The Wild West of the Carbon Market — Regulators around the Corner

One might assume that an industry as important to reducing greenhouse gas (GHG) emissions as the carbon credit market would be regulated to ensure transparent and trustworthy transactions and business practices, but the reality is that the carbon credit market is in fact the Wild West with little to no government oversight. For an asset class estimated to be in the trillions of dollars, this lack of regulation stagnates the growth and success of the carbon market and its efforts to reduce and remove GHG emissions. This unregulated environment increases the risk of fraud and mismanagement, undermines the credibility of the carbon credit system and reduces confidence in the market. The recent Guardian articles on Verra highlight these regulatory shortcomings.

Whether there was any malfeasance on the part of Verra will be determined later, but it highlights the underlying issue of a massive and growing asset class that is unsupervised. Given the FTX issue, and in the US the bank issues of Silvergate, SVB, Signature Bank the regulatory oversight is around the corner. In the US, the interesting tussle, as in crypto, will be the dynamics of the CFTC or the SEC who makes a better case for regulatory oversight.

Over the past 10+ years with the absence of regulation, unscrupulous actors have been emboldened to commit fraud. A 2013 Interpol report listed a number of crimes to which the carbon market is vulnerable, including the fraudulent manipulation of measurements to inflate emission reduction or removal estimates; sale of carbon credits that do not exist, or which belong to another party; false or misleading claims about the environmental or financial benefit of investments in carbon credits; and financial crimes such as money laundering, securities fraud, or tax fraud. Nor are these merely hypothetical: questionable measurements, money laundering, and tax fraud are issues that have plagued the carbon market for over a decade.

Without effective oversight, both sustainable project developers and potential carbon credit buyers lose confidence in the carbon credit system, reducing its effectiveness. This issue is exacerbated by the fact that the staff of credit registries and validation bodies rarely have any experience in the banking or securities industries, and are not registered with any regulatory body, making it difficult, if not impossible, to hold them accountable for their poor risk management. This lack of accountability increases the risk of fraud and mismanagement, further undermining the credibility of the carbon credit system.

To address these problems, the regulation of carbon credits as financial instruments, and of validation bodies and registries as securities institutions, is not only suggested, but needed. Treating carbon credits as financial instruments would subject them to the same rules and regulations as the rest of the financial market. This would increase transparency, accountability, and confidence in the market. In the same vein, by regulating validation bodies and registries as securities institutions, they can be held to the same standards of professional conduct as investment banks, broker-dealers, and the like. In turn, this would increase accountability, reduce the risk of fraud and mismanagement, and strengthen the credibility of the carbon credit system.

While the precise treatment of carbon credits is ultimately the province of regulators, Capturiant is taking the natural step in bringing oversight to this space with a team that has commodities and securities experience and the FINRA-registered credentials to back it up. With licensed professionals in the process, project developers and credit purchasers alike can be more confident in the integrity of the credits validated and issued by Capturiant. The carbon credit market can become more transparent and accountable, and the credit system as a whole can become a more effective and reliable tool for reducing and removing carbon emissions in addition to the vast benefit to developers looking for financing.

Capturiant is a global environmental asset validator, registry, and exchange committed to speed, quality, and regulatory standardization. The Capturiant team consists of financially regulated and highly experienced staff, fluent in securities, banking, custody, valuation, commodities, and digitalization. With this skillset, we are bringing standardized methodologies, rapid processing, and lower-cost validation to an inefficient and outdated industry. Credits are digitized and custodied on the Capturiant platform, enabling global transactions. Capturiant’s business model leverages distributed ledger technology and warranty coverage to greatly enhance the trust, transparency, quality, tracking, distribution, retirement, and risk management of credits and ESG instruments. Our process and compliance expertise provides exactly the level of trust and transparency issuers, investors, buyers, and sellers need throughout the entire ESG sector and asset class. Capturiant is headquartered in Houston with branch offices to be established in Zurich, Abu Dhabi, and Nassau.

This article was written by Will Baird.