Voluntary Carbon Markets: What Role Should the CFTC Play?

Voluntary Carbon Markets: What Role Should the CFTC Play?

Energy industry and market participants provided a variety of comments on the 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 help strengthen the integrity and transparency of voluntary carbon markets and what aspects of voluntary carbon markets are susceptible to fraud and manipulation.

Some felt that the CFTC should implement rules governing voluntary carbon markets and a robust standard for auditing purposes and establish a registration framework for market participants in voluntary carbon markets. Others said the CFTC should publish definitions for key carbon market terms to enhance transparency. And others noted 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.

Convocation of voluntary carbon markets and request for information

On June 2, 2022, the CFTC hosted the Voluntary Carbon Markets Meeting to discuss issues related to supply and demand for high-quality carbon offsets and to solicit feedback from market participants on the CFTC’s role. in the regulation of carbon offset markets. The discussion at the meeting on voluntary carbon markets made it clear that there is a need to increase transparency and standardization of voluntary carbon markets to build trust in markets and the ability to trust carbon offsets that are negotiated. Market participants looking to purchase carbon offsets want and need to be sure that the offsets purchased represent the actual reduction or avoidance of carbon emissions.

The CFTC also issued a request for information to better inform its understanding and oversight of climate-related financial risks related to derivatives markets and underlying commodity markets. With respect to voluntary carbon markets, the CFTC requested information on the following:

  • Whether there are ways the CFTC could strengthen the integrity of voluntary carbon markets and promote transparency, fairness, and liquidity in those markets
  • Whether certain aspects of the voluntary carbon markets are susceptible to fraud and manipulation and/or warrant enhanced oversight by the CFTC
  • Whether the CFTC should consider creating some form of registration framework for all market participants within the voluntary carbon markets to improve the integrity of the voluntary carbon markets, and if so, what would a registration framework be? registration would involve

The CFTC has also indicated that it is considering establishing a framework for registering market participants in voluntary carbon markets.

Responses to the request for information

The responses and comments submitted reflected a lack of industry consensus on the role the CFTC should play in voluntary carbon markets. Some urged the CFTC to continue strong oversight of voluntary carbon markets while others encouraged the CFTC to facilitate an ongoing discussion while keeping in mind that imposing regulations too soon can stifle innovation.

A group of Democratic senators stressed the need for meaningful standards in voluntary carbon markets and cited various concerns and issues with offsets, including inaccurate and exaggerated promises of positive effects and significant emission reductions, inflated climate benefits and weak or unenforceable regulations. They urged the CFTC to implement rules governing voluntary carbon markets that include a clear definition of a carbon credit and a robust auditing standard and that take into account the environmental justice risk of carbon market growth. The compensation. The senators recommended that the CFTC (1) investigate the integrity of currently approved derivatives and their underlying carbon offsets and develop qualification standards for carbon offsets that effectively reduce greenhouse gas emissions and can serve as underlying products for approved derivatives in the future, (2) create a registration framework for offsets, clearing brokers and clearing ledgers, (3) prosecute fraud cases of individual projects and (4) develop a working group to study both the investor risk associated with carbon offsets and derivatives and the systemic financial climate risk created by their availability and use.

Some organizations have expressed support for the CFTC establishing reporting standards that require sellers to report the additionality, permanence, and monitoring, reporting, and verification (“MRV”) process of their credits in order to ‘enhance the transparency of the quality of credit being transacted, improve confidence in credit (and the market as a whole) and incentivize sellers to produce more high-quality credit. Additionality would explain how the purchase of the credit leads to a new net absorption of carbon beyond the absorption that was already going to occur. Permanence would indicate how long the carbon is guaranteed to be sequestered from the atmosphere. The MRV would reveal how the seller will approach carbon sequestration monitoring, reporting and verification. These organizations noted that these standards should build on the work and progress already made on carbon markets.

Other organizations have recommended that the CFTC develop definitions for key carbon market terms. For example, one organization noted that there are currently multiple definitions of additionality, permanence, and measurement in 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 critical to the long-term health and integrity of markets: (1) whether a carbon credit reflects the physical climate service of the atmosphere the removal of carbon dioxide and (2) the sustainability of any carbon storage promised by a carbon credit. The organization noted that the lack of clear definitions and lack of adequate disclosure of credit sustainability terms has led market participants to misprice assets and created barriers to obtaining credit. high quality.

Several other organizations noted that it may be premature for the CFTC to develop regulations and a registration framework. These organizations have raised concerns that the development of regulations and a registration framework could hamper industry efforts, progress and innovation. Developing new regulations can also sow confusion and uncertainty in voluntary carbon markets. These organizations encouraged the CFTC to continue to facilitate ongoing discussions and noted that forums hosted by the CFTC, including the Voluntary Carbon Convening held in June 2022, are excellent opportunities for various industry stakeholders. to discuss relevant issues.

Take away food

Although there is a lack of consensus in industry and among market participants on the role the CFTC should play in voluntary carbon markets, we expect the CFTC to continue to look closely at credits. carbon, voluntary carbon markets and actions it can take to promote integrity and transparency in voluntary carbon markets.

The CFTC has limited enforcement jurisdiction over carbon credits and is authorized under the Trade in Commodities Act to sue for fraud and manipulation. The CFTC will need to assess whether voluntary carbon markets are susceptible to fraud and manipulation and, if so, what steps it can take within its jurisdiction to combat potential fraud and manipulation.

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