How the Commodity Futures Trading Commission failed to regulate voluntary carbon credits

CFTC’s guidelines are woefully inadequate to regulate the “decades of misrepresentation, mismanagement, and fraud” in the voluntary carbon market.

The US Commodity Futures Trading Commission has issued its final guidelines for the trading of derivatives based on carbon credits. Rostin Behnam, CTFC’s chairman, describes the guidelines as “a critical step in support of the development of high-integrity voluntary carbon markets”.

The reality, predictably enough, is that the guidelines are extremely limited, and unlikely to make much difference.

The guidelines will lend legitimacy to the scam of carbon credits — the idea that emissions from burning fossil fuels can continue based on the possibility that emissions might be, often temporarily, reduced somewhere else.

“It’s giving this imprimatur to a system that doesn’t have credibility to begin with,” Clara Vondrich, senior policy counsel for Public Citizen, told Grist.

In February 2024, Public Citizen submitted a comment to the CFTC on the proposed guidance on carbon credit derivative contracts. Public Citizen highlighted the “decades of misrepresentation, mismanagement, and fraud” in the voluntary carbon market.

No regulation of carbon credits

A fundamental problem with CFTC’s guidelines is that while they attempt to regulate derivatives of carbon credits (such as futures contracts), the guidelines do nothing to regulate the credits themselves.

That’s a massive oversight. Particularly when we’re dealing with a commodity that no one can see, and that is created based on a fictional story about what would have happened in the absence of carbon finance.

Meanwhile the voluntary carbon market is awash with companies established in the hope of cashing in on the climate crisis.

Not legally binding

The 99 pages of guidelines published by the CFTC on 19 September 2024 are not legally binding. The guidance creates no new legal requirements for the CFTC to enforce. Instead, the CFTC relies on the Core Carbon Principles of the Integrity Council for the Voluntary Carbon Market.

Todd Phillips is an assistant professor of law in the Robinson College of Business at Georgia State University. He points out to Grist that by deferring to the ICVCM, CFTC is limiting its scope of responsibility:

“What the CFTC has done with this guidance is they have said that only offsets that meet the ICVCM standards can be listed on exchanges. Which means there are no low-quality offsets that will be listed on exchanges, which means the CFTC does not have anti-fraud authority there.”

Of course, there will be low-quality offsets listed on exchanges — for the simple reason that all offsets are by definition low-quality in terms of addressing the climate crisis. They all allow emissions from burning fossil fuels to continue. That’s what offsets were created to do.

So by relying on ICVCM standards, and assuming that these credits are not fraudulent, CFTC will avoid having to regulate the carbon credits themselves.

Erin Shortell, a Climate Risk Legal Fellow at the New York University School of Law’s Institute for Policy Integrity, points out that by focussing only on derivatives, the guidance “applies only to a tiny sliver of transactions one step removed from voluntary carbon markets’ core”.

The fox guarding the hen house

The ICVCM is not a neutral body. It is heavily dominated by carbon market proponents. When Joseph Winters, a journalist with Grist, asked the ICVCM for a comment, he was referred to Nat Keohane. Until 2021, Keohane was Senior Vice President for Climate at Environmental Defense Fund, which is rabidly pro-carbon markets.

Keohane is now President of the Center for Climate and Energy Solutions (C2ES) where Keohane continues to promote carbon markets.

In his response to Grist, Keohane dismissed any need for outside regulation of carbon credits:

“These are expert issues.They take a lot of specialized expertise . . . and I don’t think anybody would say that the CFTC has the kind of requisite understanding of the real issues and the details involved.”

This is the fox guarding the hen house telling us that everything is fine as the feathers fly and blood drips off its whiskers.

Todd Phillips, the professor of law at at Georgia State University disagrees with Keohane. He tells Grist that if carbon credits and their derivatives should exist, Congress should create a new agency, or appoint an existing one, to regulate carbon markets.

Phillips explains to Grist that,

“Everyone has an incentive to just cut corners and allow low-quality offsets to exist. There is no government entity whose job it is to ensure that low-quality offsets are taken off the market, and someone needs to have that responsibility.” 

Carbon offsets are bullshit

Of course, far better than attempting to regulate carbon credits would be to scrap them completely and focus on genuine solutions to the climate crisis. Such as, leaving fossil fuels in the ground.

Climate scientist Peter Kalmus describes the problem well in an interview on Democracy Now! about the flooding that’s currently happening in the southeastern US:

The planet’s overheating. It’s irreversable. It’s caused by the fossil fuel industry. This industry has been systematically lying and blocking action for almost 50 years. And they’ve said publicly, testifying in front of Congress, that they plan to continue systematically blocking action.

Carbon offsets are one of the tools that the fossil fuel industry is using to distract from the need to leave fossil fuels in the ground. And, as Cory Doctorow points out, “Carbon offsets are bullshit”:

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