Introduction

Good morning and welcome to the Voluntary Carbon Markets Convening.  I want to thank Commissioners Johnson, Goldsmith Romero, Mersinger, and Pham for joining today’s meeting.  I also want to thank and acknowledge the members of the Climate Risk Unit (CRU), our distinguished keynote speakers, moderators, and panelists.  Finally, I want to extend my gratitude to David Gillers, the CFTC’s Chief of Staff and CRU Director, Abigail Knauff, a Special Counsel in my office and CRU Deputy, and all of the CRU staff for their work in initiating this Convening.

There has been an outpouring of interest since I announced the Convening last month.  I believe this interest is a testament to the strength of public-private partnerships aimed at determining how the derivatives markets can facilitate the transition to a net-zero economy.

Common Ground

There is now a common understanding that climate change presents an emerging and increasing threat to financial stability, and can cause sub-systemic shocks and wide-ranging ripple effects to the U.S. financial system and larger economy.  However, climate change also presents opportunities as we work to ensure decisive and cohesive leadership over the markets and institutions charged with monitoring and managing risk, capital, and asset allocation.  The derivatives markets overseen by the CFTC are used for hedging a range of risks in the traditional commodity as well as interest rate, foreign exchange, credit, and equity markets.  These markets also serve as powerful information resources for hedgers and investors alike when it comes to price discovery, market transparency, and facilitating the allocation of capital towards sustainable investments. Market participants from across all sectors, including the agricultural, industrial, and financial sectors will increasingly turn to the derivatives markets as they manage the impact of physical and transition risks.

The Path Forward

I am proud of my own efforts over the last several years in support of the Commission and industry efforts as former sponsor of the CFTC’s Market Risk Advisory Committee  (the MRAC) whose Climate Related Financial Market Risk Subcommittee released the 2020 report Managing Climate Risk in the U.S. Financial System[1].  And I would be remiss if I did not mention former Commissioner Bart Chilton, who exemplified the role policy makers have the potential to play, and the efforts of the Bank of England, the Network for Greening the Financial System (NGFS), the Financial Stability Board, IOSCO, among others, towards achieving sustainable finance and resilient markets.  At the heart of their efforts, and in the pages of the MRAC Subcommittee’s Climate Report, is the concept of partnerships.

The CFTC is uniquely poised as the regulator at the forefront of climate-related risk management as firms and individuals will increasingly turn to the derivatives markets to mitigate climate change-induced physical and transition risk and seek price discovery for new and evolving risk management products.  Recognizing the CFTC’s leadership and vigilance in overseeing these markets, I announced the creation of the internal Climate Risk Unit in March 2021 to thoughtfully leverage the agency’s resources and expertise to better understand the role of derivatives in pricing and mitigating climate-related risk, and support the orderly transition to a net zero economy through market-based initiatives.[2]

Comprised of economists, risk analysts, market analysts, and attorneys from across the CFTC, the CRU is primarily responsible for accelerating early CFTC engagement in support of industry-led and market-driven processes in the climate space.  For its part, the CRU is currently focused on a regulatory assessment of what CFTC registrants, registered entities, and other market participants can do to mitigate climate-related financial risk and explore opportunities for public-private partnerships between CFTC staff and market participants to identify opportunities in the commodities and derivatives markets to support the transition of risk to finance climate change solutions.

Request for Information

In addition to designing and executing today’s meeting, I am pleased to announce the CRU’s leadership in drafting a Request for Information (RFI) on climate-related market risk, coming out in the next week.  The RFI will seek feedback on all aspects of climate-related financial risk as it may pertain to the derivatives markets, underlying commodities markets, registered entities, registrants, and other market participants.

The RFI will also seek responses on questions specific to data, scenario analysis and stress testing, risk management, disclosure, product innovation, voluntary carbon markets, digital assets, greenwashing, financially vulnerable communities, and public-private partnerships and engagement.  The Commission may use this information to issue new or amend existing guidance, interpretations, policy statements, and regulations, or take other potential Commission action.

I am incredibly proud of the efforts that have gone into the upcoming RFI and look forward to the public’s responses.  My intention is to focus on ensuring that America’s farmers, ranchers, manufacturers, commercial end-users, and investors are equipped to manage their risks from increasingly severe and frequent weather events as well as the transition to a net-zero, low-carbon economy.  The RFI seeks to ensure that we as regulators are informed, educated, and engaged.

