The Commodity Futures Trading Commission headquarters in Washington, DC. (Photo: iStock)
To mitigate the turmoil in the carbon credit market caused by the frequent occurrence of greenwashing incidents, the U.S. Commodity Futures Trading Commission (CFTC) is expected to finalize guidelines for carbon credits as early as September. These guidelines will serve as the basic standards for trading related commodities. CFTC also crackdown on fraud and manipulation in the carbon credit market, particularly targeting companies’ false statements regarding ESG investment strategies.
According to Bloomberg, carbon credits are currently traded mostly over the counter rather than through exchange. This has led to heightened concerns over exaggerated environmental benefits, prompting many companies to demand clearer legal regulations to avoid falling into greenwashing traps. This demand contrasts with the general industry's preference for relaxed restrictions, highlighting the chaos in the carbon credit market and the urgent need for regulatory frameworks.
Chicago Mercantile Exchange (CME) building. (Photo: Wikimedia Commons)
Market anticipates carbon credit regulations
The guidelines will be incorporated into the CFTC's basic standards for commodity trading, adding regulations for carbon credit futures and other derivative products. After releasing a draft in December last year, the CFTC has completed the collection of opinions and entered the review stage. Commissioner Christy Goldsmith Romero revealed at an investment forum in the UK that the final version of the guidelines will be announced by the end of this year and maybe as soon as September.
Romero stated that it is evident that both buyers and sellers in the carbon credit market, as well as traders, do not want to cause trouble for investors or regulators. Therefore, these market participants are seeking a standard.
She also noted that since the CFTC launched a whistleblower mechanism nearly a year ago, it has investigated several activities potentially involving carbon credit market fraud, but no formal lawsuits have been filed yet.
CFTC draft enhances carbon credit credibility
Kyle Harrison, head of Sustainability Research at BloombergNEF, stated that based on the CFTC’s draft, there is potential to significantly enhance the credibility of carbon credits and inject confidence into the $2 billion carbon offset market.
The price of voluntary carbon offset futures has been declining since Jan. 2022. According to data from CBL’s Global Emissions Offset, the price dropped from $8 per ton to 50 cents, a decline of over 90% in just over two years.
In the face of numerous uncertainties in the carbon credit market, the U.S. Securities and Exchange Commission (SEC) is also combating greenwashing by investment funds. Climate envoy John Podesta has hinted that the U.S. will soon announce its own standards for carbon credit quality. Meanwhile, the International Organization of Securities Commissions (IOSCO), which sets benchmarks for global securities regulatory standards, is in discussions with relevant agencies in the U.S. and the EU regarding the carbon market.
