In the News Law360

CFTC, Private Sector Actions May Aid Carbon Market Integrity

In this Law360 article, partners Paul Barker and James Dolphin and associate Varnika Chawla discuss the U.S. Commodity Futures Trading Commission's recent announcements on its new VCM enforcement efforts, and how market-led initiatives to promote integrity — including the new Voluntary Carbon Market Integrity Initiative, or VCMI, Claims Code of Practice — could help to mitigate risk and shape future regulation. Partner Ruth Knox, associate Kyle Guest and ESG adviser Tony Moller also contributed to this article.

The voluntary carbon market, or VCM, is recognized by a broad range of stakeholders — including the United Nations Expert Group on Net Zero Commitments and the U.S. government — for its potential to support businesses to decarbonize and mobilize private capital to finance climate mitigation projects in developing economies.

The VCM, which does not capture carbon credits purchased to comply with the caps imposed under a regulated carbon market — such as California's cap and trade program or the European Union emissions trading system — will have to scale massively to deliver on this promise.[1]

However, concerns over market integrity and greenwashing raise reputational and legal risks for market participants that could hinder progress.

Promisingly, private and public sector initiatives are proactively addressing these challenges.

In this article, we highlight the U.S. Commodity Futures Trading Commission's recent announcements on its new VCM enforcement efforts, and how market-led initiatives to promote integrity — including the new Voluntary Carbon Market Integrity Initiative, or VCMI, Claims Code of Practice — could help to mitigate risk and shape future regulation.

CFTC Whistleblower Office Alert and Environmental Fraud Task Force

In the U.S., the CFTC has varying degrees of regulatory and enforcement authority over primary and secondary transactions of carbon credits in the VCM.[2]

On June 20, the CFTC's Whistleblower Office in the Division of Enforcement published an alert notifying the public on how to identify and report potential Commodity Exchange Act violations connected to fraud or manipulation in the carbon markets. [3] This was followed on June 29 by the CFTC's announcement of a new Environmental Fraud Task Force that will investigate carbon credit quality on the supply side of the market as well as the claimed environmental or ESG benefits made on the demand side by purchasers of carbon credits.

The alert encourages individuals to report information related to misconduct such as manipulative and wash trading, fraud related to so-called ghost credits listed on registries, double counting of credits, fraudulent statements relating to material terms of the carbon credits and potential manipulation of tokenized carbon markets.

Individuals who submit such information through the CFTC's whistleblower program may be eligible for monetary awards if that information leads to a successful CFTC enforcement action.

The Environmental Fraud Task Force, which consists of four attorneys, will address fraud and other misconduct in regulated derivatives markets and relevant spot markets, including voluntary carbon-credit markets, relating to purported efforts to address climate change and other environmental risks.

The task force will examine, among other things, fraud with respect to the purported environmental benefits of purchased carbon credits, as well as registrants' material misrepresentations regarding environmental, social and governance products or strategies.

Both the whistleblower alert and new task force reflect CFTC's increasing focus on the supply and demand sides of the VCM. Stakeholders should therefore continue to pay close attention to evolving CFTC policy.

The CFTC held a second convening on July 19 that considered private sector initiatives for high-quality carbon credits. Indeed, private sector initiatives such as the new VCMI Claims Code of Practice could influence the development of regulation in the U.S. and other jurisdictions.

VCMI Releases Final Claims Code of Practice

On June 28, the VCMI released its Claims Code of Practice, which seeks to establish high integrity on the demand side of the market by providing guidance on how corporations can credibly use carbon credits as part of their climate commitments — and make associated claims in public disclosures.

The VCMI claims code is integrated with the Integrity Council for the Voluntary Carbon Market's Core Carbon Principles, or CCPs, which were launched in March 2023 and establish standards for high-quality carbon credits on the supply side of the market. On June 20, ICVCM and VCMI announced their collaboration to ensure alignment between demand-side and supply-side integrity principles.[4]

As illustrated in the table below, the claims code involves a four-step process overall.

First, comply with the VCMI Foundational Criteria, which draws on the Science-Based Targets initiative, and other guidance and emerging regulatory frameworks.

Second, select a VCMI claim to make.

Third, meet the required carbon credit use and quality thresholds established by ICVCM's CCPs.

The ICVCM's CCPs establish use and quality thresholds including disclosing whether a credit is associated with a corresponding adjustment under Article 6 of the Paris Agreement. Recent negotiations at the 26th Conference of the Parties summit resulted in the adoption of rules implementing Article 6 of the Paris Agreement, establishing an accounting mechanism, or corresponding adjustment, under which VCM credits purchased abroad by private entities can be counted toward a country's progress on its national emissions reductions commitment.

ICVCM has asked for public feedback on whether the voluntary use of carbon credits should require host-country authorization to ensure association with corresponding adjustments under Article 6, either as a general matter or in particular circumstances.

Fourth, obtain third-party assurance. The final claims code, unlike the 2022 draft, does not cover rules for claims made at the product, service or brand level, although these are expected to follow in the expansion of the code later this year. The ICVCM expects to begin announcing carbon crediting programs that are CCP-eligible, and carbon credit categories that can be labeled CCP-approved, in the second half of 2023.

The Four Steps For Making A VCMI Claim

Comply with the Foundational Criteria

  • Maintain and publicly disclose an annual greenhouse gas emissions inventory.
  • Set and publicly disclose validated science-based near-term emissions reduction targets, and publicly commit to reaching net-zero emissions no later than 2050.
  • Demonstrate that the company is on track toward meeting a near-term emissions reduction target and minimizing cumulative emissions over the target period.
  • Demonstrate that the company's public policy advocacy supports the goals of the Paris Agreement and does not represent a barrier to ambitious climate regulation.

