Carbon Offsets and Regulators

Carbon credits or offsets and their related markets provide tools for tools for organizations seeking to reduce their carbon footprint and comply with both voluntary and mandatory emissions reduction goals. Carbon credits or offsets represent carbon emission reductions or removal and are traded in on various exchanges or markets. 

Carbon markets allow carbon emitters to purchase credits that are awarded to projects that remove or reduce atmospheric carbon.  These credits offset their emissions to reach their voluntary commitment to reduce “net” emissions. Each carbon credit typically corresponds to one metric ton (tonne) of reduced, avoided or removed carbon dioxide or equivalent greenhouse gas. 

Offsets are a popular tool that companies use to reduce their net greenhouse gas (GHG) emissions and live up to their environmental, social and governance (ESG) goals, as well as promises made to customers and consumers. By purchasing carbon offsets, businesses believe they are financing renewable energy projects that remove GHG emissions from the atmosphere or avoid GHG emissions – such as commitments to preserve forests or the construction of facilities to capture carbon emissions – without being involved directly in these projects.

These voluntary markets can be distinguished from “compliance” carbon markets, which is the term for systems where a government or regulator issues a carbon allowance that participants must not exceed unless they can purchase additional compliance allowances from another participant under the cap-and-trade program.

The Inflation Reduction Act (IRA) is a far-reaching law includes provisions to “finance green power, lower costs through tax credits, reduce emissions, and advance environmental justice.” The law states that the IRA is intended to reduce U.S. carbon emissions by roughly 40% by 2030 and to reach a net-zero economy by 2050. The passage of the IRA has inspired greater regulatory scrutiny, or the carbon credit markets to avoid greenwashing.

Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) have all proposed updated rules to address deceptive claims about the use of carbon offsets. The CFTC is exerting jurisdiction over fraud and manipulation in "physical" carbon markets and recently created an Environmental Fraud Task Force. The FTC has proposed updates to its Green Guides to address deceptive claims about the use of carbon offsets.

The CFTC recently created an Environmental Fraud Task Force to examine fraud and other misconduct in regulated and voluntary carbon markets. In particular, the CFTC is interested in:

• manipulative and wash trading or other violations in carbon market futures contracts
• fraud in markets related to ghost or illusory carbon offsets listed on carbon market registries
• double counting or other fraud related to carbon offsets when the same offset is claimed by more than one entity without an additional carbon benefit
• fraudulent statements relating to material terms of the carbon offset
• manipulation of tokenized carbon markets
• Fraudulent claims that offsets are in addition to any reductions that would have occurred in a business-as-usual scenario or as required by law.

The FTC will use its broad statutory authority over unfair and deceptive practices with respect to environmental claims. The FTC is finalizing standards for the “Use of Environmental Marketing Claims” to provide clarity and stricter guidance for claims made by using carbon offsets that products or businesses are carbon-neutral, have net‑zero emissions, or are low‑carbon or carbon-negative.

There is currently no legal requirement that companies verify the quality of offsets used to make climate claims, although many do voluntarily verifying through organizations such as the Integrity Council for the Voluntary Carbon Market (ICVCM).