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As the CFTC recognizes, accurate information leads to appropriate financial flows. This comment letter responds to questions 22-24, related to Voluntary Carbon Markets (VCMs), of the CFTC RFI on Climate-Related Financial Risk, and focuses on the CFTC’s opportunity to head off a significant misinformation issue: the incorrect conflation of emission reductions and the purchase of carbon credits (when used as ‘offsets’). In actuality, a carbon credit holds far more inherent risk than pure emission reductions because it cannot guarantee the environmental benefit that emission reductions can. As such, the incorrect use of carbon credits as functionally equivalent to emission reductions results in unaccounted-for legal, reputational, and market-based risks.
These risks combine to highlight the unreliability of carbon credits as the underlying assets in derivatives contracts and the resulting market distortion and misallocation of capital that occurs when these risks go unaddressed. The result of not recognizing and accounting for this problem is a market where buyers and investors lack the necessary information to correctly evaluate risk and are susceptible to manipulation. This problem harms those participating in the derivatives markets, as well as investors and the public, who may receive incorrect carbon price signals and misinformation about climate progress as a result. In order to avoid a market failure and financial instability, this issue must be recognized, addressed, accounted for, and communicated to market participants. ClientEarth USA Response to CFTC 2 We suggest the CFTC do so by implementing a process that (i) vets the underlying assets in carbon-credit based derivatives contracts and requires increased risk disclosures, (ii) examines complaints about underlying asset quality, and (iii) vets new contract proposals thoroughly