The Commodity Futures Trading Commission is calling for whistleblowers to report “violations connected to fraud or manipulation in the carbon markets”

It will be interesting to see how CFTC attempts to regulate a scam

On 20 June 2023, the US Commodity Futures Trading Commission (CFTC) issued a whistleblower alert “notifying the public on how to identify and report potential Commodity Exchange Act (CEA) violations connected to fraud or manipulation in the carbon markets”.

In a CFTC press release, Rostin Behnam, Chairman of the CFTC, said,

“Alongside the continued growth of CFTC regulated carbon offset derivatives contracts, the agency is building upon its expertise to ensure the utility and reliability of these markets, as well as its ability to identify and pursue any potential fraud or abusive practices. Information from whistleblowers advances the Commission’s enforcement mission and, in turn, further builds integrity and trust in the carbon markets by rooting out fraud and manipulation.”

The alert states that CFTC’s Whistleblower Office is looking for information on the following:

• Manipulative and wash trading or other violations of the CEA [Commodity Exchange Act] in CM [Carbon Market] futures contracts.

• Fraud in the underlying spot markets related to ghost (a/k/a illusory) credits listed on carbon market registries.

• Double counting or other fraud related to carbon credits.

• Fraudulent statements relating to material terms of the carbon credit, including, but not limited to: 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.

June 2022: CFTC’s Request for Information

In June 2022, the CFTC released a Request for Information on how the CFTC can improve the integrity and transparency of the voluntary carbon markets. It also sought information on which aspects of voluntary carbon markets are vulnerable to fraud and manipulation.

The public comments are available on the CFTC website. Verra’s response is particularly interesting.

David Antonioli, Verra’s CEO, who recently announced that he would be resigning on 16 June 2023, told the CFTC that,

VCMs [voluntary carbon markets] are an important tool in efforts to combat climate change and are well-positioned to support corporate net-zero targets, including among companies that have adopted science-based targets.

Not surprisingly, Verra doesn’t want regulatory oversight from the CFTC over voluntary carbon markets. In a statement about its public comments to the CFTC, Verra states that,

In Verra’s view, many VCM transactions are spot transactions of commodities (i.e., the sale of a carbon credit results in the delivery of a credit in exchange for payment on a specified spot date), rather than transactions of derivative instruments, and accordingly fall outside of CFTC authority to regulate.

Verra has issued more than one billion carbon credits already. A nine-month investigation by The Guardian, Die Zeit, and SourceMaterial found that more than 90% of Verra’s rainforest carbon offsets were worthless.

A series of carbon credit ratings agencies have sprung up in recent years promising to differentiate between “high quality offsets” and junk offsets. But the ratings agencies cannot agree on how many junk offsets there are out there.

The reality is that all carbon offsets are junk - a distraction from the urgent need to leave fossil fuels in the ground.

October 2022: Seven Senators urge CFTC to regulate voluntary carbon markets

On 13 October 2022, seven Senators wrote to CFTC’s Chairman Rostin Behnam requesting that the CFTC “take concrete steps to implement rules governing the carbon market”.

In their letter, the Senators (Cory Booker, Elizabeth Warren, Ed Markey, Richard Blumenthal, Bernie Sanders, Jeffrey Merkley, and Kirsten Gillibrand) point out that “We need bold, realistic action to effectively address carbon emissions that exacerbate environmental injustice and drive climate change.”

They are critical of companies that buy carbon offsets:

The purchase of offsets allows many of these multinational companies to make bold claims about emission reductions and pledges to reach “net zero,” when in fact they are taking little action to address the climate impacts of their industry. . . .

Extensive research indicates systemic and persistent issues with offsets, including inaccurate or exaggerated promises of the positive effects, inflated climate benefits, and weak or unenforceable regulations. These fraudulent investments are a convenient and profitable way to market climate consciousness without requiring real action to reduce emissions.

The Senators made the following recommendations to the CFTC:

• Investigate the integrity of currently approved derivatives and their underlying carbon offsets, and develop qualifying standards for carbon offsets that effectively reduce greenhouse gas emissions and can serve as underlying commodities for approved derivatives in the future.

• Create a registration framework for offsets, offset brokers, and offset registries.

• Pursue cases of individual project fraud.

• Develop a working group to study both the risk to investors associated with carbon offsets and derivatives (legal, reputational, and regulatory) and the systemic climate financial risk created by their availability and usage.

Carbon offsets are a scam

Obviously, regulation of voluntary carbon markets is long overdue. But the problem isn’t that some carbon offsets are fraudulent.

“There’s really no such thing as a ‘carbon offset’,” Tom Goldtooth of the Indigenous Environmental Network recently pointed out. “If you really look at it, it’s made up. There is no such thing as offsetting pollution by planting a tree.”

All carbon offsets are based on a story about what would have happened if the carbon offsetting project had not gone ahead. The story is a counterfactual baseline.

And the story is fiction. It is impossible to verify, because the project did go ahead.

As Larry Lohmann of The Corner House pointed out in a comment on REDD-Monitor seven years ago,

If baselines are indeed unverifiable, then there can be no distinction between “fraud” and “nonfraud”, and it doesn’t make sense to say that any particular baseline, or baselines in general, are fraudulent.

To say that REDD accounting is fraudulent implies that with some reform, and some honest work on the part of VCS and others, it might be made nonfraudulent. This is simply not the case with offsets. The situation is unfortunately far worse than that.

Lohmann concludes that,

The problem is not ‘bad baselines’ but the concept of counterfactual baselines itself. That reality does more than invalidate any particular REDD project. It invalidates REDD (and all other offsets) as a whole.

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