Voluntary carbon markets: “decades of misrepresentation, mismanagement, and fraud”

Public Citizen’s comment on CFTC’s draft guidance on carbon credits is spot on.

In December 2023, the Commodity Futures Trading Commission approved a “proposed guidance and request for public comment regarding the listing for trading of voluntary carbon credit derivative contracts”. The CFTC received 86 comments from carbon traders, industry organisations, NGOs, carbon registries, and universities.

This post looks at the comment sent in by Public Citizen, founded by Ralph Nader in 1971. But first, here’s a quick quiz. The following paragraph is from one of the comments to the CFTC:

Well-designed, transparent and functioning carbon markets, whether voluntary or mandatory, can be important tools in reducing and avoiding GHG emissions across a large set of market participants. For the voluntary carbon market (VCM) to play an impactful role in addressing climate change, it is necessary to ensure that the VCM is transparent, liquid, global, and represents high-integrity voluntary carbon credits (VCCs).

Decades of fraud and failed projects

Public Citizen notes the challenges that are inherent in the voluntary carbon market, “namely decades of misrepresentation, mismanagement, and fraud”.

Public Citizen believes that the CFTC’s proposal “fundamentally sidesteps” an important question: “Are offsets and their derivatives legitimate financial instruments that ‘promote resilience to climate risk?’”

Public Citizen answers its own question as follows:

Decades of fraud and failed projects provide a clear answer, yet there remains hope that “integrity” might somehow be restored to the market. Moreover, this hope presupposes that key attributes of integrity, such as transparency and efficacy, ever existed in the carbon market in the first place.

And Public Citizen raises a fundamental problem for the regulation of carbon markets. It is impossible to prevent manipulation of a commodity that no one can see, which is generated by a fictional story about what would have happened in the absence of carbon finance.

“Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened,” as journalist Dan Welch put it.

Public Citizen writes that:

CFTC-regulated exchanges have two key obligations under the Commodity Exchange Act, namely to “list only contracts that are not readily susceptible to manipulation,” and “to have the capacity and responsibility to prevent manipulation, price distortion and other market disruptions, and other requirements aimed at market integrity.” Unfortunately, exchanges will be unable to comply with these basic principles in the case of VCM derivative contracts.

A dangerous distraction

The fundamental problem with carbon offsets is that “they do not mitigate climate change”, Public Citizen notes. Carbon offsets “appear much more like a dangerous distraction than a solution”.

Fraud and misrepresentation are not the only problems. Guaranteeing “permanence” is “simply a structural and physical impossibility for all nature-based credits”. Proving that a project is “additional” means proving that the project would not have gone ahead without the money from sales of carbon credits. That, Public Citizen notes, “requires proving a counterfactual”.

Core Carbon Principles

In March 2023, the Integrity Council for the Voluntary Carbon Market (ICVCM) launched its Core Carbon Principles. According to the ICVCM, “They are ten fundamental principles for high-quality carbon credits that create real, verifiable climate impact, based on the latest science and best practice,” according to ICVCM’s chair, Annette Nazareth.

Public Citizen points out that,

Permanence and additionality are insurmountable barriers to integrity for the vast majority of carbon offsets. . . . The voluntary carbon market has been unable to evidence offsets that meet these criteria for more than thirty-five years.

Public Citizen writes about the concerns with nature-based offsets:

The concerns include the exaggeration of the level of additional carbon emissions actually avoided, the limits on the level of emissions that can reasonably be sequestered, and the challenges of preventing emissions from being returned to the atmosphere at a later date. Once emitted, carbon dioxide lives in the air for hundreds of years, exerting its heating effect for the duration. Any release of the stored carbon back into the atmosphere—say because a forest fire wipes out a forestry offset project—nullifies the benefit and no “offset” has taken place.

Since early 2022, the price of nature-based offsets has fallen dramatically:

Public Citizen’s conclusion

Public Citizen argues that,

The Commission should not incentivize growth of this fundamentally flawed market with new guidance for VCM derivatives that will create a financial spur for more gamesmanship and volatility.

And Public Citizen concludes that,

The Commission’s mandate is to ensure the transparent operation of derivatives markets, foster price discovery, and ensure that contracts listed on its regulated exchanges are not subject to manipulation. Carbon credit or offset derivatives contracts are inherently subject to manipulation and defy price discovery because the underlying “commodity” is foundationally compromised. . . .

The Commission should not underestimate its power to legitimize the market, and therefore promote its growth and expansion, at a time when the vast majority of the market needs the exact opposite: it should be shut down.

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