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During the past two weeks, as part of IATP’s work to reduce risk from climate change, we have responded to questions from the U.S. Securities and Exchange Commission (SEC) and the private sector Task Force on Scaling Voluntary Carbon Markets (TSVCM) public consultation report. The questions were dissimilar for the most part but predicated on the (arguably dubious) assumption that if corporations and financial institutions measure their greenhouse gas (GHG) emissions, they will reduce those emissions and help prevent the planet from heating up.

There was significant pushback to the SEC request. Twelve Republican Senators asserted that it was simply “activists with no fiduciary duty to the company or its shareholders [who] are trying to impose their progressive political views on publicly traded companies, and the country at large, having failed to enact change via the elected government.” The American Petroleum Institute signaled it would battle the SEC all the way to the U.S. Supreme Court. Big Oil claims that mandating disclosure of climate-related financial information “could raise serious First Amendment issues . . .” if the SEC were to require financial information beyond the current balance sheet, e.g., to include the costs of replacing facilities and supply chains damaged by climate change exacerbated weather events. Despite Republican and Big Oil opposition to federal climate change action, many investor groups, as well as environmental advocates, have called for mandatory, standardized, comparable and reliable corporate reporting to the SEC of climate change risks and opportunities.

Current voluntary climate change reporting is inconsistent, incomparable, incomplete and of no use for making investment decisions, according to both climate activists and investor groups. Mandatory yearly corporate climate financial risk reporting would help investors, auditors, corporate banker, credit rating agencies and public interest groups assess what investments and changes in business practices that SEC registered companies were making both short term and long term to ensure their financial viability. The SEC staff will start the rulemaking process by reviewing the 5,672 comments submitted. Former SEC Commissioner Robert Jackson Jr. told The Wall Street Journal, “It’s a generational project unlike anything the SEC has ever undertaken. It requires a great deal of expertise at the staff level and an enormous amount of market outreach.” SEC Chair Gary Gensler said a climate disclosure rule was one of his top priorities.

IATP’s response to the SEC’s questions

IATP began our letter with a warning that industry groups opposed to a climate disclosure rule would attack it on cost-benefit grounds. We advised the SEC staff to not allow industry to discount the long-terms benefits of a stable climate, but to read and heed Frank Ackerman’s four principles for improving climate economics, including the principle of not discounting the value of future grandchildren. Our main recommendations are that:

  1. The SEC must build staff capacity to evaluate disclosures about long-term corporate climate risks based on computer modeling of climate science and the effect of investments to reduce corporate GHGs and adapt to climate change.
  2. The SEC should develop industry specific disclosure requirements, perhaps on a phased-in basis, in addition to general disclosure requirements for all SEC registered firms. Climate change affects even related firms differently, e.g., the grain processor Archer Daniels Midland’s facilities and supply chains are impacted differently than ADM Investments, a financial firm.
  3. Ensure that all SEC registered companies report their climate change adaptation vulnerabilities and their plans and investments to reduce those vulnerabilities. Most voluntary climate change reporting concerns only plans to reduce GHG emissions.
  4. Monitor and stringently limit SEC registrant use of emissions offset credits and offset futures contracts to represent registrant GHG reductions to investors, auditors, insurers and other interested parties. Investors and other interested parties should know how much companies are investing to directly reduce their GHG emissions and adapt to climate change versus how much they are spending on contracts claiming to offset their emissions through projects to reduce, avoid or “permanently” remove GHGs from the atmosphere.
  5. Apply climate and ESG (Environment, Social and Governance) disclosure requirements to private equity and closely held companies that are currently exempt from SEC registrant recordkeeping, reporting and other requirements. According to Bloomberg, there are twice as many private equity-controlled companies as SEC registered companies. No disclosure regime can be fair, comprehensive and successful if half of all companies are exempt from mandatory disclosure.

Finally, we presented a mini-case study based on the IATP and GRAIN report, Emissions Impossible,  according to which, “Together, the world’s top five meat and dairy corporations are now responsible for more annual greenhouse gas emissions than ExxonMobil, Shell or BP.” Only six of 35 companies analyzed report their supply chain emissions, which comprise 90% of the total. A global dairy industry response to our Milking the Planet contended we had misestimated the GHG emissions of 13 global dairy companies because we hadn’t taken into account the impact of mergers and acquisitions on each company’s aggregate emissions. IATP replied that lack of disclosure transparency and relevant detail make a granular accounting difficult to calculate. IATP continued, “Our calculations, indeed, include mergers and acquisitions because companies and their investors must own the climate footprint and risk they add to their operations due to mergers and acquisitions.”

