iIn June 2023, the Commodities Futures Trading Commission (CFTC) issued an alert for whistleblowers to be on the lookout for fraud in the carbon credit market. Anyone who is able to alert the Commission about fraud in the buying and selling of carbon credits, also known as carbon offsets, may be able to claim a substantial award.
Fighting carbon credit fraud is especially important, not just for the usual reasons of fairness and market equilibrium. Scam artists who take advantage of the carbon credit exchange have the potential to do even more harm than usual. The offset of carbon is a last-ditch effort to slow the effects of climate change and correct negative externalities in the economy. By selling fake credits, double counting reductions, or otherwise attempting to manipulate this commodities futures exchange, companies undercut the potential of the entire carbon credit effort. In this instance, fighting financial fraud means also directly fighting back against environmental destruction.
The buying and selling of carbon credits is an attempt to harness market forces to combat climate change. In the carbon offset market, companies that reduce emissions of greenhouse gases, especially carbon dioxide, can sell credits to companies that emit carbon into the atmosphere. Each carbon offset is equivalent to one metric ton of carbon dioxide that has been removed, reduced, or even prevented from being released into Earth’s atmosphere.
This economic incentive is meant to disabuse companies of the notion that pollution comes at no cost. By charging for carbon emissions, the carbon market will theoretically help reorient profit motives towards finding ways to emit less dangerous greenhouse gases into the atmosphere, as doing so becomes more costly. To meet the goals set forth by the international 2015 Paris Climate Accords, it is estimated that globally, 1 gigaton of carbon dioxide must be removed each year through 2030, based on data from the Network for Greening the Financial System.
The carbon market also offers enormous financial potential for investors, as well as continued room for growth. Morgan Stanley Research recently published their Carbon Offset Market Trends and Growth 2050 Paper, which anticipates that the carbon offset market will grow up to around $100 billion by 2030, and up to $250 billion by 2050. The carbon credit market currently is valued at $2 billion, and offers the opportunity for up to 10 gigatons of carbon to be removed or offset per year if the financial system is properly utilized.
The carbon market, however, like any other commodities exchange, also comes rife with opportunities for fraud, waste, and abuse. The CFTC has regulatory power over designated contract markets (DCMs), like the exchange of carbon offsets. The CFTC is the federal government’s anti-fraud and anti-market manipulation arm for commodities and futures trades.
In 2010, Section 748 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act created the CFTC Whistleblower Reward Program. The Office has continued to expand since then into new territories of oversight, such as carbon allowances and other environmental commodities products that have to do with futures contracts. With this June 2023 announcement, the CFTC plans to ensure that the carbon offset market, sometimes criticized for the possibility of “greenwashing” industry pollution, delivers on its promises. The CFTC will reward whistleblowers who can report on fraud in the carbon offset market that leads to an enforcement action of at least $1 million.
The following are possible ways in which bad actors may seek to take advantage of the carbon credit market. The CFTC warns whistleblowers to be on the lookout for any of these or other methods of market manipulation:
- Fraud in the underlying spot markets such as illusory or “ghost” credits listed on carbon market registries
- Wash trading
- Double counting or other kinds of reporting fraud
- Misleading statements relating to carbon credits, such as those involving the quality, quantity, additionality, project type, methodology substantiating the emissions claim, permanence or duration, buffer pool, or expected environmental benefits
- Attempts to manipulate tokenized carbon markets
- Violations of the Commodity Exchange Act (CEA) in carbon market futures contracts
You do not have to be an employee of a company involved in the exchange of carbon credits in order to blow the whistle on carbon offset fraud. Some common regulatory whistleblowers besides employees include competitors and auditors who learn of wrongdoing. The CFTC also accepts tips from non-citizens of the United States.
“As carbon credit markets continue to grow,” said Ian McGinley, Director of the Division of Enforcement, “we will act to foster the integrity of these markets by fighting fraud and manipulation. Whistleblowers are invaluable allies in these efforts.” The Director continued, “We will diligently investigate all credible tips and complaints from whistleblowers relating to carbon credit markets.”
The CFTC has already paid out approximately $330 million in awards to whistleblowers since its inception in 2014. The program has also collected sanctions of more than $3 billion from these enforcement actions.
CFTC whistleblowers are eligible to receive legal protections against retaliation, as well as anywhere from 10-30% of the total monetary sanctions collected from a successful judgment. Whistleblower rewards are paid out from the CFTC Customer Protection Fund, which is financed wholly from monetary sanctions paid to the CFTC by companies and individuals found guilty of violating the Commodity Exchange Act. Award percentages are determined based on the level of cooperation from the whistleblower, promptness with which they come forward, and value of the information toward a successful enforcement action. Once information has already been reported to the CFTC, it becomes ineligible for a reward.
If you suspect you may be able to blow the whistle on ghost credits, manipulative trading practices, greenwashing, or other kinds of fraudulent activity in the carbon offset market, speak to a qualified qui tam lawyer. Reporting carbon offset fraud is similar to reporting other kinds of securities, commodities, or banking fraud, in that a qui tam law firm can help you build your case, assemble evidence, and liaise with the appropriate government agency to ensure your contribution is considered for the highest award level possible. Working with a law firm can also help protect your anonymity throughout the reporting process.
Speaking up as a CFTC carbon offset whistleblower ensures that the system works as it should to remove carbon from the atmosphere, benefitting us all. Don’t let scam artists take advantage of a shared attempt to slow global warming, support greener businesses, and protect our atmosphere.
