The U.S. Commodity Futures Trading Commission’s (CFTC) Whistleblower Office took the unusual step of inviting market participants to look for and submit tips related to fraud, manipulation, and other forms of misconduct in the carbon markets. In doing so, the CFTC accomplished two separate, but related goals: first, to remind participants that the Enforcement Division is focused on environmental markets and has a powerful mechanism to entice insiders to disclose potential misconduct; and second, to lay down an updated marker that the CFTC has jurisdiction over trading in environmental commodities and intends to investigate conduct in that space.

The CFTC’s authority to regulate carbon markets

Carbon credits and offsets are “commodities” under section 1a(9) of the Commodity Exchange Act (CEA). Although the CFTC is primarily responsible for regulating commodity derivatives, it has broad enforcement authority over the physical commodity markets. This includes trading in all forms of carbon credits, offsets, and other environmental commodities, such as renewable energy certificates. Accordingly, the CFTC can bring an enforcement action under the CEA’s provisions prohibiting fraud, manipulation, and other forms of market abuse for activity involving carbon products, even if that activity does not involve derivatives. Moreover, like most US regulators, the CFTC frequently investigates activity that occurs outside the U.S. if there is the possibility that the activity has a connection with or impact on US persons or markets.

The CFTC’s whistleblower alert

The alert reminds market participants of the CFTC’s authority over carbon products and specifically calls for potential whistleblowers to “be on the lookout” for certain forms of misconduct, including:

• manipulative and wash trading in credit market futures contracts;
• fraud in the underlying spot markets related to “ghost or illusory credits”;
• “double counting” or other fraud related to carbon credits;
• fraudulent statements related to a carbon credit’s material terms; and
• manipulation of “tokenized” carbon markets.

Although some of these enforcement themes are familiar to the CFTC and participants in the commodities and derivatives markets, others represent new territory that the CFTC may be trying to claim as part of its broader enforcement remit. For example, double-counting and other forms of fraud arising out of a carbon product implicate the fundamental integrity of the carbon markets and are, therefore, potentially significant to the success and viability of this emerging asset class. By actively pursuing enforcement actions in this area, the CFTC is positioning itself as one of the primary regulators of these new environmental markets.

This alert comes on the heels of several recent public statements from CFTC Commissioners, including Chairman Rostin Benham, suggesting that the CFTC should play a role in overseeing the voluntary carbon markets. The Commission has also faced pressure from U.S. lawmakers to “pursue strong oversight of these markets.” Additionally, on 27 June 2023 the CFTC announced a second voluntary carbon markets meeting to be held on 19 July 2023.

Takeaways

The 20 June 2023 alert represents a significant development in the CFTC’s oversight of the carbon markets, and signals more enforcement activity in the markets for carbon and other environmental products.

The CFTC’s Whistleblower Program has been successful and provides a powerful incentive for people to report suspected wrongdoing. Since its creation in 2010, the Whistleblower Program has led to fines in excess of USD3 billion and payouts of more than USD300 million to individuals who can collect between 10% and 30% of the fines collected by the CFTC. This includes a record-breaking single payout of more than USD200 million to one whistleblower.

That the Division of Enforcement is directing its attention to the carbon markets – and soliciting tips related to misconduct in those markets – suggests an increased focus on “green” businesses. Increased political pressure for the CFTC to play a greater role in regulating environmental markets is likely also a contributing factor.

In any event, participants in the carbon markets should familiarize themselves with CFTC regulations affecting the markets and remain vigilant for conduct that could give rise to tips to and subsequent action by the Division of Enforcement.