One week after the Commodity Futures Trading Commission’s (CFTC) Whistleblower Office issued an alert seeking tips on potential fraud and manipulation in the carbon markets, the CFTC chairman announced that the second voluntary carbon markets convening will be held on July 19.
With this announcement, the CFTC chairman noted that “the CFTC has an important policy responsibility to promote product innovation, price discovery, and liquidity for high-quality carbon credits that are the underlying commodity for derivatives products listed on CFTC-registered exchanges.”
The first voluntary carbon markets convening was held in June 2022 and focused on issues related to the supply of and demand for high-quality carbon offsets and soliciting input from market participants on the CFTC’s role in regulating the carbon offset markets.
Immediately following the first voluntary carbon markets convening, the CFTC issued a request for information to better inform its understanding and oversight of climate-related financial risk related to the derivatives markets and underlying commodities markets. It sought information specific to the voluntary carbon markets, including information on aspects of these markets that are susceptible to fraud and manipulation and/or merit enhanced CFTC oversight.
Recognizing that the voluntary carbon markets are continuing to grow and evolve, the second voluntary carbon markets convening will build on the information discussed at the first convening and on the information received from comments submitted in response to the request for information.
Topics that are expected to be covered in the second voluntary carbon markets convening include the following:
- Recent private sector initiatives for high-quality carbon offsets
- Current trends and developments in the cash and derivatives markets for carbon offsets
- Public sector initiatives related to carbon markets
- Market participants’ perspectives on how the CFTC can promote integrity for high-quality carbon offset derivatives
The discussion at the upcoming convening may inform the Climate Risk Unit’s recommendations for any new or amended guidance, interpretations, or policy statements related to the voluntary carbon markets.
In addition, the CFTC’s Whistleblower Office issued an alert on June 20 that individuals can become eligible for financial awards and certain protections by “blowing the whistle” and identifying potential fraud or market manipulation in the carbon markets. The alert identified several types of misconduct that individuals should be on the lookout for:
- Manipulative and wash trading or other violations of the Commodity Exchange Act in carbon market futures contracts
- Fraud in the underlying spot markets related to ghost (also known as illusory) offsets listed on carbon market registries
- Double counting or other fraud related to carbon offsets
- Fraudulent statements relating to material terms of the carbon offset, including but not limited to the quality, quantity, additionality, project type, methodology substantiating the emissions claim, environmental benefits, the permanence or duration, or the buffer pool
- Manipulation of tokenized carbon markets
The issuance of the alert by the CFTC’s Whistleblower Office and the announcement of the second voluntary carbon markets convening demonstrate the CFTC’s continued commitment to assessing actions it can take to address potential fraud and manipulation within the voluntary carbon markets and to promoting integrity and liquidity for high-quality carbon offsets that underlie derivatives products that are transacted on CFTC-registered exchanges.
Entities transacting in the voluntary carbon markets should continue to ensure that the carbon offsets they hold are permanent, additional, verifiable, and unclaimed and to mitigate against commercial risks and potential regulatory and enforcement exposure.