Across the United States, more and more companies are pledging to eliminate greenhouse gas emissions using “voluntary carbon offsets” — credits that represent the amount of climate pollution prevented or removed from the atmosphere.
These credits, which were bought and sold in unregulated markets and are expected to be worth $100 billion by 2030, have long drawn criticism for failing to deliver on promised emissions cuts. Some of the credits come from projects that claim to protect forests that were never in danger of being cut down. Others pull carbon out of the air, but only temporarily, or are subject to “double counting,” where two separate organizations claim the same credits. Experts have called the compensation a “climate fraud” and the voluntary market for them the “Wild West”.
Now, federal regulatory agencies are starting to take note. One of these is the Commodity Futures Trading Commission, or CFTC, which is an independent government body tasked with ensuring the stability of the derivatives markets in the country. This week, the committee held its second roundtable discussion on enhancing the “integrity of high-quality carbon credit derivatives,” and other recent actions indicate that it is preparing for a more proactive regulatory role in this area.
Last month, for example, the CFTC issued a whistleblower alert asking the public for tips on fraud and manipulation in voluntary carbon markets — a “prelude” to applying enforcement action against market manipulators, according to Todd Phillips, a fellow at the Roosevelt Institute think tank. Just a few days later, the CFTC announced a new Environmental Fraud Task Force within its enforcement division, to help investigate cases of “fraud and misconduct” in offset-related markets.
“The CFTC is uniquely positioned to address this issue,” Phillips said. “Really, there is no one else.”
Exactly how they will do this is uncertain.
The Commodity Futures Trading Commission, created by Congress in 1974, regulates the US markets for derivatives, contracts between parties in which prices are derived from the value of an underlying asset or an underlying benchmark. These contracts can help hedge against risk; A forward contract, for example, guarantees the price at which a particular asset will be sold at some point in the future. Farmers often use these types of contracts to guarantee that their crops will be sold at an agreed upon price at the end of harvest, protecting them from a downward swing in the market. Meanwhile, the CFTC’s job is to ensure that crops are actually delivered, according to the contract.
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This is all relatively straightforward when it comes to derivatives involving tangible commodities like wheat, which the CFTC has long regulated. But it’s more complicated when it comes to carbon offsets. Offset credits are usually approved by unregulated standard-setters, sold to intermediaries, and then purchased by a company or organization to rely on decarbonization pledges—often through a futures contract, if emissions offsets have not yet occurred and a promise to occur sometime in the future. Compared to wheat, what counts as legitimate delivery of a carbon credit is less clear. Many market participants worry that if the underlying commodity—compensation—is based on fraudulent assumptions and does not, in fact, eliminate climate pollution, then derivatives based on those commodities are also fraudulent.
This is a really big problem. Experts note “widespread perverse incentives” among market participants to exaggerate the climate benefits of their carbon credits. Buyers are incentivized by lower prices, for example, and unregulated standard-setters run carbon credit registries that charge a fee based on the volume of credits bought and sold, incentivizing them to set looser standards to enable more sales. Already, millions of rainforest-related credits approved by Verra, the world’s largest standard-setter for voluntary carbon markets, have been shown to be “non-incremental,” meaning they did not result in additional emissions reductions in addition to what would have been expected if the credits had not been in place.
Robin Ricks, Fira’s chief legal, policy and markets officer, acknowledged at the CFTC’s roundtable on Wednesday that voluntary carbon markets have characteristics that make them “vulnerable to abuse by malicious actors.” But he said it was a “misconception” that voluntary carbon markets lack transparency, and said his organization would support “a more aggressive approach to fraud and market manipulation” than the CFTC.
Verra controls two-thirds of the world’s voluntary carbon markets. The rest is largely dominated by three other private records: the Climate Action Reserve, the Gold Standard, and the US Carbon Record.
The CFTC has not yet waded into this quagmire, although many experts, advocacy groups, and even private companies would like to. After the body’s first public meeting on voluntary carbon markets last year, dozens of organizations responded to a request for information by saying that the CFTC should set standards for carbon offsets that “effectively reduce greenhouse gas emissions and can serve as commodities for certified derivatives.”
Such standards should require voluntary carbon markets to clearly distinguish between compensations that It is forbidden carbon emissions – such as if a project developer builds a wind farm instead of a coal plant – and those Remove carbon from the atmosphere. She also called for more transparency about the “permanence” of removal-based compensation, i.e. how long it will keep carbon locked up. Carbon dioxide lasts about 1,000 years in the atmosphere. Meanwhile, carbon credits derived from offset projects such as planting trees—which may only keep carbon sequestered for decades, since forests are vulnerable to wildfires and illegal logging—are often treated like those derived from geological sequestration, where carbon is injected into rock formations and is more likely to remain fixed.
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However, it is not clear whether a definition of what constitutes high-quality carbon offsetting will come from the CFTC. Several speakers at the roundtable on Wednesday said that in order to allow voluntary carbon markets to “reach their full potential,” the commission must leave the induction work to the private sector, possibly in the hands of an independent body called the Integrity Council for Voluntary Carbon Markets. One speaker, representing a forestry advocacy group, called the CFTC for a “light touch” that would allow standard-setters like Vera to continue to “innovate.”
Phillips, of the Roosevelt Institute, said the CFTC should hold standard-setters accountable for the claims they make. During the roundtable, he emphasized three words: “enforcement, enforcement, enforcement.”
Groups like Verra or American Carbon Registry “have criteria that say if you meet those criteria, your offset will count as one ton of carbon emissions reduced,” Phillips said in an interview with Grist. “If they make these assertions knowing they are not true, it is fraud.” In such a situation, the CFTC could impose civil financial penalties, freeze assets, or restrict the corporation’s trading privileges. The committee may also refer the case to the Ministry of Justice for prosecution.
As carbon markets grow, it is likely that the CFTC’s efforts will complement or even overlap with the work of other federal agencies to prevent offset-related greenwashing. The Securities and Exchange Commission, for example — an independent regulatory agency responsible for protecting investors — has proposed rules requiring companies to disclose “certain information” about the offsets they use, though it’s not yet clear what kind of information that might include. Some experts say another agency, the Federal Trade Commission — charged with enforcing consumer protection laws in the United States — could step in by including a more realistic (albeit non-binding) definition of high-quality carbon offsets in its soon-to-be-updated guidelines for environmental marketing claims.
Still, Phillips is pinning its hopes on the CFTC, which he said has shown the most interest in taking enforcement action. Indeed, on Wednesday, commissioners spoke forcefully about the need to clean up voluntary carbon markets.
“The rapid growth of these markets requires the Commission’s careful attention,” Commissioner Christine Johnson told the audience. “Our common goal should be to adopt a transparent path that effectively prevents double counting, guarantees overtime, and prevents fraud.”
The CFTC has issued another request for information from the public and is accepting submissions through August 18.