Voluntary carbon markets deserve scrutiny, CFTC chairman says

Commodity Futures Trading Commission Chairman Rostin Behnam said Wednesday his agency would work within the limits of its legal authority to maintain the integrity of carbon credit trading, but he warned of the potential for fraud as those markets develop.

Behnam told the Senate Agriculture Committee that CFTC is a market regulator, not an environmental regulator, and thus cannot ensure that carbon offsets represent true carbon reductions.

He noted that private sector efforts are underway to protect the integrity of carbon credits. For example, he said, the Integrity Council for the Voluntary Carbon Market is “an industry-led effort to ensure a minimum set of standards and principles around the integrity of the carbon markets to ensure ... that the advertised sequestration is actually occurring.”

Ag Committee Chairwoman Debbie Stabenow, D-Mich., said issues surrounding carbon markets would be examined at a hearing next week featuring Ag Secretary Tom Vilsack.

She noted that the Growing Climate Solutions Act, passed by Congress as part of the Inflation Reduction Act, “gives (USDA) the authority and responsibility to develop the technical expertise to be able to measure carbon reductions in agriculture with integrity, because you're exactly right, we have to know it’s real reductions (and) there's integrity in the markets, and I think farmers want to know that as well.”

Behnam called it “critically important as this committee continues to think about the benefits of a carbon market, a market-driven carbon market to not forget that you're creating a marketplace with buyers and sellers. And as I experienced with the (Renewable Fuel Standard) RINs market, when you create a market, you're creating a place that's susceptible to fraud and manipulation.”

Carbon markets create “a huge opportunity for landowners … to create a new revenue stream for themselves” through carbon sequestration, Behnam said. But when carbon offset futures contracts are being traded on CFTC markets, “the market then becomes jurisdictional to us – both the derivatives market and the underlying cash market, the offsets themselves, because that fraud and manipulation is almost fungible between the cash market and the futures market.”

“We will use every tool we have within the enforcement division to ensure that we're policing those markets so that they have integrity and that the futures markets are both resilient but reflective of price discovery and risk management,” he said.

Some senators, including Indiana Republican Mike Braun, questioned CFTC’s role in addressing climate change.

 Behnam said he knows his agency is limited to the authority granted it under the Commodity Exchange Act, but he added that he has “taken a number of steps to ensure that the agency is engaging with the private market to ensure that  … we’re facilitating the development of new innovative products that can help mitigate climate risk, and the derivatives market, in my view, becomes a central focal point in the transition to a low carbon economy.”

Behnam also said, in response to questions from Sen. Amy Klobuchar, D-Minn., and Sen. John Hoeven, R-N.D., that the CFTC is focused on making sure ag producers of any size can use hedging tools.

“We've seen a consolidation in the market, which I think is not unique to the derivatives space, especially since 2008” and passage of the Dodd-Frank Act, he said. “And I think that creates limitations for some of the smaller end-users like farmers and ranchers in Minnesota to be able to use derivatives markets.”

“What we can do is constantly look at our rules and regulations to make sure that markets remain resilient and strong and cost-effective, which we do consistently,” to make sure farmers and ranchers can continue to participate in them, he said.

“We have to make sure that futures markets remain a cost-effective risk management tool for the agricultural economy,” Behnam said.

Much of the hearing focused on the cryptocurrency industry and the need for legislation to regulate it, especially in light of the collapse of crypto exchange FTX.

“The sooner we shine the spotlight on what happened to FTX, the full extent of the scope of the failure, the better,” said Sen. Dick Durbin, R-Ill.

“There is open litigation at both the civil and criminal level by the SEC, CFTC, and the Justice Department,” Behnam said. “We are working diligently … and trying to unpack all the facts that are coming to us. So, more to come, but we're going to do it cautiously and slowly so that we can get it right, and all charges are going to be addressed appropriately.”

Durbin, however, said that despite the indictment of FTC founder Sam Bankman-Fried, “the crypto industry is on full steam ahead. Hardworking Americans are taking financial advice from investment advisors like Matt Damon, Larry David and Tom Brady.”

Behnam said the FTX situation “supports my argument and many of the arguments that have been made by members of this committee that we need comprehensive regulation. I don't believe that the technology is going to go away.”