The Commodity Futures Trading Commission sets up an Environmental Fraud Task Force to address misconduct in carbon markets

But what if this market trading in an imaginary commodity consists only of “misconduct”?

On 29 June 2023, the US Commodity Futures Trading Commission’s Division of Enforcement created two new task forces.

The first is the Cybersecurity and Emerging Technologies Task Force. The CFTC explains in a press statement that this “will address cybersecurity issues and other concerns related to emerging technologies (including artificial intelligence)”.

The second is the Environmental Fraud Task Force that will “combat environmental fraud and misconduct in derivatives and relevant spot markets”.

The announcement of the new task forces comes just over one week after the CFTC issued a whistleblower alert explaining to the public how to identify and report violations connected to fraud or manipulation in the carbon markets.

“As voluntary carbon markets grow, there exists the potential for fraud and manipulation”

The two new task forces will consist of lawyers and investigators, “who will prosecute cases, serve as subject matter experts, and coordinate efforts with the CFTC’s other divisions and offices”.

CFTC’s Chairman, Rostin Behnam, says in the press statement that,

“We must be dynamic and proactive in protecting derivatives markets against evolving threats. Recent events that directly impacted derivatives markets highlight the concerns that cybersecurity breaches raise in our markets. Meanwhile, as more firms tout their environmental credentials and as voluntary carbon markets grow, there exists the potential for fraud and manipulation. The creation of these two task forces demonstrates the vigorous and forward-looking approach the CFTC will take to address misconduct in these critical areas.”

It’s funny that Behnam should talk about a “forward-looking approach” to regulating voluntary carbon markets. These markets have been riddled with fraud and manipulation since the first offset project was developed in 1998.

Given that offsets are an imaginary commodity based on a counterfactual baseline (that is impossible to verify) CFTC’s lawyers and investigators are going to have their work cut out.

A “coming wave” of offsets litigation

Law firms are already asking about “a coming wave of litigation” regarding carbon offsets. In a recent memorandum, Quinn Emanuel Urquhart and Sullivan noted the rise in legal cases against companies claiming “net zero” or “carbon neutrality” as a result of buying offsets.

Quinn Emanuel Urquhart and Sullivan note that “Scientific errors can lead to massive overestimates of GHG reductions.” They add that when it comes to evaluating the impact of offsets, the “‘hard science’ may be the easy part”. The four conceptual problems with offsets are far more difficult to resolve: Additionality, Leakage, Permanence, and Double Counting.

Benham is clear that the CFTC is not an environmental regulator. “I say that often,” he told Bloomberg in a recent interview. However, he explains that,

“[T]here are at least two listed futures contracts on CFTC registered exchanges. And just by virtue of that reality that we have regulated futures contracts, I then have a vested interest in the underlying market, right?”

In the interview with Bloomberg, Benham comments on the integrity of the registries and the actual offsets, including questions about,

“whether or not they're really meeting their goals of sequestering X tons of carbon, whether the project really exists, you know, is there additional carbon being sequestered or is it just, ‘oh, I have a thousand acres of trees. Let me just generate some credits that have been sitting there for 30 years.’”

Addressing fraud and manipulation

In the press statement about the two new task forces, Ian McGinley, Director of Enforcement at the CFTC says,

“The Environmental Fraud Task force will focus on addressing fraud and manipulation in carbon credit markets and other forms of greenwashing, including material misrepresentations about ESG investment strategies.”

And the press statement explains that the mission of the Environmental Fraud Task Force is as follows:

This task force will address fraud and other misconduct not only in regulated derivatives markets, but also in relevant spot markets (such as voluntary carbon credit markets), relating to purported efforts to address climate change and other environmental risks. The task force will examine, among other things, fraud with respect to the purported environmental benefits of purchased carbon credits, as well as registrants’ material misrepresentations regarding ESG products or strategies.

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