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).
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