was defrauded. The DEQ, they received false data that generated these credits. This Canadian company that bought the credits, they’ve been defrauded because they thought they were legitimately earned. DEQ isn’t out any money. Elbow River, this Canadian company is - they paid 1.8 million for those credits and then DEQ, after investigating TTS, froze the credits, essentially saying, Elbow River, you can’t use these in our program to lower your own emissions, nor can you sell them to anybody else who could. So financially, Elbow Rivers is out. DEQ is just, I guess, feeling a bit burned about having given these credits that were earned illegitimately.

When it comes to the carbon credit market in so many ways, these state programs, which are only in Oregon and California, the only two states with their own carbon crediting program like this, this is the extent of regulation. In many ways carbon credit markets worldwide, like when you buy a new pair of shoes and they say that they’ll plant a tree or whatnot, that’s largely unregulated. So this is sort of the best we have.

Miller: According to the allegations, and you mentioned this briefly, Merlin wasn’t just defrauding the state. He was also not paying some of his employees. What did you hear from them?

Baumhardt: Yeah. So he had, at any given time, somewhere between 12 and 15 employees. Seven of them, so about half, submitted wage and hour complaints with the Bureau of Labor and Industries. Between those complaints and just interviews with some of the technicians, he owes tens of thousands of dollars. A lot of these guys had to go on work trips that involved long distance drives and hotels and gas that they were never reimbursed for. The company that provided those machines on credit, Tellus, says they’re owed about $400,000. Paul Johal owns the Valley Market where the machines were supposed to be installed. He actually bought one of the machines, so he’s out $40,000. And then the carbon credit broker, who ended up blowing the whistle and telling the DEQ to look into this, said he’s owed about a quarter million dollars.

Miller: And that’s how the state finally caught on because [of] this whistleblower saying, “hey there’s something suspicious here.” But I mean, and you noted this earlier, this doesn’t sound like a sophisticated scam. This is somebody who is just making, according to the allegations, without even these machines hooked up, telling the state that they were running 24 hours a day, seven days a week for months, but they literally weren’t even unwrapped at that point. Let’s say that there hadn’t been a whistleblower and that the employees, instead of lodging complaints with BOLI, had been paid. Would the DEQ have ever known about what was happening?

Baumhardt: They say they would have caught this after they reviewed his quarterly report. DEQ, I guess, has two employees that review these quarterly reports from all of these carbon credit generators. Merlin’s report was submitted in June. The whistleblower came through in August, so by then it still hadn’t been reviewed. So it’s hard to know when it would have happened. It’s possible he was preparing to submit his next quarterly report, which would have generated 32,000 credits for him, which would have been worth about $3 million. So DEQ said that they would have caught it by reviewing. But two months after that first report had been submitted, it had still not been reviewed.

Miller: You talked briefly to Merlin Thompson. What did he tell you about what happened?

Baumhardt: Merlin sort of claims that he misunderstood the program. So he thought he was registered in DEQ’s Advanced Carbon Credit Program. That’s newer. It’s available to tribal governments, nonprofits or the people that are doing business with and for them. It would allow a company or a tribal government or nonprofit to project how much carbon dioxide the chargers will save from entering the atmosphere, over a period of a few years. They would get the credits in advance and then they could sell them to invest in their own infrastructure. So right now no one is registered in that program, according to DEQ and TTS would not have qualified. They weren’t doing business for any nonprofit or tribal government. So he’s claiming that his reporting was projections into the future of how much charge he thought the machines would give.

Miller:  Although that doesn’t answer the many, many of the other questions about allegations of not paying the vendors, not paying for the machines themselves or not paying employees. We are talking about Oregon’s carbon credit program here. But what level of fraud has there been in the federal carbon credits program run by the EPA?

Baumhardt: The EPA has a similar program. They don’t reward, like EV charging manufacturers or installers, but they do reward companies that make biofuels like corn ethanol, so those companies can get carbon credits that they can sell to the big fossil fuel suppliers. In the first few years of that program, there’s about $100 million worth of carbon credits that were sold, that were not legitimately earned. So some of those biofuels companies had submitted false data. They earned credits, sold them and later it was found out that they had not in fact saved tons of carbon dioxide from entering the atmosphere as reported.

The EPA did what DEQ is now doing, which is sort of mandating third party verification. So bringing somebody else in to review the data to ensure that the sale is legitimate. The credits are legitimate. So it’s a little less of the buyer beware mentality. It’s another layer of accountability.

Miller: And DEQ is doing that because of this case?

Baumhardt: Yeah. I think it was forthcoming. I think it’s much more enforced now, so I’m not sure exactly when it was first introduced, but it is currently in, it is currently mandated.

Miller: Before you say goodbye, you’ve been reporting another big story about DEQ. The question of who’s going to be the next leader of this agency? It’s down now to two finalists. Who are they?

Baumhardt: Leah Feldon is the Interim Director currently, and Jamie McLeod-Skinner, who most recently ran as a Democrat to represent Oregon’s 5th District in Congress.

Miller: It’s easy to see how a longtime agency employee and the current interim leader would be considered to be the permanent leader. But why Jamie McLeod-Skinner, a Democrat who’s most known for running twice, both times unsuccessfully for a seat in Congress?

Baumhardt: This whole search for a new director began in September and DEQ hired a consultancy to do a nationwide search and last month, it was announced that these two are the finalists. So it’s a bit of a shrouded mystery as far as how we got here. I’m always curious about consultancies that get paid to do nationwide searches and end up with two local candidates, one of which works for the department. So yeah, DEQ paid like $50,000 for this consultancy to go out and look for a new director. Jamie McLeod-Skinner has an emergency management background. Both her and Leah Feldon have environmental law backgrounds. So I’m not exactly sure how we came to these two in the end. But this was the work of a consultancy DEQ hired.

Miller: Who’s going to make the ultimate decision?

Baumhardt: It’ll be the Environmental Quality Commission. So that’s a five member commission, all government appointed members. And they said that at the last meeting, they’ll make the ultimate decision. So this won’t be a government area, governor appointee. It’ll be the Environmental Quality Commission that makes the final call.

Miller: Alex, thanks very much.

Baumhardt: Thank you.

Miller: Alex Baumhardt is a reporter for the Oregon Capital Chronicle.

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