Good morning and thank you all for joining us at the CFTC’s second convening on voluntary carbon markets. I want to thank Chairman Benham for his continued priority of climate issues and for working with me to promote resilience to climate risk.
Understanding and monitoring climate risk is a critical role for the CFTC, as the physical impacts of climate change pose serious risks to commodities markets and climate change poses systemic risk to the financial system, as the physical. I have met with farmers and producers, reviewed United States Department of Agriculture and National Oceanic and Atmospheric Administration reports, as well as seen and heard many examples of the impacts that severe climate events have on those markets. Last year, farmers and ranchers experienced $21 billion in total crop & rangeland losses, mostly s drought and wildfire.[1] 2023 is shaping up to be a year of heavy climate impacts with two-thirds of the U.S. corn production area experiencing drought and harvested winter wheat substantially down as the season progresses.[2] This naturally serves as a risk for derivatives markets.
Once we know the risk, we can plan for it. We can manage around it. We can use every tool at our disposal as an opportunity to manage risk and promote climate resilience. In the end, managing risk is what derivatives markets are all about.
I have heard a lot from farmers and producers about their contributions to climate resilience. In many ways, they are the originals of sustainability. Longstanding practices like conservation tillage or no-till, planting cover crops, and prescribed grazing can all help improve a farm or ranch’s resilience to climate-related disasters, and remove carbon from the atmosphere.[3] This is especially important because 40% of natural disaster damage is uninsured in the United States.[4] The US Department of Agriculture announced plans to invest almost $3 billion in 70 projects under its Partnerships for Climate-Smart Commodities funding program, which could result in more than 60 million metric tons of carbon dioxide sequestered.[5]
Some market participants see potential in voluntary carbon credit markets as another opportunity to manage climate-related risk. There are currently carbon credit futures products trading on CFTC-regulated exchanges. This puts the CFTC in a unique position.
There is much interest in spot voluntary carbon credit markets over which the CFTC has antifraud jurisdiction. Despite predictions that carbon credits may grow from a $2 billion to a $50 billion market, research by Bloomberg found that corporations used 4% fewer credits in 2022.[6]
The spot voluntary carbon credit markets continue to face challenges. I look forward to hearing today about some of the challenges to these markets. I also look forward to hearing about possible solutions.
Well-designed markets help deliver liquidity and price transparency, while managing risk, when participants are confident they have credible information about the product. One of the biggest challenges in spot voluntary carbon markets is fragmentation that prevents market confidence. There are different registries and standard setters, and much of the market happens in opaque over the counter transactions.[7] A lack of transparency through consistent, comparable data with an agreed-upon taxonomy can present challenges to proper functioning of markets, including price discovery.
The recent slowdown in markets may reflect concerns over a lack of transparency and trust. Those interested in participating in the markets want to be assured that they are purchasing high quality credits. Some companies have pivoted away from carbon markets entirely out of concerns that using carbon credits leaves them open to accusations of greenwashing.[8]
The market should signal through pricing those carbon credits that are high quality, compared with credits reflecting projects that do not achieve the requisite level of carbon reduction or are temporary. However, there is insufficient price transparency given the fragmentation and lack of trust in the market. According to a May 2023 report by the World Bank, the price of carbon credits has fallen to under $5 per ton for most categories, except credits for carbon removal which trade at approximately $15 per ton.[9] It attributes this drop, in part, to a “least common denominator” effect, where high-quality projects cannot be distinguished from lower-quality efforts of the same type.
Efforts by voluntary bodies like the Integrity Council on Voluntary Carbon Markets (“ICVCM”) are an important and welcome attempt to create a common understanding of a high-quality carbon credit. The ICVCM has released Core Carbon Principles but has not yet finalized an assessment framework for identifying credits “that create real, additional and verifiable climate impact with high environmental and social integrity.”[10] I have had the fortune of spending time discussing this work with Annette Nazareth of the ICVCM, who was an SEC Commissioner when I worked at the SEC and who is a participant today.
Buyers of carbon credits are also becoming clearer about how they will use credits in order to avoid accusations of greenwashing. The Voluntary Carbon Markets Initiative (“VCMI”), announced at the COP26 global climate convening, has developed a Claims Code of Practice to guide companies on how “they can credibly make voluntary use of carbon credits as part of their near-term emissions reduction objectives, and long-term net zero commitments.”[11] One key element of that code is encouraging companies to stop treating carbon credits as “offsetting” their emissions and instead to frame them as a contribution above and beyond what they are doing to decarbonize their own business.[12]
The Role of the CFTC
First and foremost, our role is to regulate U.S. derivatives markets. The Commission should work with exchanges and market participants to ensure the integrity of derivatives markets and promote responsible innovation in environmental products. A few weeks ago, I met with both CME and ICE to discuss their voluntary carbon credit derivative products, the markets, market demand, and the issues that surround these markets. These conversations build on my proposal earlier this year that the CFTC work with exchanges on listing standards through guidance related to environmental products.[13] These standards would be designed to guide exchanges in fulfilling the Commodity Exchange Act core principles. The guidance could involve looking at the standards developed by the ICVCM and the VCMI and other due diligence.[14]
Additionally, in March at ISDA’s ESG conference, I proposed that the Commission follow a similar oversight and approach to environmental products as those adopted for digital assets. This would include education including related to the qualities of a high-quality carbon credit, asserting our anti-fraud legal authority, including in spot carbon credit markets, increasing intelligence in the market, robust enforcement, and government-wide and international coordination.[15] And to continue mirroring the approach the Commission has taken to digital assets, I proposed that the Commission adopt a heightened review framework of any self-certified environmental products that are listed on exchanges, including those related to carbon credits, just as it did with derivatives on digital assets.[16]
I continue to believe that bringing more of this market onto exchanges would increase transparency and bring greater confidence to the market, including related to pricing. Additionally, listing standards in the derivatives markets could prove an example for how the spot market might consider changing.
