US senators push for regulator crackdown on carbon offsets market

US lawmakers are pushing the federal regulator to crack down on the market for carbon offsets and draw up new rules for its oversight.

A group of Democratic party senators, including former presidential contenders Bernie Sanders, Elizabeth Warren, Cory Booker, Kirsten Gillibrand, have asked the Commodity Futures Trading Commission to address the schemes that are used by companies to offset their carbon emissions.

In a letter to the CFTC, obtained by the Financial Times, the senators said that the purchase of offsets allowed companies “to make bold claims about emission reductions and pledges to reach “net zero”, when in fact they are taking little action to address the climate impacts of their industry.”

Each carbon credit represents a tonne of carbon either avoided or removed from the atmosphere, in theory. In practice, the offsets are often derived from dubious sources, and both pricing and verification lacks transparency.

Trading in the offsets market has jumped from around $520mn in 2020 to $2bn in 2021, according to data group Ecosystem Marketplace.

The senators said that offsets that did not genuinely deliver the environmental benefits they promised constituted “fraudulent investments” that were “a convenient and profitable way to market climate consciousness without requiring real action to reduce emissions.”

The letter was sent in response to the CFTC’s public call for information on climate-related financial risks.

Carbon offsets, such as tree planting schemes, are generated by a broad range of projects designed to capture carbon emissions or avoid pollution being emitted in the first place. While they have grown increasingly popular over the past 18 months, criticism about a lack of standards in the market has also grown louder.

The market is fragmented and unregulated, although a number of private-sector initiatives are working to draw rules aimed at improving credibility.

However, the rules for voluntary carbon markets proposed by a group backed by former Bank of England governor Mark Carney have received criticism, as participants argue they risk further complicating the market.

As part of its work to better tackle climate-related financial risks, the CFTC is considering whether the offsets market is “susceptible to fraud and manipulation.”

In their letter, the senators asked the CFTC to develop standards for offsets, investigate cases of potential fraud, and convene a working group to study the risks to investors of offsets and derivative products.

This week, the UK’s Climate Change Committee, which advises the government, warned that without reform the offsets market risked undermining net zero emissions plans. The CCC also asked the government to introduce “guidance, regulation and standards” to raise standards and increase transparency in the market.

Scott O’Malia, head of the International Swaps and Derivatives Association, told the FT this week that greenwashing could destroy the offsets market. “We cannot risk having greenwashing or double counting,” he said.

Proponents of the offsets market say it helps channel money into environmental projects and that a carbon price incentivises companies to cut their emissions. They argue that while companies should endeavour to reduced emissions as much as possible, offsets are necessary to deal with the emissions that are hard to eliminate entirely.

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