Dive Brief:
- A group of nine Democratic lawmakers showed their support for the Commodity Futures Trading Commission’s proposed guidance for companies looking to list and trade voluntary carbon credits in a letter Wednesday to the independent agency.
- Rep. Doris Matsui of California, along with Sens. Cory Booker and Sheldon Whitehouse of New Jersey and Rhode Island respectively, spearheaded the letter asking the commodity regulator to “vigorously implement” its final guidance. The lawmakers also asked the CFTC to consider the “integral role” carbon credit registries have in derivatives markets, which allow for trading of both carbon credits and carbon offsets.
- The lawmakers said they are considering legislative action to improve regulation of voluntary carbon markets and asked the commission to brief Congress on any relevant enforcement action needed to “safeguard the integrity” of such markets. Lack of regulation leads to significant environmental risks, which ultimately spur substantial financial risks, the letter said.
Dive Insight:
The CFTC unveiled its proposed guidance in December 2023 which outlined what factors a commission-regulated exchange or designated contract market should consider when listing or trading voluntary carbon credits. These included adhering to the requirements of the Commodity Exchange Act and other relevant CFTC regulations.
The commission said at the time that its proposal was the result of a two-year examination of carbon markets and an even more extensive time period spent on evaluating how climate impacts financial markets.
“Our goal all along has been to help shape standards in support of integrity, which will lead to transparency, liquidity, and ultimately price discovery - all established hallmarks of CFTC regulated markets,” CFTC Chairman Rostin Behnam said in December, announcing the proposal.
Democratic lawmakers urged the commission Wednesday to ensure its final guidance was “as rigorous as possible,” and said the voluntary carbon credit market needs “clear, consistent, and commonsense regulation” to guarantee “stability, integrity, and efficient price discovery.”
However, the lawmakers also recognized the complications that come with validating the integrity of the market.
CFTC’s proposal comes at a time where the effectiveness of the voluntary carbon market has been put into question due to overarching issues with its role in lowering carbon emissions. Earlier this week, the Science Based Targets initiative published research that found “various types of carbon credits are ineffective in delivering their intended mitigation outcome.”
SBTi said in its analysis that there could be “clear risks” to corporations using carbon credits to offset their carbon footprint.
Last month, a group of over 80 organizations focused on environmental and social issues argued that allowing entities to meet climate commitments through carbon credits is “likely to slow down global emission reductions.” The organizations expressed concern over the growing push to utilize carbon credits to offset emissions and said this reliance reduces the scale of funding and urgency needed to develop systems that hold emission-intensive sectors accountable and assist regions disproportionately impacted by climate change, such as the Global South.
In their letter to the CFTC, the lawmakers said carbon credits — when misused by corporations — effectively amount to a “license to pollute.” Nevertheless, increased and effective regulation could unlock the market’s potential to “accelerate the drawdown of greenhouse gas emissions, potentially avoiding the worst consequences of climate change, while also providing a new source of income for small farmers and forest owners,” the letter said.
The lawmakers said CFTC’s guidance would help the market police any double counting of emissions and allow only those credits to be traded that assure “the durability of the underlying carbon being removed or reduced” is accounted for scientifically.
