CFTC establishes Environmental Fraud Task Force and solicits tips on potential fraud and manipulation in the carbon markets

The Commodity Futures Trading Commission (CFTC) recently announced the launch of a specialized Environmental Fraud Task Force to combat environmental fraud and misconduct in derivatives and relevant spot markets. This will include fraud relating to the “purported environmental benefits of purchased carbon credits, as well as registrants’ material misrepresentations regarding ESG products or strategies.” This is the CFTC’s most assertive step yet toward exercising jurisdiction over carbon markets, and it likely portends more to come.

The task force, to be comprised of attorneys and investigators across different offices within the Enforcement Division, will coordinate investigative efforts with the CFTC’s other divisions and offices.

Trading activity in the voluntary carbon market is increasing around the world as more companies commit to decarbonization even as global emissions from commercial activities remain stubbornly high. The launch of a specific task force policing the voluntary carbon market attests to the CFTC’s view of its role in protecting the integrity of the market.

Nor was this initiative taken in isolation. In the lead-up to this announcement, the CFTC’s Whistleblower Office published 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.

In addition to manipulative and wash trading and double counting, the CFTC is also scrutinizing fraud in the underlying spot markets. This includes fraud related to listing illusory credits on carbon market registries. The CFTC also has its sights set on fraudulent statements relating to material terms of carbon credits – such as quality, quantity, additionality, project type and methodology substantiating the emission claim and environmental benefits – and manipulation of tokenized carbon markets.

The rapid growth of the voluntary carbon market, currently estimated at $2 billion and forecast to grow to $250 billion by 2050, underscores the importance of maintaining its integrity. CFTC Chairman Rostin Behnam stated that, “as more firms tout their environmental credentials and as voluntary carbon markets grow, there exists the potential for fraud and manipulation.”

Voluntary carbon market participants should be aware of the risks fraud poses and take steps to avoid running afoul of regulations from the CFTC and other relevant agencies. For more information on what can be done to mitigate these risks, contact the authors or your usual DLA Piper counsel.