As Prepared for Delivery

Introduction

Good morning and welcome to the CFTC’s second Voluntary Carbon Markets Convening. I want to thank the Commissioners for joining today’s meeting. I also want to thank and acknowledge the members of the Climate Risk Unit (CRU), our distinguished keynote speakers, members of the CFTC’s Agricultural Advisory Committee, moderators, and panelists. Among them is former CFTC Commissioner and General Counsel, Dan Berkovitz, who will be moderating two panels today. Dan, thank you for your ongoing service to the American public. Finally, I want to extend my gratitude to David Gillers, the CFTC’s Chief of Staff and CRU Director, and Abigail Knauff, a Special Counsel in my office and CRU Deputy, for their work in bringing this convening to fruition.

Last year, I hosted the CFTC’s first Voluntary Carbon Markets Convening [1], and followed it with a Commission issued Request for Information on Climate-Related Financial Risk.[2] Both comprised a very intentional first step to making greater progress through public-private partnerships towards ensuring that the developing carbon and carbon-related products and markets have integrity and adhere to basic market regulatory requirements. At that point, we were already on common ground with the understanding that climate change presents both risks and opportunities in our derivatives and larger financial markets that require decisive and cohesive leadership to fully realize. The challenge of supporting high integrity offsets, resilient and transparent infrastructure, and global credibility lay before us. Our core question then was what role the CFTC should have in the voluntary carbon markets.

In the weeks and months since the first Convening, the Commission received comments from over 80 stakeholders expressing views from the halls of Congress to farmers, ranchers, and others along the traditional agricultural value and supply chains that serve as our historical core constituency, as well as from traditional financial market participants. We received comments from forestry experts, environmental and public interest groups, energy traders and associations, emission-trading focused trade associations, carbon-credit rating agencies, registries, CFTC-registered exchanges and clearinghouses, and derivatives trade associations.[3]

Two main takeaways from the input we received are: 1) the Commission should use our anti-fraud and anti-manipulation enforcement authority to the fullest extent possible; and 2) the Commission should support the development of standards to promote the growth of high integrity carbon offsets.

We recently launched two enforcement-oriented efforts, which I will describe in a moment. Today’s convening serves as the public launch of a Commission workstream led by the CRU aimed at drafting, for Commission consideration, agency guidance addressing standards in the voluntary carbon markets. We anticipate that, with the Commission’s support, an issuance for public comment will be forthcoming.

A Critical Moment

The voluntary carbon markets are at a critical point in their development. The CFTC has an important policy responsibility to promote product innovation, price discovery, and liquidity for high-quality carbon credits that are the underlying commodity for derivatives products listed on CFTC-registered exchanges. The CFTC also has an increasingly critical role in policing for fraud and manipulation in underlying and related markets. Building on the work of the private sector, we are aiming to support standards for high-integrity carbon credits and ensure the financial integrity of all transactions within our jurisdictional space while protecting market participants from fraud and other abuse.

Today culminates years of developing an approach of using my role at the CFTC, first as a Commissioner and sponsor of the Market Risk Advisory Committee (MRAC), then as Acting Chairman and architect of the CRU, and now as Chairman, to ensure the CFTC plays an active role in supporting the growth of the voluntary carbon markets linked to high integrity carbon offset derivatives.

During my 2021 confirmation hearing I recognized the critical role the CFTC-regulated derivatives markets would play in ensuring a complete recovery in the aftermath of the global pandemic, especially in the rural economy.[4] America’s farmers and ranchers have long relied on derivatives markets to manage risk and discover prices, and I committed to engage, listen, and decisively act to support American agricultural producers. With the CRU, I explained, the Commission would explore the CFTC’s role in managing climate related financial market risk, and supporting an orderly transition through market-based solutions. In taking over sponsorship of the CFTC’s Agricultural Advisory Committee (AAC), I could further amplify the synergy of public-private partnerships aimed at bringing the right groups and people together.

We are here today at this convening, which immediately followed an AAC meeting, because we have gathered the information we need. We have a clear understanding that there is interest, and there is opportunity to ensure that we take intentional steps towards support standards for high-integrity offsets.

The financialization of the voluntary carbon markets is here. The funneling of private climate finance and capital allocation towards climate solutions, and the increasing need to hedge risk throughout the value and supply chains that comprise and support the voluntary carbon markets demand the highest integrity from the products and markets available. At the same time, public and private efforts are working across the globe on what can only be described as a burgeoning credibility crisis.

Today, our agenda seeks to further explore: (i) a market overview of the current and forecasted state of the voluntary carbon markets; (ii) the CFTC’s recent enforcement announcements; (iii) public sector initiatives related to carbon markets; (iv) recent private sector standardization initiatives; (v) current trends and developments in the cash and derivatives markets for carbon credits; and (vi) market participants’ perspectives on how the CFTC can promote integrity for high quality carbon credit derivatives.

Building Trust

Last month, the CFTC announced two initiatives aimed at building trust and rooting out misconduct in the voluntary carbon and larger environmental markets. On June 20th, the CFTC’s Whistleblower Office within the Division of Enforcement (DOE) issued an alert notifying the public on how to identify and report potential Commodity Exchange Act violations connected to fraud or manipulation in the carbon markets.[5] On June 29th, the Division of Enforcement announced the establishment of two new task forces, one of which will focus on environmental fraud and misconduct in derivatives and relevant spot markets.[6] Among other things, the new Environmental Fraud Task Force will investigate potential fraud with respect to purported environmental benefits of purchased carbon credits and material misrepresentations and misconduct regarding environmental products and strategies. Later today we will hear from the CFTC’s DOE Director about these two efforts.

