The energy industry and market participants offered mixed comments on what role the Commodity Futures Trading Commission (CFTC) should play in voluntary carbon markets, in response to a June 2022 request for information on how the CFTC can strengthen integrity. and the transparency of voluntary carbon markets and what aspects of voluntary carbon markets are vulnerable to fraud and manipulation.
Some argue that the CFTC should implement rules governing voluntary carbon markets and a stronger standard for auditing purposes and establish a framework for the registration of market participants in voluntary carbon markets. Others argued that the CFTC should provide definitions for key terms in carbon markets to create more transparency. And others commented that it may be premature for the CFTC to develop regulations and a registration framework, but that the CFTC should facilitate ongoing discussions.
Voluntary carbon markets invite and request information
On June 2, 2022, the CFTC held a Voluntary Carbon Markets Convention to discuss issues related to the supply and demand of carbon offsets and to receive input from market participants on the CFTC’s role in regulating carbon offset markets. Discussions at the Voluntary Carbon Markets Convention made it clear that there is a need for additional transparency and standardization in voluntary carbon markets to increase confidence in the markets and the ability to trust the carbon offsets being traded. Market participants who wish to purchase carbon offsets ensure that the purchased offsets represent a reduction or avoidance of carbon emissions.
The CFTC also issued a request for information to better understand and monitor climate-related financial risk related to derivatives and underlying commodity markets. In relation to voluntary carbon markets, the CFTC requested information on the following:
- Are there ways that the CFTC can strengthen the integrity of voluntary carbon markets and enhance transparency, fairness and liquidity in these markets?
- Whether or not there are aspects of the voluntary carbon markets that are vulnerable to fraud and manipulation and/or deserve enhanced oversight by the CFTC.
- Should the CFTC consider establishing some form of registration framework for all market participants in voluntary carbon markets to enhance the integrity of voluntary carbon markets, and if so, what would the registration framework include?
The CFTC also indicated that it is considering establishing a framework for the registration of market participants in voluntary carbon markets.
Responses to requests for information
The responses and comments provided reflected the lack of consensus in the industry about what role the CFTC should play in voluntary carbon markets. Some urged the CFTC to pursue stricter oversight of voluntary carbon markets, while others encouraged the CFTC to facilitate continued discussion, mindful that setting regulations too early could stifle innovation.
A group of Democratic senators emphasized the need for meaningful standards in voluntary carbon markets and cited various concerns and issues with offsets, including false and exaggerated promises of positive impacts and significant emissions reductions, incremental climate benefits, and weak or unenforceable regulations. They called on the CFTC to implement rules governing voluntary carbon markets that include a clear definition of carbon credit and a robust auditing standard, and take into account the environmental justice risks of growing the offset market. The senators recommended that the CFTC (1) review the integrity of certified derivatives and underlying carbon offsets and develop qualified carbon offset standards that effectively reduce greenhouse gas emissions and can serve as the underlying commodity for certified derivatives in the future, (2) a framework create registrations for offsets, offset brokers and offset registries, (3) track individual project fraud cases and (4) develop a working group to study both the investor risk associated with carbon offsets and carbon derivatives as well as systemic climate finance . the risk caused by their existence and use.
Some organizations have set CFTC reporting standards that require vendors to report additional, ongoing, and monitoring, reporting, and verification (MRV) of their credit, in order to improve transparency of credit quality, improve creditworthiness ( and the market as a whole) and encourage sellers to produce high-quality loans. The supplement explains how the purchase of new clean carbon credits will be removed after the removal that has already occurred. Permanently reports on the guaranteed duration of carbon sequestration from the atmosphere. MRV shows how a retailer approaches carbon sequestration monitoring, reporting and verification. These organizations noted that these standards should build on the work and progress already achieved in carbon markets.
Other organizations have recommended that the CFTC develop definitions for key terms in carbon markets. For example, one organization noted that there are currently many definitions for incremental, permanent, and measurable in voluntary carbon markets. Another organization encouraged the CFTC and other federal regulators to consider developing definitions for the following two key criteria that they believe are important to the long-term health and integrity of the markets: (1) Does the carbon credit reflect the physical climate of the atmosphere? carbon sequestration and (2) the sustainability of any carbon storage promised by a carbon credit. This organization explained that the lack of clear definitions and adequate disclosure of loan duration conditions has led to mispricing of assets by market participants and created barriers to purchasing high-quality debt.
Several other organizations commented that it is premature for the CFTC to develop regulations and a registration framework. These organizations expressed concern that the development of regulations and registration frameworks could stifle existing industry efforts, progress and innovation. The development of new rules may also create confusion and may create uncertainty in voluntary carbon markets. These organizations encouraged the CFTC to continue to facilitate the ongoing debate and noted that forums hosted by the CFTC, including the Voluntary Carbon Convention, held in June 2022, for various parties in the industry to discuss relevant issues have great opportunities.
Although there is a lack of consensus in the industry and market participants about the role the CFTC should play in voluntary carbon markets, we expect the CFTC to pay close attention to carbon credits, voluntary carbon markets and actions. it may be necessary to promote integrity and transparency in voluntary carbon markets.
The CFTC has limited authority to enforce carbon credits and is authorized under the Commodity Exchange Act to take actions for fraud and manipulation. The CFTC must assess whether voluntary carbon markets are vulnerable to fraud and manipulation and, if so, what it can do within its jurisdiction to address potential fraud and manipulation.