  • Select a VCMI Claim to Make

    Select a VCMI claim to make and meet the respective requirements. Each claim requires the purchase and retirement of high-quality carbon credits proportionate to remaining emissions once a company has demonstrated progress towards meeting its near-term targets:

  • VCMI Silver (≥ 20% and < 60%)
  • VCMI Gold (≥ 60% and < 100%)
  • VCMI Platinum (≥ 100%)

  • Meet the Required Carbon Credit Use and Quality Thresholds

    Companies should use the highest-quality carbon credits. Purchase and retire high-quality carbon credits following the ICVCM's Core Carbon Principles and transparently report relevant information pertaining to retired credits, including authorization of credit by the host country.

    Obtain Third-Party Assurance Following the VCMI MRA Framework

    To substantiate a VCMI claim, it is essential that companies provide information relating to the foundational criteria, VCMI claim-specific requirements including key information relating to the retirement of high-quality carbon credits. This information will need to be assured by an independent third party to ensure integrity and credibility of claims.

    Notably, the VCMI does not use the concept of "offsetting" and recommends that corporations refrain from making compensation claims, such as "carbon neutral." Instead, the claims code establishes three tiers of VCMI claims that corporations can make that represent beyond-value chain mitigation using carbon credits:

  • VCMI Silver: requires the purchase and retirement of high-quality credits in an amount equal to or greater than 20%, and less than 60%, of a company's remaining emissions once it has demonstrated progress toward its near-term targets.
  • VCMI Gold: requires the purchase and retirement of high-quality carbon credits in an amount equal to or greater than 60%, and less than 100%, of a company's remaining emissions once it has demonstrated progress toward its near-term targets.
  • VCMI Platinum: requires the purchase and retirement of high-quality carbon credits equal to or greater than 100% of remaining emissions.
  • By November, the VCMI plans to publish its Monitoring, Reporting and Assurance, or MRA, Framework, which will outline the assurance process required to validate a VCMI claim, as well as supplemental guidance for specific geographies, sectors and smaller entities, among others.

    VCMI intends to expand the claims code further in the second half of 2023, and envisages the development of a broader range of claims tiers, including lower-tier claims for companies unable to currently meet near-term targets but taking significant credible action. After the publication of the MRA Framework, companies that have completed the first three steps above can seek third-party assurance in pursuit of a validated VCMI claim.

    Private and Public Sector Initiatives Will Continue to Focus on Integrity

    The VCM has recently been subject to heightened public scrutiny over alleged integrity issues and greenwashing, raising reputational and legal risks for market participants. The VCMI's guidance that corporations should refrain from making "carbon-neutral" claims explicitly notes the regulatory risks associated with such claims.

    Indeed, lawsuits have been filed with respect to such claims in the EU - e.g., Foundation for the Promotion of the Fossil Free Movement v. Royal Aviation Maatschappij NV in the Court of Amsterdam on June 7.[5] In the U.S., lawsuits have been filed concerning offsetting claims — e.g., Mayanna Berrin v. Delta Airlines Inc. in the U.S. District Court for the Central District of California on May 30.[6]

    The U.K. Advertising Standards Authority, e.g., in the case of Deutsche Lufthansa AG, or Lufthansa, and the Dutch Advertising Code Committee, e.g., in the case of Shell PLC, have found "CO2 neutral" or "climate neutral" claims to be misleading. The U.K. Advertising Standards Authority also recently released guidance on misleading claims that concern environment-related advertising issues.

    More regulation of the demand side of the VCM is expected. In addition to the CFTC's focus on enforcement, the U.S. Securities and Exchange Commission's proposed climate disclosure rule and the revised Federal Trade Commission Green Guides are expected to require greater transparency over carbon-credit use and associated claims in the U.S. In the EU, a proposed new law on green claims would require disclosure with regard to the use of offsets, including the substantiation of associated claims with methodologies and clear accounting.

    Pending further developments from the CFTC, the EU looks set to lead on regulating the supply side of the VCM following its November 2022 proposal for a voluntary framework for the certification of high-quality carbon removals.

    The VCM is entering a new phase, with the interplay of regulatory and market-led initiatives focused on integrity that proponents hope will enable the rapid scaling of the market in support of net-zero goals. As they wait for clearer regulatory guidance in this highly technical field, market participants should nevertheless expect the CFTC and other regulators to actively pursue fraud and greenwashing enforcement actions in the VCM.

    Given the rise of greenwashing litigation and enforcement in several jurisdictions, private sector initiatives seeking to promote integrity in the VCM, such as VCMI, may lead to companies reevaluating the nature and scope of their climate commitments and climate-related disclosures going forward — e.g., with respect to "carbon-neutral" claims.

    Moreover, ICVCM and VCMI's integrated market integrity framework may potentially influence policymakers and regulators, similar to how the Task Force on Climate-related Financial Disclosures' recommendations have evolved from a purely voluntary framework "by the market for the market" to the basis for mandatory disclosure around the world.

    For now, market participants can seek to navigate the uncertainties and mitigate reputational and legal risks by seeking to align with evolving best practices and fully integrating jurisdiction-specific legal advice into their climate and carbon management strategies.

    [1] See: A blueprint for scaling voluntary carbon markets to meet the climate challenge - McKinsey report available at

    [2] See: e.g.,

    [3] See:


    [5] available at!/details?id=ECLI:NL:RBAMS:2023:3499&showbutton=true&keyword=klm&idx=1).

    [6] available at