Second, we have antifraud authority over spot markets. In June, the Commission took an important step forward in promoting the integrity of spot voluntary carbon markets by announcing an Environmental Fraud Task Force. I had advocated for this task force and I appreciate Chairman Behnam’s leadership and working with me to launch the task force.[17] I appreciate the Director of Enforcement who has worked closely with me and my office to launch the task force, and develop strategies to ensure the task force’s success. We are working on sourcing cases, and an important source are whistleblower tips, as we have recently announced. I am extremely pleased with this launch and intend to keep our sleeves rolled up to combat fraud in these markets.
Thank you to all of our participants today. I look forward to hearing your views, as well as other concrete opportunities for the Commission to ensure that carbon credit derivatives markets work well and related to our antifraud authority over the spot markets.
[1] Daniel Munch, “New Estimates Reveal Major 2022 Weather Disasters Caused Over $21 Billion in Crop Losses,” Farm Bureau (Mar. 3, 2023), https://www.fb.org/market-intel/new-estimates-reveal-major-2022-weather-disasters-caused-over-21-billion-in-crop-losses.
[2] Office of the Chief Economist, “Corn Areas in Drought,” United States Department of Agriculture (updated July 4, 2023), https://agindrought.unl.edu/Maps.aspx?1; United States Department of Agriculture “Crop Progress and Condition: Winter Wheat in United States, 2023” https://www.nass.usda.gov/Charts_and_Maps/Crop_Progress_&_Condition/2023/index.php.
[3] Natural Resources Conservation Service, “Conservation Practices on Cultivated Cropland,” United States Department of Agriculture (January 2022), https://www.nrcs.usda.gov/Internet/FSE_DOCUMENTS/nrcseprd1893222.pdf
[4] Swiss Re Institute, “Natural catastrophes and inflation in 2022: a perfect storm” at 30 (2023), https://www.swissre.com/institute/research/sigma-research/sigma-2023-01.html.
[5] United States Department of Agriculture, “Partnerships for Climate-Smart Commodities” (last accessed July 14, 2023), https://www.usda.gov/climate-solutions/climate-smart-commodities.
[6] Ben Elgin, Alastair Marsh, and Max de Haldevang, Faulty Credits Tarnish Billion-Dollar Carbon Offset Seller, Bloomberg (Mar. 24, 2023), https://www.bloomberg.com/news/features/2023-03-24/carbon-offset-seller-s-forest-protection-projects-questioned.
[7] Shane Shifflett, ”Companies Are Buying Large Numbers of Carbon Offsets That Don’t Cut Emissions,” The Wall Street Journal (Sept. 8, 2022), https://www.wsj.com/articles/renewables-carbon-credits-do-not-cut-emissions-united-nations-verra-gold-standard-11662644900?st=9wb1m73angup5xv&reflink=desktopwebshare_permalink.
[8] Id.
[9] World Bank Group, States and Trends of Carbon Pricing 2023 at 41 (May 2023), https://openknowledge.worldbank.org/entities/publication/58f2a409-9bb7-4ee6-899d-be47835c838f. Carbon removal credits refer to projects that claim to remove carbon emissions from the atmosphere, as opposed to avoiding or reducing emissions.
[10] See The Integrity Council for the Voluntary Carbon Market, Core Carbon Principles, Assessment Framework and Assessment Procedure, Draft for public consultation (July 2022), https://icvcm.org/the-core-carbon-principles/ (The Core Carbon Principles include Additionality, Mitigation activity information, No double counting, Permanence, Program governance, Registry, Robust independent third-party validation and verification, Robust quantification of emissions reductions and removals, Sustainable development impacts and safeguards, and Transition towards net-zero emissions).
[11] Voluntary Carbon Markets Initiative, “VCMI Claims Code of Practice” (June 28, 2023), https://vcmintegrity.org/vcmi-claims-code-of-practice/.
[12] Id.; Patrick Greenfield, “Drop carbon offsetting-based environmental claims, companies urged,” The Guardian (July 10, 2023), https://www.theguardian.com/environment/2023/jul/10/carbon-offsetting-environmental-claims-aoe.
[13] Commissioner Christy Goldsmith Romero, Remarks of Commissioner Christy Goldsmith Romero at ISDA’s ESG Forum on Promoting Market Resilience: A Thoughtful Approach to the Daunting Challenge of Climate Financial Risk, Mar. 7, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero7.
[14] Also, the Commission should create a category for climate and environmental-related products. As I have said before, this will help the Commission use its ample market intelligence resources to monitor trends and provide the transparency needed for proper market function, including price discovery. Id.
[15] Id.
[16] Id.
[17] See id.; see also Commissioner Christy Goldsmith Romero, Adjusting the Sails for Cyber and Climate Resilience, (Feb. 10, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/oparomero6.
