Voluntary carbon markets: what role should the CFTC play? – Power and tubes

Energy industry and market participants have provided a number 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 improve the integrity and transparency of voluntary carbon markets and which aspects of voluntary carbon markets are susceptible to fraud and manipulation.

Some argued that the CFTC should implement rules governing voluntary carbon markets and a robust standard for audit purposes and establish a registration framework for market participants in voluntary carbon markets. Others said the CFTC should issue definitions for key terms in 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 convening of carbon markets and information request

On June 2, 2022, the CFTC held its Voluntary Carbon Markets Convening to discuss supply and demand issues for high-quality carbon offsets and to solicit input from market participants on the CFTC’s role in regulating carbon markets. carbon offsets. The discussion at the Voluntary Carbon Markets Conference made it clear that more transparency and standardization is needed in voluntary carbon markets to increase confidence in the markets and the ability to trust the carbon offsets that are negotiated. Market participants seeking to purchase carbon offsets want and need assurances that the offsets purchased represent the effective reduction or prevention of carbon emissions.

The CFTC has also released an information request to better inform its understanding and oversight of climate-related financial risk relating to the derivatives markets and the underlying commodity markets. With regards to voluntary carbon markets, the CFTC requested information on the following:

  • Whether there are ways the CFTC could enhance the integrity of voluntary carbon markets and foster transparency, fairness and liquidity in those markets
  • Whether there are aspects of voluntary carbon markets that are susceptible to fraud and manipulation and/or deserve increased oversight by the CFTC
  • Whether the CFTC should consider creating some form of registration framework for all market participants within voluntary carbon markets to enhance the integrity of voluntary carbon markets and, if so, what a registration framework

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

Responses to requests for information

The responses and comments presented reflected a lack of consensus within the industry on what role the CFTC should play in voluntary carbon markets. Some have urged the CFTC to pursue strong oversight of voluntary carbon markets, while others have encouraged the CFTC to facilitate an ongoing discussion, while recognizing that imposing regulations too early can hinder innovation.

A group of Democratic senators stressed the need for meaningful standards in voluntary carbon markets and cited various concerns and problems with offsets, including inaccurate and exaggerated promises of positive impacts and significant emissions 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 standard for audit, 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 qualification standards for carbon offsets that effectively reduce greenhouse gas emissions and can serve as underlying commodities for future approved derivatives, (2) create a registration framework for clearings, clearing brokers and clearing registries, (3) prosecute individual project fraud cases, and (4) develop a group work to study both the investor risk associated with carbon offsets and derivatives and the financial systemic risk created by their availability and use.

Some organizations have expressed support for the CFTC which establishes reporting standards that require sellers to report the additionality, permanence and monitoring, reporting and verification process (“MRV”) of their credits to improve transparency of the credit quality covered transactions, improve confidence in credit (and in the market as a whole) and would incentivize sellers to produce higher quality credit. Additionality would explain how the credit purchase results in net new carbon removed beyond the removal that was already about to occur. Permanence would report the length of time that carbon is guaranteed to be sequestered from the atmosphere. MRV would reveal how the seller will approach carbon sequestration tracking, reporting and verification. These organizations noted that these standards should build on the work and progress already made 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 multiple definitions for 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 essential to the long-term health and integrity of markets: (1) whether a credit reflects the physical climate service of the atmosphere removing carbon dioxide and (2) the lifetime of any carbon sink promised by a carbon credit. The organization commented that the absence of clear definitions and lack of adequate disclosure of credit durability terms led market participants to misprice assets and created barriers to sourcing high-quality credits .

Several other organizations have commented that it may be premature for the CFTC to develop regulations and a registration framework. These organizations have expressed concern that developing regulations and a registration framework could inhibit existing industry efforts, progress and innovation. The development of new regulations can also create confusion and could introduce uncertainty into voluntary carbon markets. These organizations have encouraged the CFTC to continue facilitating ongoing discussions and noted that the forums hosted by the CFTC, including the Voluntary Carbon Convening held in June 2022, are great opportunities for diverse industry stakeholders to discuss relevant issues.

Take away

While there is a lack of consensus within the industry and among market participants about the role the CFTC should play in voluntary carbon markets, we expect the CFTC will continue to scrutinize carbon credits, voluntary carbon markets and actions it may be necessary to promote integrity and transparency in voluntary carbon markets.

The CFTC has limited enforcement jurisdiction over carbon credits and is authorized under the Commodity Exchange Act to prosecute actions for fraud and manipulation. The CFTC will need to assess whether voluntary carbon markets are susceptible to fraud and manipulation and, if so, what actions it can take within its jurisdiction to address potential fraud and manipulation.

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