Public Statements & Remarks

Keynote Remarks of Commissioner Kristin N. Johnson at The Federal Reserve Bank of Dallas

All Hat, No Cattle: The Need For Market Structure Reforms in Voluntary Carbon Markets

November 29, 2023

Remarks As Prepared


I am honored to join you this evening here in my hometown. Before I begin, I must thank Dallas Federal Reserve Bank President Lorie Logan, Senior Vice President Sam Schulhofer-Wohl, and Senior Vice President of the Houston Branch of the Dallas Federal Reserve Bank Daron Peschel for the invitation to join you this evening. I should also share an anticipated disclaimer. The views that I will share this evening are my own. I am, however, hopeful that I will be successful in convincing my colleagues and many of you to carefully consider the issues that I will raise.

World-Class Victories in Texas and the Eleventh District

It’s great to be here in Dallas especially as you continue celebrating the World Series Champions—the Texas Rangers—and at a moment when the Dallas Cowboys are enjoying a winning streak.

Unique in its public and private characteristics, the Federal Reserve System is critical to maintaining the health of the U.S. financial system. Originally created in 1913 pursuant to the Federal Reserve Act to address a national epidemic of bank runs, the U.S. central banking system has been instrumental in steering the country through periods of severe financial stress, including the 2007-09 financial crisis and, beginning in the winter of 2020, the Covid-19 global pandemic.

The Federal Reserve Bank opened its doors in Dallas in 1914 as the eleventh federal reserve district. This district reflects production in central sectors of the economy, including agriculture, energy, and commerce—markets deeply impacted by the Commodity Futures Trading Commission’s (Commission or CFTC) effective regulation of the derivatives markets and enforcement against fraud and manipulation in both the derivatives and underlying spot markets.

I commend the work of the Energy Advisory and Financial Sector Advisory Councils here at the Federal Reserve Bank of Dallas for your valuable and insightful contributions. During the course of my career, I have focused on the interconnectedness of different markets and the interplay between traditional markets and emerging innovation. I appreciate the focus on the implications of such vulnerabilities to the overall health of the U.S. economy. This evening, I’ll focus on the emerging market for carbon credits—tradeable intangible instruments that represent the removal or reduction of atmospheric carbon and are used to offset carbon emissions.

Our nation boasts the world’s deepest and most liquid capital and derivatives markets and first-class, innovative, cutting-edge energy markets. The significance of energy and financial markets to domestic and global economies cannot be overstated.

We are on the precipice of an energy transformation. As was recently stated at the energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City, the “new” paradigm for supply must balance cost, security, and emissions. Markets have witnessed growth in renewable resources and utility-scale batteries for electricity generation and in electronic vehicles for transportation. At the CFTC, we also see significant investment in wind and solar generation across the U.S. supported, at times, by large scale batteries to balance short-term variations. The U.S. energy transformation is occurring in tandem with significant climate and market conditions.

Severe Weather and other Market Stress Events

Over the last several years, the global economy has navigated persistent inflation alongside other challenging macroeconomic conditions. The challenges presented by the onset of the COVID-19 pandemic and geopolitical events that have deeply impacted energy and grain markets have introduced further stress. Our markets have demonstrated resilience, yet much work remains.

A report by the U.S. Department of the Treasury in September explains that “[t]he impacts of climate change are significant and escalating, including through more frequent and severe weather events, rising sea levels, and higher temperatures.”[1] The report details how climate risks are impacting individual household finances, U.S. financial markets, and supply chains. “In 2022 alone, the cost of climate and weather disasters in the United States totaled more than $176 billion—the third most costly year on record.”[2]

A recent United Nations IPCC Synthesis Report indicates that “[h]uman activities, principally through emissions of greenhouse gases, have unequivocally” caused an increase in the global surface temperature over the last century.[3] “Global greenhouse gas emissions have continued to increase, with unequal historical and ongoing contributions arising from unsustainable energy use, land use and land-use change, lifestyles and patterns of consumption and production across regions, between and within countries, and among individuals.”[4]

All Hat, No Cattle

Contemporaneous with our gathering this evening, global thought leaders have convened in Dubai for the 28th Conference of the Parties to the United Nations (UN) Framework Convention on Climate Change or COP 28. While the issues and concerns regarding climate risks are endemic, complex, and inherently require multi-lateral solutions effectuated by an international coalition of stakeholders—let’s call it: a coalition of the willing—I strongly believe that financial market regulators and committed market participants play a pivotal role in developing and implementing some basic, foundational market reforms.

