In recent remarks, Commodity Futures Trading Commission (CFTC) Commissioner Christy Goldsmith Romero proposed that the CFTC promote market resilience to climate-related risk by adopting an approach for environmental/climate-related products, such as carbon offsets, similar to the CFTC’s regulatory response to virtual currencies.
That framework involves the following:
- Consumer education
- Asserting legal authority
- Market intelligence
- Robust enforcement
- Government-wide coordination
Commissioner Goldsmith Romero proposed creating a new category of derivatives products for environmental/climate-related products. Categorizing products as environmental/climate-related can allow CFTC staff to gather market intelligence for the products and markets, which can, in turn, promote transparency in the market and provide price discovery to the market. She also noted that coordination across the government and particularly with banking regulators is critical to mitigate financial risks posed by climate change.
Following up on her prior proposal that the CFTC increase its enforcement resources and expertise to combat greenwashing, fraud, and manipulation in this space, Commissioner Goldsmith Romero proposed that the CFTC conduct targeted enforcement as well. She recommended that the CFTC develop a specialized group of enforcement staff with expertise and bring individual cases of greenwashing and other fraud in derivatives markets and targeted spot market cases, including cases related to carbon offsets. Her comments align with Chairman Rostin Behnam’s recent testimony before the US Senate Committee on Agriculture, Nutrition, and Forestry that the CFTC will “use every tool we have in the enforcement division” to ensure the integrity and resilience of the markets.
Commissioner Goldsmith Romero also proposed that the CFTC develop a “Heightened Review” framework for self-certified environmental/climate-related products that are planned to be listed by exchanges. If the CFTC were to follow the approach it took for derivatives on digital assets, the CFTC, or its staff, would provide guidance on the steps that an exchange should take before self-certifying that products comply with the Commodity Exchange Act. A Heightened Review could include consideration of whether a contract is readily susceptible to manipulation, a requirement that exchanges take certain actions to increase confidence that the underlying offset reliably removed or avoided the amount claimed, information sharing among registries, and baseline standards.
Takeaways
Commissioner Goldsmith Romero’s comments are the latest in a series of comments from CFTC commissioners on the CFTC’s potential role and enforcement oversight of carbon offsets and other environmental attributes. Although the CFTC has regulatory and enforcement jurisdiction over the derivatives markets, the CFTC can police fraud and manipulation in the spot markets, as such fraud and manipulation could be reflected in the derivatives markets. Because there are listed carbon offset contracts on registered exchanges that are regulated by the CFTC, the underlying spot market becomes important to the CFTC in its exercise of jurisdiction over the derivatives markets.
Commissioner Goldsmith Romero cautioned those who participate in the voluntary carbon markets to exercise due diligence, given concerns on the reliability and validity of carbon offsets that may be used to meet net-zero commitments and the associated impacts on pricing. She noted the absence of final principles and an assessment framework that can be used to identify credits that create real, additional, and verifiable climate impact.
Her comments underscore the regulatory exposure and practical concerns and considerations that purchasers and sellers of carbon offsets and other environmental attributes should bear in mind, which we discuss in a prior blog post. At bottom, the holder of a carbon offset—whether the purchaser or the seller—must ensure that it is confident in the quality of the carbon offset it holds. In other words, the holder must be confident that the carbon offset reflects the permanent removal or reduction of one metric tonne of carbon dioxide from the atmosphere and that it is verifiable, additional, and otherwise unclaimed. A holder of carbon offsets should evaluate whether it has the appropriate documentation and contractual protections to instill this confidence in its carbon offsets through a review of its contracts (whether existing or under negotiation) and supporting documentation.