In press releases issued in late June, the Commodity Futures Trading Commission (CFTC) announced its enforcement division’s creation of a task force on environmental fraud, and publicized its whistleblower office’s alert to carbon market participants, identifying types of misconduct of interest to the CFTC. In addition, the CFTC announced a second public discussion of voluntary carbon markets, which will be held on July 19.
The environmental task force is designed to combat environmental fraud and misconduct in the relevant derivative and spot markets, including in the voluntary carbon credit markets. The task force will examine the purported use of derivatives and the spot markets to address climate change and other environmental risks. In addition, the task force will focus on the claimed environmental benefits of purchased carbon credits and participants’ representations regarding environmental, social, and corporate governance (ESG) products or strategies. In the environmental task force press release, CFTC Chairman Rostin Behnam noted the potential for fraud and manipulation in the voluntary carbon markets as these markets rapidly expand and as an increasing number of firms make claims as to their various carbon initiatives.
In the CFTC whistleblower alert, the CFTC provided the public with information about how individuals can identify and report potential Commodity Exchange Act violations with respect to fraud and manipulation in the carbon markets, including manipulative and wash trading, “ghost” credits, double counting, fraudulent statements relating to material terms of the carbon credits, and potential manipulation of tokenized carbon markets.
A common theme of these announcements is the CFTC’s anti-fraud and anti-manipulation authority over spot markets underlying the commodity derivatives subject to the Commission’s jurisdiction.
The voluntary carbon credits spot market is a focus of the new Division of Enforcement task force,1 and the whistleblower alert identifies “fraudulent statements relating to material terms of the carbon credit, including … quality, quantity, additionality, project type, methodology substantiating the emissions claim, environmental benefits, the permanence or duration, or the buffer pool” as misconduct that could lead to a whistleblower receiving a monetary award following a successful enforcement action.
The July 19 meeting on voluntary carbon markets has been framed by Chairman Behnam as reflecting the CFTC’s “important policy responsibility to promote product innovation, price discovery, and liquidity for high-quality carbon credits that are the underlying commodity for derivatives products.”
The upcoming meeting may provide additional insight into their view of the scope of the CFTC’s regulatory authority with respect to carbon markets (including voluntary carbon credits) and whether there is potential actionable misconduct in the carbon markets. In addition, the CFTC may provide further insight as to their plans to regulate aspects of the rapidly developing carbon markets, including voluntary carbon credits.
As the CFTC’s approach to carbon markets continues to come into focus, members of Wilson Sonsini’s Energy and Climate Solutions, Derivatives, and Fintech and Financial Services practices will continue to monitor developments to help provide informed advice and guidance to clients in light of unprecedented interest in and reliance upon carbon markets, and associated public claims, for implementing voluntary decarbonization strategies.
[1] “The task force will address fraud and other misconduct not only in regulated derivatives markets, but also in relevant spot markets (such as voluntary carbon credit markets), relating to purported efforts to address climate change and other environmental risks.”