Allow me to propose several such reforms to address urgent and deeply concerning issues arising from climate-related risks in our markets. And, while many reforms may require adoption by a diverse, international standard setting body, the reforms that I will discuss are well within the ambit of the Commission’s existing authority.

Before turning to the legal intricacies of the scope of the Commission’s jurisdictional authority, the economics of market structure and the complexities of climate science, I would like to offer a simple observation regarding derivatives on voluntary carbon credits and the spot market for the underlying credits.

In order for the carbon offset markets to have any significance (and, arguably, for such markets to avoid extinction), we must ensure the integrity of the market. More specifically, we must ensure the veracity of the benefits attributed to these offsets. Simply stated, we must ensure that the market is not—all hat, no cattle.

The Rise of Carbon Offset Markets

There is increasing consensus that emissions of greenhouse gasses are among the dominant causes of the observed warming of the planet since the mid-twentieth century. As set out in the official report to Congress this month, the Fifth National Climate Assessment, carbon dioxide concentrations have increased by more than 47% since 1850 and if not reduced along with the concentrations of other greenhouse gasses in the atmosphere, the results will be nothing short of “irreversible … and catastrophic.”[5]

Carbon credits have become an important climate change tool—allowing those seeking to reduce their carbon footprint to fund a green initiative or environmental project intended to remove or reduce atmospheric carbon. Theoretically, encouraging greater investment in these beneficial projects will enhance carbon neutrality.

Perhaps the most foundational cooperation treaty on climate matters, the Paris Climate Change Agreement, sets out the framework for countries to transfer carbon credits to each other and established trading mechanisms under the supervision of the UN.[6] Additionally, the Kyoto Protocol similarly allows such emissions trading and further created several market mechanisms for doing so, such as the Clean Development Mechanism and joint implementation.[7] Finally, the UN maintains its own Carbon Offset Platform where a company, an organization or a regular citizen can purchase carbon credits to compensate greenhouse gas emissions or to simply support climate change action. There are also examples of compliance-based carbon offset mandates in the United States.

Carbon credit trading and financing create co-benefits, which are unique to the sustainability projects with carbon offsetting purposes. Co-benefits refer to improvements in other outcomes in addition to achieving the goal of emission-reductions, such as social, economic or ecological improvements.

Typical co-benefits include improving: community employment opportunities, air or water quality, biodiversity, and biological habitat conservation, energy access, and access to community health and education services.[8] Such co-benefits, in addition to harnessing the economic incentives of market participants, give carbon offset projects the potential to be a particularly useful and efficient solution for addressing climate change.

However, the market for carbon credits is ripe for malfeasance.

Fraud in the Carbon Offset Market

In November 2022, the International Organization of Securities Commissions (IOSCO) published a paper on voluntary carbon markets that laid out a series of potential vulnerabilities of the integrity of carbon credits. IOSCO pointed out the lack of a uniform definition of what constitutes a “high quality” credit; the lack of a standadrized methodology for determining a baseline scenario against which to measure the effect of an offset project; the risk of reversal and a lack of permanency of sequestered carbon; the risk of double counting due to an absence of centralized registries; the risk of so-called “leakage,” when a carbon offset project in one location incentivizes aggravating projects elsewhere; and unclear transparency, oversight, accuracy, and verification.[9]

Academic studies of carbon offset projects have increasingly found that they do not accomplish their stated climate change mitigation goals. A study from earlier this year written by academics from four continents examined 27 forest conservation projects in six countries concluded that the majority did little to reduce deforestation and the remainder provided less protection from deforestation than claimed.[10] A study from the University of Cambridge and ETH Zurich this summer concluded that “88% of the total credit volume across four sectors in the voluntary carbon market”—renewable energy, cookstoves, forestry, and chemical processes—“does not constitute real emissions reductions.”[11]

Market participants are trading a range of futures, swaps, and forwards on carbon credits as underlying assets. Allow me the opportunity to lay out the market and regulatory structures for those products.

Robust Regulatory Framework for Environmental Futures

Futures contracts have been a central part of the derivatives market since the founding of our nation. Over the last several years, the Commission has authorized the listing of futures contracts on certain environmental instruments, including voluntary carbon credits. There are almost 200 futures contracts on environmental commodities although at this time there is very minimal open interest.

