From Guidance to Governance: Empowering the CFTC to Regulate Voluntary Carbon Markets

Abstract

The voluntary carbon market (VCM) has emerged as a critical mechanism for channeling private capital into emissions-reducing projects, yet its potential remains largely unrealized. Pervasive fragmentation, opacity, and fraud have deterred investment. Disclosure-focused initiatives by the Securities and Exchange Commission (SEC) address only one dimension of the problem, leaving the structural flaws that enable the proliferation of low-quality and fraudulent credits unresolved.

This Note argues that the Commodity Futures Trading Commission (CFTC) is best positioned to fill the resulting regulatory void. The CFTC’s most recent guidance on the listing of voluntary carbon credit (VCC) derivatives, though now rescinded, was already too deferential to be effective. It delegated standard-setting authority to private actors and stopped short of prescribing the enforceable rules necessary to ensure market integrity. Drawing on case law establishing virtual currencies as commodities under the Commodity Exchange Act (CEA), this Note contends that VCCs satisfy the CEA’s broad commodity definition, which confers upon the CFTC anti-fraud and anti- manipulation jurisdiction over the VCC spot market. It then proposes that the CFTC repurpose the regulatory template it successfully deployed in the virtual currency space to govern the VCM. By adopting this proactive, multi-pronged approach, the CFTC can establish uniform standards, deter fraudulent conduct, and cultivate the market integrity necessary to unlock the VCM’s potential as a tool for large-scale climate change mitigation.