The scope of the FTC’s authority puts it in the best position among agencies to regulate carbon credits.
The voluntary carbon market connects companies and other entities seeking to offset greenhouse gas emissions with developers of projects that reduce or remove emissions and sell corresponding carbon credits. A carbon credit is a transferable instrument intended to represent one metric ton of carbon dioxide or carbon dioxide equivalent reduced or removed from the atmosphere. But in recent years, journalistic investigations and peer-reviewed studies have highlighted an abundance of low-integrity carbon credits—credits that are unlikely to represent the claimed amount of emissions reductions or removals or that cause other environmental or social harms—and misleading environmental claims by companies that rely on such carbon credits. To address these mounting issues, groups have advocated federal interventions such as the guidance on carbon credit derivatives that the Commodity Futures Trading Commission (CFTC) finalized in October 2024.
No federal agency has comprehensive authority over this market. In a new report, my colleague Don Goodson and I analyze potential sources and limitations of authority for three agencies—the CFTC, the Securities and Exchange Commission (SEC), and the Federal Trade Commission (FTC)—to regulate aspects of the voluntary carbon market. The public conversation has so far focused on the CFTC, perhaps because the Biden Administration’s CFTC expressed the most interest in this area. But the CFTC’s authority is limited. Of these three agencies, the FTC probably has the most relevant authority.
The CFTC has exclusive jurisdiction to regulate carbon credit derivatives. But carbon credit derivatives—standardized, exchange-traded contracts typically used to hedge or speculate rather than to buy or sell carbon credits—are an insignificant part of the voluntary carbon market. There may be only two such derivatives currently trading on U.S. exchanges. The CFTC’s exclusive jurisdiction does not extend to spot purchases of carbon credits, where the buyer pays for and receives carbon credits immediately, or to customized forward purchases of carbon credits for future delivery, such as Microsoft’s recent deal with carbon-removal start-up Vaulted Deep. Moreover, the CFTC can regulate carbon credit derivatives only to advance the narrow purposes of the Commodity Exchange Act, which do not include improving the quality of commodities underlying derivatives. A close examination of the CFTC guidance reveals this limitation. Just as the CFTC cannot regulate how cotton is grown or harvested despite the existence of cotton futures, it cannot directly regulate carbon credit integrity.
Although the CFTC has anti-fraud enforcement authority over spot and forward purchases of carbon credits, that authority applies only to extreme cases of fraud, such as the intentional falsification of records by a clean-cookstove project developer in actions brought by the CFTC last fall. If project developers and crediting programs fully and truthfully disclose information about the carbon credits they sell and issue—how the project aims to reduce or remove emissions, what methodology it follows, and what standard it meets—the CFTC’s anti-fraud authority may not apply, even if the carbon credits lack integrity. To analogize to another commodity, falsely labeling 5-karat gold as 14-karat is fraud, but simply selling 5-karat gold is not. Likewise, the CFTC cannot ban low-integrity carbon credits.
As for the SEC, it may have authority to require public companies and other securities issuers to make certain disclosures in registration statements and periodic reports about the use of carbon credits for investor-protection purposes. It attempted to do so in its climate-related disclosures rule—now subject to litigation and changed SEC leadership. The SEC can probably also prohibit these entities from making certain material false or misleading statements or omissions based on carbon credits, potentially including some net-zero or carbon-neutral claims, when offering or selling securities. More rarely, the SEC’s disclosure and anti-fraud authorities could apply to carbon credit sellers that issue stocks, bonds, or other securities, as reflected in the SEC’s enforcement action against the same clean-cookstove project developer mentioned above. Like the CFTC, however, the SEC cannot compel project developers to sell, or corporate buyers to purchase, only high-integrity carbon credits.
The FTC’s authority is probably the strongest. That authority comes from section 5 of the FTC Act, which prohibits deceptive acts or practices in or affecting commerce, but which does not apply to nonprofit crediting programs. The FTC has already explained in guidance known as the Green Guides, last updated in 2012, that section 5 may require project developers to maintain certain standards or clearly disclose if they do not—for instance, if they sell carbon credits that represent emissions reductions or removals that will not occur for two years or more. But section 5 applies more broadly to material misrepresentations likely to mislead reasonable consumers. Such misrepresentations could include overstatements by project developers of the emissions reductions or removals represented by carbon credits or, perhaps less likely, certain net-zero or carbon-neutral claims that rely on low-integrity carbon credits if companies lack a reasonable basis for making them. In both cases, clearly and prominently qualifying a claim can prevent a section 5 violation, but unlike for the CFTC’s anti-fraud authority, fine-print disclosures may not suffice.
Next time an opportunity arises, proponents of regulating the voluntary carbon market should first concentrate on legally durable ways to exercise the FTC’s section 5 authority. But none of the agencies discussed above can banish low-integrity carbon credits from the market, and federal regulation may not be the best or the only way to move forward.
