The Growth and Development of Carbon Offset Markets

Morgan Lewis - Power & Pipes
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Morgan Lewis - Power & Pipes

With the push to transition to a low-carbon economy, carbon offsets have become an option that many have turned to in order to decarbonize and achieve their climate goals. The demand for carbon offsets is quickly increasing, and the industry has recognized the need for quality standards applicable to a carbon offset, the ability to monitor, report, and verify carbon offsets, and mechanisms that ensure market integrity. Next month, the Commodity Futures Trading Commission (CFTC) will be hosting a meeting to discuss issues related to the supply and demand for high quality carbon offsets and to gather information to assess its potential role in regulating products involving carbon offsets.

A carbon offset is a credit that represents the reduction or removal of one ton of carbon dioxide emissions from the atmosphere. Emissions-reducing projects can generate a carbon offset by capturing and destroying a greenhouse gas that would otherwise be emitted or by capturing and storing a greenhouse gas that would otherwise be released into the atmosphere. They can also generate a carbon offset by producing energy with a clean, renewable resource. A carbon offset can be purchased or sold to allow the holder of the carbon offset to mitigate or negate the impact of the greenhouse gas emissions from its own activities to achieve its climate goal of reducing emissions.

Carbon offsets can be traded in both mandatory compliance carbon markets and in voluntary carbon markets. Compliance carbon markets are marketplaces through which regulated entities can purchase and sell emissions allowances or offsets to meet established regulatory obligations. On the other hand, voluntary carbon markets function independent of compliance carbon markets and allow companies to purchase and sell carbon offsets voluntarily without an intent to use the offset for compliance purposes. Companies may wish to voluntarily purchase carbon offsets to compensate for emissions that cannot be reduced through direct emissions reductions to meet their climate commitments and emission reduction goals.

As noted above, CFTC Chairman Rostin Behman announced that the CFTC will be hosting its first Voluntary Carbon Markets Convening on June 2, 2022. The purpose of the meeting is to discuss issues related to the supply and demand for high quality carbon offsets, including product standardization and the data necessary to support the integrity of carbon offsets’ greenhouse gas emissions’ avoidance and reduction claims. The CFTC has previously recognized the need for standardization in the voluntary carbon markets to help scale up trading and to create a role for regulators to ensure market integrity. With the continued development of voluntary carbon markets and the emergence of CFTC-regulated derivatives that reference cash offset markets, the CFTC now also seeks to gather information from market participants in the voluntary carbon markets to better understand its potential role.

To halve greenhouse gas emissions by 2030 and reach net zero emissions by 2050, proponents of voluntary carbon markets have stated that voluntary carbon markets need to grow significantly over the next decade. The industry and market participants have identified several areas that will need to be developed and addressed to facilitate the expansion of carbon markets. These areas include ensuring that carbon offsets represent actual, verifiable units of removed or avoided emissions, the need for additional transparency in the market and carbon offset pricing, the need for measures to ensure the integrity and credibility of the carbon offsets traded, and the interaction of voluntary carbon markets with and the impacts of the compliance carbon markets.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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