The energy industry and market participants have provided a variety of comments on what role the Commodity Futures Trading Commission (CFTC) should play in the voluntary carbon markets, in response to a June 2022 request for information on how the CFTC can help enhance the integrity and transparency of the voluntary carbon markets and what aspects of the voluntary carbon markets are susceptible to fraud and manipulation.
Some opined that the CFTC should implement rules governing the voluntary carbon markets and a robust standard for auditing purposes and establish a registration framework for market participants in the voluntary carbon markets. Others stated that the CFTC should issue definitions for key terms in the carbon markets to build greater transparency. And others commented that it may be premature for the CFTC to develop regulations and a registration framework, but that the CFTC should continue to facilitate ongoing discussions.
Voluntary Carbon Markets Convening and Request for Information
On June 2, 2022, the CFTC held the Voluntary Carbon Markets Convening to discuss issues related to the supply of and demand for high-quality carbon offsets and to solicit input from market participants on the CFTC’s role in regulating the carbon offset markets. The discussion at the Voluntary Carbon Markets Convening made clear that there is a need for additional transparency and standardization in the voluntary carbon markets to enhance the confidence in the markets and the ability to trust in the carbon offsets that are transacted. Market participants seeking to purchase carbon offsets want and need assurances that the offsets purchased represent the actual reduction or avoidance of carbon emissions.
The CFTC also released a request for information to better inform its understanding and oversight of climate-related financial risk related to the derivatives markets and underlying commodities markets. With respect to the voluntary carbon markets, the CFTC sought information on the following:
- Whether there are ways in which the CFTC could enhance the integrity of voluntary carbon markets and foster transparency, fairness, and liquidity in those markets
- Whether there are aspects of the voluntary carbon markets that are susceptible to fraud and manipulation and/or merit enhanced CFTC oversight
- Whether the CFTC should consider creating some form of registration framework for any market participants within the voluntary carbon markets to enhance the integrity of the voluntary carbon markets, and if so, what a registration framework would entail
The CFTC also indicated that it is considering establishing a registration framework for market participants in the voluntary carbon markets.
Responses to Request for Information
The responses and comments submitted reflected a lack of consensus in the industry on what role the CFTC should play in the voluntary carbon markets. Some urged the CFTC to pursue strong oversight of the voluntary carbon markets while others encouraged the CFTC to facilitate an ongoing discussion while being mindful that imposing regulations too early may impede innovation.
A group of Democratic senators emphasized the need for meaningful standards in the voluntary carbon markets and cited various concerns and issues with offsets, including inaccurate and exaggerated promises of positive effects and meaningful emissions reductions, inflated climate benefits, and weak or unenforceable regulations. They urged the CFTC to implement rules governing the voluntary carbon markets that include a clear definition of a carbon credit and a robust standard for auditing and that take into account the environmental justice risk of growth in the offset market. The senators recommended that the CFTC (1) investigate the integrity of currently approved derivatives and their underlying carbon offsets and develop qualifying standards for carbon offsets that effectively reduce greenhouse gas emissions and can serve as underlying commodities for approved derivatives in the future, (2) create a registration framework for offsets, offset brokers, and offset registries, (3) pursue cases of individual project fraud, and (4) develop a working group to study both the risk to investors associated with carbon offsets and derivatives and the systemic climate financial risk created by their availability and usage.
Some organizations voiced support for the CFTC establishing reporting standards that requires sellers to report their credits’ additionality, permanence, and monitoring, reporting, and verification (“MRV”) process to enhance the transparency of the quality of the credit being transacted, enhance the confidence in the credit (and the market as a whole), and would incentivize sellers to produce more high-quality credits. Additionality would explain how purchasing the credit results in net new carbon removed beyond the removal that was already going to occur. Permanence would report the length of time the carbon is guaranteed to be sequestered from the atmosphere. MRV would reveal how the seller will approach monitoring, reporting, and verification of carbon sequestration. These organizations noted that these standards should build on the work and progress that has already been made in the carbon markets.
Other organizations recommended that the CFTC develop definitions for key terms in the carbon markets. For example, one organization noted that there currently are multiple definitions for additionality, permanence, and measurement in the voluntary carbon markets. Another organization encouraged the CFTC and other federal regulators to consider developing definitions for the following two key criteria that it described as essential to the long-term health and integrity of the markets: (1) whether a carbon credit reflects the physical climate service of atmospheric carbon dioxide removal and (2) the durability of any carbon storage promised by a carbon credit. The organization commented that the absence of clear definitions and the lack of adequate disclosure of the durability terms of a credit has led to market participants mispricing assets and has created barriers to high-quality credit procurement.
Several other organizations commented that it may be premature for the CFTC to develop regulations and a registration framework. These organizations raised concerns that the development of regulations and a registration framework may inhibit existing industry efforts, progress, and innovation. The development of new regulations may also create confusion and could interject uncertainty in the voluntary carbon markets. These organizations encouraged the CFTC to continue facilitating ongoing discussions and noted that forums hosted by the CFTC, including the Voluntary Carbon Convening held in June 2022, are great opportunities for different industry stakeholders to discuss relevant matters.
Takeaways
Although there is a lack of consensus in the industry and among market participants of the role the CFTC should play in the voluntary carbon markets, we expect the CFTC will continue to take a hard look at carbon credits, the voluntary carbon markets, and the actions it can take to promote integrity and transparency in the voluntary carbon markets.
The CFTC has limited enforcement jurisdiction over carbon credits and is authorized under the Commodity Exchange Act to pursue actions for fraud and manipulation. The CFTC will need to assess whether the voluntary carbon markets are susceptible to fraud and manipulation and, if so, what actions it can take within the confines of its jurisdiction to address potential fraud and manipulation.