These environmental futures are already subject to a range of robust statutory and regulatory requirements that seek to ensure the integrity of the derivatives market during the life-cycle of a transaction—from pre-execution to clearing and settlement—and are consistent in the treatment of contracts across asset classes.

Futures contracts trade in a regulated marketplace. Exchanges that list and offer environmental futures must be registered with the Commission as a designated contract market (DCM) prior to operating as an exchange and must establish compliance with the DCM core principles in Part 38 of the CFTC’s regulations.[12] To obtain and maintain its designation, a DCM must comply with twenty-three core principles established under the CEA, including principles requiring that contracts are not readily subject to manipulation, the prevention of market disruption, and the financial integrity of transactions, to name a few. These principles were designed to ensure Commission involvement when a futures contract is listed for trading on a DCM, and certain of those principles directly relate to the underlying asset. These DCM core principles are supplemented by guidance and acceptable practices, which provide carefully crafted and precise guidance to DCMs on complying with the core principles.

Additionally, the Commission has clear visibility into the types and volume of futures offered by DCMs because they must submit contracts, either by way of self-certification or Commission approval under Part 40 of the CFTC’s regulations, prior to offering such products for trading.[13] Through this process, the CFTC ensures that the proposed contract complies with the CEA and CFTC regulations thereunder and where appropriate, there are mechanisms for the CFTC to prevent the listing of futures that, for example, would not comply with a core principle.

Futures contracts are required to be cleared at a derivatives clearing organization (DCO), which may be vertically integrated with the exchange or an unaffiliated third-party. Like a DCM, a DCO must be registered with the CFTC and comply with certain core principles that are set out in Part 39 of the CFTC’s regulations.[14] A DCO that seeks to provide clearing services with respect to futures contracts must register with the Commission before it can begin providing such services. To obtain and maintain registration, a DCO must comply with the DCO core principles established under the CEA, including principles such as having: adequate financial, operational, and managerial resources, adequate and appropriate risk management capabilities, and standards and procedures to protect member and participant funds, among others. Congress integrated the core principles into the CEA in the Commodity Futures Modernization Act of 2000, the stated purpose of which is to “promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-the-counter derivatives.”[15]

Intermediaries have historically been a staple, and indeed the front line of defense, in the futures market and they facilitate the execution and clearing of futures contracts for their clients. Futures commission merchants are perhaps among the most prevalent and well-known intermediaries in the futures markets, and they are subject to robust requirements that ensure the protection of customers and customer assets, including risk disclosure requirements.

Parallel Regulatory Framework for (Certain) Environmental Swaps

Another important product in the derivatives market is swaps. Historically, the swaps market—traded over-the-counter and off-exchanges—was largely exempt from the purview of the CEA and the CFTC’s regulations. The Commission had little visibility into the over-the-counter swaps market and the accumulation of risk exposure that culminated in the 2007-2009 financial crisis. According to the U.S. Government Accountability Office, the 2007-2009 financial crisis, which threatened the stability of the U.S. financial system and the health of the U.S. economy, may have led to $10 trillion in losses, including large declines in employment and household wealth, reduced tax revenues from lower economic activity, and lost output (value of goods and services).[16]

In response, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which reformed the swaps market, enhanced the stability of the U.S. financial system and provided other benefits.[17] Under the Dodd-Frank Act, the over-the-counter swaps market structure parallels the futures market structure described above. However, the Commission’s visibility into the types and trading volume of environmental swaps is still limited.

The Dodd-Frank Act created swap execution facilities (SEFs) to promote pre-trade price transparency in the swaps market and requires any platform or facility that functions as a SEF to be registered with the Commission and comply with the SEF core principles under Part 37 of the CFTC’s regulations.[18] SEFs are the trading platforms on which swaps are executed, and SEFs are subject to similar product listing requirements as DCMs. Certain credit default and interest rate swaps are subject to the Commission’s clearing mandate, which requires the clearing of such swaps through a DCO, and may also be swaps subject to mandatory trade execution, which requires the execution of certain swaps on a SEF.

Another new feature of the swaps market created by the Dodd-Frank Act is a swap data repository (SDR), which was created to provide a central facility for swap data reporting and recordkeeping. SDRs are required to be registered with the Commission. To obtain and maintain registration, an SDR must comply with the three core principles set forth in Part 49 of the CFTC’s regulations.[19] Swaps, whether cleared or uncleared, must be reported to SDRs, which are critical to the Commission’s regulatory oversight mission and public transparency goals with the dissemination of swaps data.

