The CFTC's Second Voluntary Carbon Markets Meeting

This week the US CFTC held their second meeting focussing on voluntary carbon markets. In his opening statement, Chairman Rostin Behnam pointed out that voluntary carbon markets are at a critical point in their development and that the CFTC has an important policy responsibility to promote product innovation, price discovery, and liquidity for high-quality carbon credits where they are the underlying for derivatives products listed on CFTC-regulated exchanges.

Key points in his address were as follows:

• The CFTC received feedback from over 80 stakeholders since their first meeting on the voluntary carbon credit topic which distilled into two key takeaways for the CFTC:

1. The CFTC should use its anti-fraud and anti-manipulation enforcement authority to the fullest extent possible; and
2. The CFTC should support the development of standards to promote the growth of high integrity carbon offsets.

• Chairman Behnam believes that the financialization of the voluntary carbon markets has arrived at the same time as public and private efforts are being made globally to stave off what he describes as a “burgeoning credibility crisis”.
• He recapped on two initiatives the CFTC announced in June which aim at building trust and rooting out misconduct in the voluntary carbon market:

1. The CFTC’s Whistleblower Office within the Division of Enforcement (DOE) issued an alert notifying the public on how to identify and report potential Commodity Exchange Act violations connected to fraud or manipulation in the carbon markets (click here); and
2. The DOE announced the establishment of two new task forces, one of which will focus on environmental markets fraud and misconduct in derivatives and relevant spot markets. The new Environmental Fraud Task Force will investigate potential fraud with respect to purported environmental benefits of purchased carbon credits and material misrepresentations and misconduct regarding environmental products and strategies (click here).

• He noted that the CFTC is a financial market regulator and this is where their responsibilities begin and end" and that it is “not a climate regulator….not within our authority to require that market participants comply with a specific climate policy”. Rather they are there to support the integrity of developing markets, and to encourage the growth of transparent, liquid and robust markets in which farmers, ranchers, manufacturers, commercial end-users, and investors are able to participate to efficiently manage their risk. 
• He noted that the voluntary carbon market has doubled in size in a little over a year, now being worth an estimated $2 billion.
• He noted the importance of the work being done by international bodies such as IOSCO’s Sustainable Task Force’s (STF) Carbon Markets Workstream (which Behnam co-chairs with Verena Ross from ESMA), stating that the CFTC will work closely with international partners through IOSCO.

Commissioners Goldsmith Romero and Mersinger also made supportive introductory statements on the topic (see here and here)

Commissioners Goldsmith Romero endorsed efforts by the Integrity Council on Voluntary Carbon Markets (ICVCM) claiming that they are an important and welcome attempt to create a common understanding of a high-quality carbon credit and cited their recently released Core Carbon Principles guidelines (covered in further detail in this week’s newsletter).  

She also reiterated her proposal that the CFTC should follow a similar oversight and enforcement approach to carbon credits as used for digital assets which includes education related to the qualities of a high-quality carbon credit, asserting the CFTCs anti-fraud legal authority, and increasing intelligence in the market combined with robust enforcement, and government-wide and international coordination. She also proposes that the CFTC adopts a heightened review framework of any self-certified environmental products listed on exchanges, including those related to carbon credits.

RegTrail Insights

Energy and commodity firms participating in voluntary carbon markets in the US falling under the CFTC’s jurisdiction are advised to acknowledge the focus being placed by the Commission on this sector. It couldn’t be messaged more clearly that enforcement action is likely to be on its way. Ensuring that appropriate governance and controls are placed around trading and origination in this area is vital.