The Commodity Futures Trading Commission (CFTC) is testing the waters for its commodity-based carbon credit market. As an agency traditionally tasked with regulating commodities, the commission has recently implemented an unapproved environmental market to oversee the exchange of “carbon credits.”
Last week, CFTC Chairman Rostin Bentham hosted the second voluntary carbon markets convening at the agency’s headquarters in Washington D.C., roughly a year after its first meeting in June 2022. The CFTC recently reported that the voluntary carbon credit market is valued at $2 billion, and expected to rise to $250 billion by 2050, according to research by Morgan Stanley. But that doesn’t answer the question of why is the CFTC has decided to place itself in the business of regulating carbon credits in the first place. Why does the CFTC presume it can regulate credits – instruments more like a cross between a conservation easement and a security – when its jurisdiction is limited to commodities trading?
Carbon credits can be understood as a sort of environmental currency, capable of being purchased and sold across a carbon market. Such credits derive worth from a company’s attempt to decarbonize part of its operations. As the United Nations Development Programme says, “One tradable carbon credit equals one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided.” Credits that are purchased are then considered to “offset” a given amount of greenhouse gases that a company firm has or will release into the environment. Once a credit is used to neutralize or prevent emissions, it becomes untradeable.
Credits are often issued by nonprofit projects and environmental organizations and then regulated and brokered via international entities like the United Nations Carbon Offset Platform’s Cross-State Air Pollution Rule and the European Union’s (EU) Carbon Removal Certification, but can also be supplied in the US by state governments like California, which conducts its own carbon market through the California Air Resources Board.
Regulators spur carbon trading by establishing what is known as a “cap and trade” system, where a government-imposed cap, like the EU’s Emissions Trading System (ETS), is established on permitted emissions levels for a given year. This cap gradually decreases in order to incentivize participating companies to meet their targets for decarbonization. Individual consumers can also purchase carbon credits to offset their own household emissions outside of a cap and trade framework.
Carbon credits have an established marketplace in Europe, with the ETS is described as being the world’s first and biggest carbon market. Internationally, the largest sellers of carbon credits are China and India.
Given all of this, the CFTC’s act of establishing a carbon credit market is very suspect. The CFTC only holds jurisdiction over the purchase and selling of commodities for US derivatives markets. By this, it oversees the trade of basic futures, swaps, and options. When looking to the clear meaning of a “commodity,” the Commodity Exchange Act does not say anything about regulating chemical elements like carbon or a modified, carbon-based derivative.
Rather, the Act specifically states, “the term ‘commodity’ means wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions.”
The agency’s emergent interest into the issuance of carbon credits derives from Chairman Bentham’s aim to synchronize the CFTC’s efforts to combat climate change with that of related agencies, like the Securities and Exchange Commission (SEC). Suddenly the CFTC feels it should account for climate-related financial risks for investors as it issues carbon credits to fulfill futures contracts. It does so through the issuance of credits attached to future contracts traded across designated contract markets (DCMs).
The CFTC claims to wield regulatory oversight of DCMs, yet has pointed to zero statutory authorization. This agency should not be permitted to radically alter the traditional basis of futures trading so as to encompass a new carbon-based contract simply because of perceived climate risks.
In the CFTC’s recent convening on July 19th, Bentham issued a similar refrain to the one SEC Chair Gary Gensler made in his recent April 18th hearing before the House Financial Services Committee, by proclaiming, “the CFTC is not a climate regulator.” Bentham continues by stating that, “indeed it is not within our authority to require that market participants comply with a specific climate policy or foreclose access to our regulated markets based on any such policy.”
While participation in the CFTC’s carbon credit program is indeed currently voluntary, the act of enlarging oversight of derivatives to incorporate a makeshift credit system that incentives decarbonization among participants may be an endorsement of “sustainable” investing.
The CFTC’s questionable role in this becomes even more problematic when considering how the agency just established two anti-fraud enforcement divisions over the market to prevent “environmental fraud” and “material misrepresentations of environmental products and strategies,” according to Bentham’s remarks at the July meeting.
Why should Congress permit funding to climate-themed quasi-enforcement divisions that could more appropriately use their time to deter fraud and manipulation related to CFTC’s actual mission? The CFTC claims to possess jurisdiction over “carbon allowances and other environmental commodities products that are linked to futures contracts,” as a means of stretching the original meaning of a “commodity” to incorporate a direct concern for the environment.
Just because many commodities consist of basic grains and staples found in the environment, this does not grant the agency authority to promote carbon offsetting in pursuit of an environmental policy objective—transitioning to net-zero emissions.
With the above in mind, it seems like the CFTC has indeed morphed into a climate change regulator, Bentham’s denial aside. Congress simply has not tasked the agency with such a pursuit.
Additionally, carbon offsetting is a highly speculative practice that is not grounded in any reasonable scientific benefit. As my colleagues Richard Morrison and Max Laraia mentioned in an article for National Review, “recent scandals… have called into question the ability of current carbon-offset markets to actually reduce emissions. Some observers even suggest the effort should be abandoned entirely.”
It’s time for the CFTC to offset its self-proclaimed policy pursuit for GHG reduction by returning to its original mission.