Dealers in swaps with a notional in dealing activities above certain de minimis thresholds and entities that hold large exposures in swaps are required to register with the Commission and are subject to comprehensive requirements that ensure the financial integrity of the firms and the protection of the financial system, manage risk and maintain good business practices, and establish business conduct standards governing the dealings with counterparties.

I want to note here that there is a gap in the context of certain transactions on environmental commodities, to the extent they are expressly excluded from the Commission’s swaps regulations.

Forwards Excluded from the Swaps Regulations

In practice, a significant part of the environmental commodity market trades as forwards, spot transactions and other types of commercial contracts where commercial market participants intend to make or take delivery of the underlying environmental commodity. Under the CEA, a forward on an environmental commodity that satisfies the forward exclusion from the swap definition for non-financial commodities is excluded from the swaps regime.

This forward exclusion applies only to a “a sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the transaction is intended to be physically settled.”[20] In this context, the Commission is intending to capture a commodity that can be physically delivered and that is an exempt commodity (or agricultural commodity), such as an environmental commodity (e.g., an emission allowance). I recognize that the forward exclusion seeks to advance an important policy consideration. This exclusion is designed to facilitate the actual acquisition and use of a physical commodity in core agricultural, energy, and precious metal sectors of our markets. Generally, these forwards are not traded on a regulated exchange, cleared at a regulated clearinghouse, or reported to a regulated trade repository, and there may be intermediaries and traders involved in these trades that are not required to be registered with the Commission. There may be vulnerabilities in this segment of the carbon credit market that may be addressed by Commission action.


I will continue to encourage the Commission to intervene to bring order to the market for carbon offsets. The Commission has many tools available that we need to continue utilizing. As industry increases investment in energy transition technologies, the role of robust, fair, and well-functioning markets for price discovery and hedging cannot be overstated.

Thank you so much for offering me the opportunity to share these reflections today.

[1]  U.S. Department of the Treasury, The Impact of Climate Change on American Household Finances (2023), at

[2]  U.S. Department of the Treasury, The Impact of Climate Change on American Household Finances (2023), at

[3]  IPCC, 2023: Climate Change 2023: Synthesis Report. Contribution of Working Groups I, II and III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, H. Lee and J. Romero (eds.)]. IPCC, Geneva, Switzerland, 184 pp., doi: 10.59327/IPCC/AR6-9789291691647.

[4]  Id.

[5]  Jay, A.K., A.R. Crimmins, C.W. Avery, T.A. Dahl, R.S. Dodder, B.D. Hamlington, A. Lustig, K. Marvel, P.A. Méndez-Lazaro, M.S. Osler, A. Terando, E.S. Weeks, and A. Zycherman, 2023: Ch. 1. Overview: Understanding risks, impacts, and responses. In: Fifth National Climate Assessment. Crimmins, A.R., C.W. Avery, D.R. Easterling, K.E. Kunkel, B.C. Stewart, and T.K. Maycock, Eds. U.S. Global Change Research Program, Washington, DC, USA.

[6]  Paris Agreement to the United Nations Framework Convention on Climate Change, Dec. 12, 2015, T.I.A.S. No. 16-1104.

[7]  Kyoto Protocol to the United Nations Framework Convention on Climate Change, Dec. 10, 1997, 2303 U.N.T.S. 162.

[8]  Broekhoff, D., Gillenwater, M., Colbert-Sangree, T., and Cage, P. 2019. “Securing Climate Benefit: A Guide to Using Carbon Offsets.” Stockholm Environment Institute & Greenhouse Gas Management Institute.

[9]  Board of the International Organization of Securities Commissions, Voluntary Carbon Markets Discussion Paper, at 13–16 (Nov. 2022),

[10]  Thales A. P. West et al., Action needed to make carbon offsets from tropical forest conservation work for climate change mitigation (preprint) (Jan. 5, 2023),

[11]  Benedict Probst et al., Systematic review of the actual emissions reductions of carbon offset projects across all major sectors (preprint) (July 27, 2023),

[12]  17 C.F.R., Part 38.

[13]  17 C.F.R., Part 40.

[14]  17 C.F.R., Part 39.

[15]  Commodity Futures Modernization Act of 2000, Comm. Fut. L. Rep. P 6858211,

[16]  U.S. Gov’t Accountability Off., GAO-13-180, Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act (2013),

[17]  Id.

[18]  17 C.F.R, Part 37.

[19]  17 C.F.R., Part 49.

[20]  7 U.S.C. § 1a(47)(B).