In June 2023, the CFTC’s Whistleblower Office notified the public that it is actively seeking whistleblower tips identifying manipulation or fraud in the carbon markets.
What is carbon market fraud?
Carbon market fraud is the dishonest practice of illegal activities within the carbon markets that exploit the rising demand for carbon credits and the global transition to a low-carbon economy. This type of fraud involves creating and selling fake carbon credits, misrepresenting credit quality or environmental benefits, manipulation of carbon credit futures trading, and the improper counting of credits. The lack of transparency in this sector provides the perfect environment for fraudulent activities. Carbon market fraud undermines the integrity of the markets, posing challenges to their effectiveness in addressing climate change. The CFTC heavily relies on whistleblowers to expose such fraudulent behavior, as they play a heavy role in combating these illegal practices.
Risks of Fraud and Manipulation in Carbon Credit Markets
Experts anticipate unprecedented growth in the carbon markets over the next decade and beyond. More than a third of the world’s largest publicly traded companies have already pledged to achieve net zero carbon emissions, with many planning specifically to use carbon credits to achieve that goal. The Taskforce on Scaling Voluntary Carbon Markets estimates that demand for carbon credits could increase 15 times by 2030 and by as much as 100 times by 2050. Currently, the voluntary carbon market is worth around $2 billion, but this could grow to as high as $50 billion in 2030 and $250 billion in 2050.
This rapid market growth, combined with the current lack of transparency surrounding carbon credits and their underlying projects, presents an historic opportunity for fraud and manipulation. Already there are signs. A recent study, for example, found that more than 90% of the rainforest offset credits offered by Verra, the world’s leading carbon credit certifier, are likely worthless “phantom credits.” Examples of other misconduct highlighted by the CFTC include double counting of carbon credits; fraudulent statements about the quality, quantity, environmental benefits or other material terms of the carbon credit; and manipulative trading of carbon credit futures.
The CFTC has enforcement authority over designated contract markets (DCMs) trading carbon credit futures contracts, as well as anti-fraud and anti-manipulation enforcement authority over the related spot markets. The CFTC’s jurisdiction applies to carbon allowances and other environmental commodities products that are linked to futures contracts.
CFTC’s Efforts to Safeguard Carbon Credit Markets
“As carbon credit markets continue to grow, we will act to foster the integrity of these markets by fighting fraud and manipulation,” said Ian McGinley, Director of the CFTC’s Division of Enforcement. “Whistleblowers are invaluable allies in these efforts. We will diligently investigate all credible tips and complaints from whistleblowers relating to carbon credit markets.”
Whistleblowers could be eligible for confidentiality and anti-retaliation protections, as well as whistleblower awards if their information leads to a successful enforcement action. Read more about the CFTC’s carbon credit alert.
The CFTC’s Whistleblower Program
The CFTC’s Whistleblower Program was created as part of the Dodd-Frank Act of 2010. Since issuing its first whistleblower award in 2014, the CFTC’s enforcement actions associated with whistleblowers have resulted in monetary sanctions totaling more than $3 billion.
Whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected. All whistleblower awards are paid from the CFTC Customer Protection Fund, which is financed through monetary sanctions paid to the CFTC by violators of the CEA.