Jayce Jimenez is a law student in the HLS Food Law & Policy Clinic and a guest contributor to this blog.
Let me paint a picture for you. You’re talking with your “friend” Kevin about the dire need for collective climate action, a subject with which you’re familiar, when he abruptly shifts the conversation to the topic of carbon credits (which he probably just learned about from a New York Times article he read last night). You can see from the glint in his eye that he knows you don’t know what he’s talking about, and you desperately attempt to add to the conversation with wise comments like “that’s very interesting” or “I know, right?” Kevin has won this exchange.
What the heck are carbon credits?
Don’t worry, I’ve got you covered. A carbon credit is a permit representing a certain amount of carbon dioxide removed from the atmosphere. These credits are often created through agricultural activities (such as reforestation), which remove or reduce atmospheric carbon. Voluntary carbon markets allow finance to flow towards these types of projects. Essentially, heavy emitters, like certain types of corporations, can use voluntary markets to invest in carbon reducing projects in order to offset their own emissions.
The potential here is promising. According to the Bipartisan Policy Center, a (you guessed it) bipartisan policy think tank, financing for quantifiable and tradable climate-friendly practices can help propel transition to a decarbonized economy. With climate news becoming increasingly dire, consumers could demand for corporations to invest heavily in carbon credits in order to address the crisis, which could drastically reduce emissions.
So what’s the problem? There are several. One concern is that carbon credits give companies an out from reducing their actual emissions, allowing them to purchase credits and continue emitting. This concern, while legitimate, is not my focus (you can read more on this here). Another issue is that there is little to no oversight of voluntary carbon markets. Independent registries administer credits, and research suggests that a majority of the credits may fall short of agreed upon quality standards. This creates a situation wherein corporations can greenwash (i.e. mislead the public in order to present an environmentally responsible image) and claim an inaccurate amount of emission reduction.
Commodity Futures Trading Commission (CFTC): our savior?
Enter the CFTC.
To clarify their relevance, I’ll try to explain the futures part of the Commodity Futures Trading Commission using my fancy CPA credentials (yes, I had to learn this for the CPA exam; no, I still don’t fully understand it). Futures are a form of derivative, which is a type of financial instrument that bases its value on an underlying asset or benchmark. Futures, more specifically, obligate a party to buy or sell an asset at a specified future date for a predetermined price.
Importantly, underlying assets upon which futures may be based include physical commodities and financial instruments.
So how does this relate to carbon credits?
The CFTC is granted the authority to regulate commodities upon which futures are based. Essentially, if there is a commodity that relates to futures, the CFTC can regulate the commodity by setting and ensuring reporting requirements.
According to the Commodity Exchange Act, commodities include “wheat, cotton, rice… and all other goods and articles, except onions… and all services, rights, and interests… in which contracts for future delivery are presently or in the future dealt in.” Yes, you read that correctly. Onions. Why does Congress hate onions? I honestly have no idea, but hopefully I’ve piqued your curiosity enough for you to Google it.
So, do carbon credits fall under this broad definition such that the CFTC has the authority to regulate them? The agency sure seems to think so. On December 4, 2023, the CFTC issued a proposed guidance on CFTC regulation of voluntary carbon credit markets.
It remains to be seen whether the agency will indeed enter this space, but if it does, not only could it set requirements for reporting, it could also pursue enforcement actions by investigating and prosecuting violations of reporting requirements. Greenwashing and substandard credits could be things of the past. For those who support carbon credits, such a move could potentially provide much-needed consistency, transparency, and legitimacy to a largely lawless exchange.
The views and opinions expressed on the FBLE Blog are those of the authors and do not necessarily reflect the official policy or position of FBLE. While we review posts for accuracy, we cannot guarantee the reliability and completeness of any legal analysis presented; posts on this Blog do not constitute legal advice. If you discover an error, please reach out to contact@farmbilllaw.org.