Growth of the Voluntary Carbon Markets

The voluntary carbon markets are growing exponentially.  Last year, the voluntary carbon markets exceeded $1 billion in value for the first time.[3]  Some forecast that additional financing from carbon markets could exceed $1 trillion by 2050.[4]

In November 2021, the 26^th UN Climate Conference of the Parties (COP26) concluded in Glasgow with a new set of initiatives to advance the Paris Agreement’s goal of limiting global warming.  Among the key outcomes was an agreement on the so-called “Article 6 Rulebook” to facilitate international trading of emissions reductions.  Article 6 of the Paris Agreement had previously set out a framework for cooperative approaches to achieve national carbon reduction and removal targets, but the absence of an agreement on specific implementation guidelines rendered it inoperative.

The Article 6 Rulebook ushers in an exciting new era for international carbon markets.  Countries can trade offset credits to satisfy their nationally determined contribution (NDCs) under the Paris Agreement.  The agreements reached at COP26 address the “double-counting” issue by requiring that countries transferring credits abroad make a corresponding adjustment—an increase in their own national emissions tally.  Although Article 6 does not regulate voluntary carbon markets, this crediting mechanism, which requires emissions tally adjustments any time credits are transferred abroad, whether to other nations or private entities, will likely have a significant impact on the trading of offsets.

The private sector has demonstrated its leadership and ingenuity by initiating, among other efforts, the Taskforce on Scaling Voluntary Carbon Markets to accelerate the growth and adoption of voluntary markets.  Multiple carbon offset derivatives contracts are already listed on the CFTC’s regulated exchanges today and more are expected.  The CFTC must build its capacity to ensure the ongoing integrity of these markets, identify and pursue any potential fraud or other abusive practices in the underlying markets, and promote responsible innovation and fair competition.  In other words, we are now past the point of wondering whether our derivatives markets are implicated by the Voluntary Carbon Markets.  The answer very clearly is yes, and we as a regulator have an imperative to examine these markets to asses credibility and integrity.

A Convening for Credible Credits

Multiple private sector-led voluntary carbon markets initiatives are underway to address the integrity of the supply and demand for carbon offsets.  It’s critical that the voluntary carbon markets support high-quality, data-supported carbon offsets that meaningfully reduce or avoid carbon emissions.  It’s also critical that we acknowledge that carbon offsets are only one tool to mitigate emissions and should only be used when all other means have been exhausted to mitigate emissions.

There is enormous potential for companies in all sectors to meet sustainability goals and net zero commitments.  But emission reduction is not a one-size-fits all undertaking.  While carbon offsets may provide an efficient and cost-effective means to check that box and populate the balance sheet, if those offsets do not represent true abatement either because they lack integrity, or the underlying infrastructure lacks transparency, then VCMs may remain in a perpetual limbo akin to being stuck in a regulatory sandbox.

As I have said before, one of our goals is always to dedicate the resources we have towards raising risk management awareness and visibility within our markets and the broader economy so that we can identify where the holes are; where we need to be most vigilant in both our support and leadership as regulators.

Today’s Convening aims to provide a public forum for wide variety of market participants in the voluntary carbon markets to examine the issues related to the supply and demand for high quality carbon offsets with a focus on integrity, infrastructure, and credibility.

To reiterate, the CFTC is here as a market regulator to ensure, where appropriate, that VCMs grow in a responsible way, with appropriate supervision and necessary guidance and guardrails.  Indeed, our efforts today demonstrate a very intentional first step towards increasing U.S. participation in international cooperative efforts. As I’ve mentioned, as the derivatives regulator we have an imperative to understand how these markets operate.  And the purpose of today’s Convening, in addition to reaching a better understanding of the markets, is to pose the underlying question that really permeates every panel, and for which we are very eager to hear your input: what role should the CFTC play in these markets?

I have quoted this passage before: climate change manifests as multiple intersecting and uncertain future hazards, acting as a risk multiplier with other stressors that create new risks and alter existing ones.[5]  There are significant and large economic repercussions if the transition to a low carbon economy is not executed in a thoughtful, cohesive, and data driven manner.  The costs associated with both transition and physical risks of climate change depend on the trajectory chosen for reducing carbon emissions.  We are here today to further ensure that the right choices are made, and to take the steps necessary to understand and support, where appropriate, responsible innovation to tackle the climate challenge.

Again, I am honored and pleased to welcome all of you here today.