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US CFTC eyes greater voluntary carbon markets scrutiny, to open consultation

19 May 2022 Keiron Greenhalgh

The US Commodity Futures Trading Commission (CFTC) is set to begin a consultation on voluntary carbon markets (VCMs) in the next couple of weeks, as it steps up plans for heightened scrutiny of both derivatives related to carbon offsets and the underlying markets, Chair Rostin Behnam said 18 May.

Speaking at Politico's second annual sustainability summit, Fast-Tracking a Sustainable Future, Behnam said the consultation would be under way before the agency holds its first meeting on VCMs on 2 June, which will discuss supply and demand of what the CFTC deemed "high quality carbon offsets," among other topics.

The CFTC regulates exchange-traded derivatives, which are often futures and options traditionally used as risk management tools, Behnam said, adding that climate change is another risk to manage.

Climate risk has been a concern for some time for Behnam, a former equities trader and lawyer. When he became acting chair of the CFTC, Behnam established its first Climate Risk Unit in March 2021.

Carbon offsets themselves are not derivatives, but many of the products available in VCMs are commodities by law, he said. In addition, key exchanges under the CFTC's purview are launching more carbon offset futures and options.

Behnam said the issue for the CFTC is whether there is any fraud or manipulation related to the VCM markets. The CFTC doesn't regulate spot or underlying markets, he said, but wants to see a correlation between cash and futures markets. If there is fraud in the underlying market, the CFTC needs to look into that cash or underlying market, he said.

He drew an analogy during the conference to the crypto-currency space, where he said the CFTC has brought more than 50 cases despite not regulating underlying crypto markets. Already in May, the agency has charged a New York state resident with a fraud scheme related to foreign exchange, commodity futures, and crypto-currency activities. A judge in the same state backed CFTC fines for the operators of a cryptocurrency derivatives trading platform earlier in May.

In VCMs, the US' top derivatives regulator said it is easy to think about the topic in a binary fashion, where there is just a seller and a buyer—for instance the farmer growing the tree, and the offset being the purchase. But, he said, it is necessary to think about VCMs as an intricate market, and therefore a regulator is needed to offer credibility. The CFTC "wants to support and scale" VCMs, he said.

And VCMs are growing their offerings. Intercontinental Exchange on 9 May launched a nature-based solutions carbon credit futures contract. The contract physically delivers Verified Carbon Unit credits certified under Verra's Verified Carbon Standard Agriculture, Forestry and Other Land Use Projects with Climate, Community and Biodiversity Certification.

Trading in voluntary carbon emissions offset contracts on CME Group's exchanges topped the equivalent of 100,000 million metric tons of CO2 in April, it said 27 April. CME launched the CBL Global Emissions Offset futures and CBL Nature-Based Global Emissions Offset futures contracts in 2021.

In March 2021, S&P Global Commodity Insights, the publisher of Net-Zero Business Daily, launched a meta-registry to track, manage, and account for trading in new and existing carbon offsets.

"Classic transition risk"

The challenge for the VCM arena is that it is currently a self-regulated space, Behnam said. There are "certainly a lot of good actors," he said, but "there are probably a lot who are not and are cutting corners." VCMs are a growing market for companies and countries, said Behnam. It is "a classic transition risk issue," he added.

Before taking the top job at the CFTC, Behnam in June 2019 initiated efforts that led to the examination of climate-related impacts on the financial system with the launch of an advisory committee. He said the idea of financial risk and climate change's intersection was new in the US at the time.

Behnam said advisory committees normally have 35 experts, and typically receive 30 to 40 applicants, but the CFTC's Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee received 120-130 applicants for seats at the table. There was "a clear demand and desire to be thinking about climate in financial markets," he said. Every element of the financial sector was interested, he added.

In September 2020, MRAC released a report titled Managing Climate Risk in the US Financial System following its discussions. The report had 53 recommendations. Behnam said the number one recommendation was that there should be a carbon price. Another recommendation high on the list was that there should be stress testing, he added.

During the same month, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) was launched. A private sector-led initiative, the TSVCM is headed by ex-Bank of England governor Mark Carney, who is also the UN Special Envoy for Climate Action, and it is sponsored by the Institute of International Finance. Behnam praised the efforts of the TSVCM 18 May. The private sector has done a great deal of work and now it's time for the public sector to step in and help, he said.

Scaling up

Behnam said he agrees with the concerns of those worried about the transparency of the VCM markets. Regulators must look into this area because the CFTC, and Behnam himself, expect a scaling up of the markets.

The taskforce agrees. The TSVCM estimates the voluntary market will be scaled up to $50 billion in 2030. Ecosystem Marketplace said in November the value of VCM trades topped $1 billion for the first time in 2021. Ecosystem Marketplace is an initiative from US-based NGO Forest Trends.

VCMs are on an upward curve because sustainability is a top concern for executives, according to an IBM survey. Some 51% of 3,000 CEOs the company surveyed said sustainability was their greatest organizational challenge in the next two to three years, up from 32% a year earlier, IBM said 10 May.

IBM added that 48% of the executives surveyed said increasing sustainability is one their highest priorities for their organization in the next couple of years, up from about a third in the 2021 version of consultant's poll. On top of that, more than 80% of CEOs polled believed their company's sustainability investments will produce improved business results in the next five years.

Posted 19 May 2022 by Keiron Greenhalgh, Senior Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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