DOE’s effectiveness in holding individuals and institutions accountable promotes confidence in U.S. derivatives markets, by not only providing a meaningful avenue for protecting customers and maintaining market integrity, but by guaranteeing that we have a canary in the coal mine when it comes to ensuring that innovation and evolution in the financial markets is responsible and fair.

Throughout the Commission, every one of our operating divisions takes its cues from what they observe across the country--what stakeholders, what the general public, or others are investing in, how they are allocating their financial resources, and how they are managing risk. We are mission focused, and our role as a financial market regulator is where our responsibilities begin and end. As I’ve said before, the CFTC is not a climate regulator. Indeed, it is not within our authority to require that market participants comply with a specific climate policy or foreclose access to our regulated markets based on any such policy. We are here to support the integrity of developing markets, and to encourage the growth of transparent, liquid and robust markets in which farmers, ranchers, manufacturers, commercial end-users, and investors are able to participate to efficiently manage their risk.

Responding Responsibly

More recently, I testified regarding the future of digital asset regulation.[7] In thinking more broadly about the role of the modern regulator, I concluded, most simply, that we have to respond to facts on the ground. And it is our responsibility to ensure that as new products and new markets develop to support them, that they are transparent, they are resilient, they do not create or contribute to systemic risks, they are credible and have integrity, and that customers and participants are protected from fraud, manipulation, and other abusive practices.

Conclusion

At our last convening, to demonstrate the exponential growth of the voluntary carbon markets, I cited a November 2021 article indicating that the voluntary carbon market exceeded $1 billion in value for the first time.[8] As cited in our recent press release regarding the CFTC Whistleblower Alert, the VCM market is currently estimated to be $2 billion.[9] In other words, at least according to one source, it roughly doubled in a little over a year.

As we will cover today, multiple private sector-led voluntary carbon markets initiatives are underway to address quality, transparency, predictability, measurability, and capacity of credits. Globally, in addition to ongoing cooperative work by the United Nations’ Intergovernmental Panel on Climate Change,[10] in November, IOSCO’s Sustainable Task Force’s (STF) Carbon Markets Workstream, which I co-chair with Verena Ross of the European Securities and Markets Authority (ESMA), issued a public consultation on 14 key considerations that relevant authorities may consider as they seek to shape a VCM market structure that supports fair, transparent, and orderly trading.[11] As a testament to the great interest in these markets, the discussion paper received over 50 comments, which are under review and will inform IOSCO’s next deliverable in the year ahead. As a global marketplace, it’s critical that we work hand-in-hand with our international counterparts through the work of IOSCO.

Getting back to today’s Convening, we have no time to waste. Our goal today is to really take advantage of the space we have created. Let’s make it a meaningful move forward.

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

[1] CFTC, Event: Commission Meetings, CFTC Announces Voluntary Carbon Markets Convening (June 2, 2022), CFTC Announces Voluntary Carbon Markets Convening | CFTC.

[2] Request for Information on Climate-Related Financial Risk, 87 Fed. Reg. 34856 (June 8, 2022), available at 2022-12302a.pdf (cftc.gov).

[3] See CFTC, Comments for Orders and Other Announcements 87 FR 34856, Comments for Orders and Other Announcements 87 FR 34856 - CFTC.

[4] See Rostin Behnam, Chairman, CFTC, Statement of Rostin Behnam, Confirmation Hearing, U.S. Senate Committee on Agriculture, Nutrition, and Forestry (Oct. 27, 2021), RBehnam_SenateAg_Confirmation_OpeningStatement_10-27-21_Final3.pdf.

[5] Press Release Number 8723-23, CFTC, CFTC Whistleblower Office Issues Alert Seeking Tips Relating to Carbon Markets Misconduct (June 20, 2023), CFTC Whistleblower Office Issues Alert Seeking Tips Relating to Carbon Markets Misconduct | CFTC.

[6] Press Release Number 8763-23, CFTC, CFTC Division of Enforcement Creates Two New Task Forces (June 29, 2023), CFTC Division of Enforcement Creates Two New Task Forces | CFTC.

[7] United States House Committee on Agriculture, The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets (June 6, 2023), “The Future of Digital Assets: Providing Clarity for Digital Asset Spot Markets” | House Agriculture Committee.

[8] Ecosystem Marketplace, Voluntary Carbon Markets Top $1 Billion in 2021 with Newly Reported Trades (10 Nov 2021), Voluntary Carbon Markets Top $1 Billion in 2021 with Newly Reported Trades, a Special Ecosystem Marketplace COP26 Bulletin - Ecosystem Marketplace.

[9] Morgan Stanley, Where the Carbon Offset Market is Poised to Surge (Apr. 11, 2023), Carbon Offset Market Trends and Growth: 2050 | Morgan Stanley.

[10] See, e.g., United Nations Intergovernmental Panel on Climate Change, AR6 Synthesis Report: Climate Change 2023 (Mar. 2023), AR6 Synthesis Report: Climate Change 2023 — IPCC.

[11] International Organization of Securities Commissions (IOSCO), CR07/2022 Compliance Carbon Markets Consultation Report (Nov. 2022), CR06/2022 Voluntary Carbon Markets (iosco.org).