The Commodity Futures Trading Commission (CFTC) is joining other federal agencies in the move toward a whole-of-government approach to the mitigation of climate-related financial risk. The CFTC has taken steps this summer—including convening on Voluntary Carbon Markets and a Request for Information (RFI), which has an upcoming deadline for comments on October 7 (extended from the original August 8 deadline)—indicating that the commission is taking a hard look at carbon credits and is actively considering oversight of voluntary carbon markets.
The June Voluntary Carbon Markets Convening was the first of its kind and focused on issues relating to the supply and demand for high quality carbon offsets. CFTC’s goal for the meeting was to discuss product standardization, data supporting the integrity of carbon offsets’ greenhouse gas emissions avoidance and reduction claims, and the market structure for trading carbon offsets and carbon derivatives. The convening was slated as a discussion among market participants as the CFTC was interested to hear a wide variety of perspectives regarding challenges and opportunities in voluntary carbon markets. Those perspectives will inform how the CFTC may regulate derivatives in carbon offset markets.
Following the June 2 meeting, CFTC published an RFI seeking public comment on climate-related financial risk in connection with derivatives and commodities markets. Responses to this RFI will inform future CFTC policies considering climate risks and the developing spot and derivative markets in environmental, social and governance (ESG) commodities.
While the CFTC currently regulates a suite of recently launched Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE) exchange traded emissions products, the CFTC only has limited enforcement jurisdiction over the over-the-counter (OTC) ESG commodities and carbon credit/offset markets and thus today is generally only targeting fraud and manipulation in these markets. However, concerns relating to carbon product mislabeling, “greenwashing” and general misrepresentation in the marketing of low carbon, carbon neutral and carbon negative products are growing and the CFTC is acutely aware, as the lead governmental agency charged with ensuring the integrity, resilience and vibrancy of the U.S. commodities markets, that it has an important role to play in the growth of the ESG commodity marketplace. While not a general consumer protection agency like the Federal Trade Commission, or even the Securities Exchange Commission, the CFTC understands it will take an all-hands on deck approach to establish rules and regulations which serve to support the long-term sustainability of this marketplace.
In March 2021, the CFTC established a Climate Risk Unit to focus on the role of derivatives in understanding, pricing and addressing climate-related risk and transitioning to a low-carbon economy. Chairman Behnam, when describing the new unit, stated that “The CFTC’s unique mission focused on risk mitigation and price discovery puts us on the front lines” of emerging risks like climate change. The Climate Risk Unit is researching these issues; engaging in ongoing market and stakeholder outreach; maintaining a dialogue with market participants; and facilitating better understanding of climate-related market risks, potential for consistent domestic and international standards, and reliable data resources.
As a reminder, the deadline for comments in response to the RFI is October 7, 2022. To provide comments on the CFTC’s actions to mitigate climate-related financial risk, visit the CFTC website.