IATP’s response to the TSVCM phase II consultation documents

The TSVCM consultation documents (each a slide deck with over 80 slides) propose how to increase the voluntary trading of emissions offset credits and offset-based futures contracts that claim to reduce, avoid or permanently remove corporate GHGs from the atmosphere. Voluntary markets, unlike the European Emissions Trading System or the State of California emissions market, are not required to include an annual and increasingly more stringent emissions limit on emitting industries. We commented on the TSCVM proposed terms for trading the offset credits and for improving the environmental and accounting integrity of the emissions reduction and avoidance projects that are the underlying asset of the credits. (Slide 40 of the Technical Appendix to the main document gives a good overview of the project to trading process.)

According to TSCVM’s survey of potential buyers for the offset credits and futures contracts, 45% were concerned about “lack of environmental and social integrity of certain projects” (slide 50) from which offset emissions reduction and avoidance credits would be derived. Forty-one percent of buyer respondents were concerned about the double-counting of emissions reductions, avoidance and/or removals by the projects’ home country (mostly a TVSCM identified dozen or so developing countries) and the buyers’ home country (mostly corporations and financial firms in North America and Europe) in reporting Nationally Determined Contributions (NDCs) to the U.N. Framework Convention on Climate Change (UNFCCC). (slide 50) Given the TSVCM’s ambition to increase the value of trading on current voluntary markets by 15 times by 2030 to $100 billion annually, these buyer concerns are a big impediment to the realization of that ambition. How to allay their concerns?

TSVCM operating leader Annette Nazareth wrote in a separate article that Digital Ledger Technology (DLT) would reduce the likelihood of fraud or misrepresentation of emission offsets because of its “immutable recordkeeping.” We agreed but argued that her reliance on remote sensing satellites and terrestrial sensors to measure carbon sequestration and ensure offset credit environmental integrity was technologically over-optimistic, given scientific research about “significant uncertainty” in remote sensing for flat U.S. cropland without the forestry canopies in the developing country emissions avoidance projects favored by many companies. Then she contended, DLT gives all involved parties the advantages of transparency, immutability, and avoiding the need for a central arbiter (or political negotiation and agreement).”

One of the political negotiations that DLT will not resolve is the UNFCCC Article 6 debate over the problem of double-counting of emissions offsets. All signs point to the difficulty of reaching a diplomatic solution to the problem of double-counting during the next UNFCCC Conference of the Parties (COP) in Glasgow, Scotland. Article 6.8 outlines “non-market mechanisms” for financing GHG reduction and climate change adaptation projects in developing countries, but this sub-article has not been negotiated for a decade, as governments have fought over the terms that would legitimate offset credits and futures to be accepted in the Nationally Determined Contributions of UNFCCC member governments to reduce GHGs.

IATP recommended that Task Force members whose employers also belonged to the International Emissions Trading Association (IETA) ask IETA to lobby governments to allow negotiation and agreement on Article 6.8 at the Glasgow COP. We cited a proposal by the Climate Land Ambition and Rights Alliance (CLARA), of which IATP is a member, as offering a sound framework for negotiations. Article 6.8, if agreed, would authorize an increase in desperately needed funding for direct GHG reduction and climate adaptation projects in developing countries.

Remarkably, the Task Force did not propose any standards for the exchanges to harmonize terms of trade and prevent deregulatory arbitrage, commenting blithely that “Exchanges are expected to set their own trading terms (see example in the Technical Appendix).” (slide 42) We noted that exchanges could set different and possibly conflicting terms to attract offset trading business. IATP also urged the TSCVM to re-engage with a market integrity concern it had identified in the draft version of the first consultation paper (slide 31) — excessive speculation in futures contracts.

Excessive speculation could disrupt price signals in contracts, such as the exchange position accountability failure to prevent excessive speculation in the Chicago Board of Trade wheat futures contract and the NYMEX West Texas Intermediate crude oil contract. Buyers of carbon offset credits who were assured that exchanges would prevent market manipulation and the huge price volatility induced by excessive speculation could be disappointed to the point of litigation if exchange computer monitoring failed to detect data and trading patterns pointing to market manipulation and excessive speculation.

The TSVCM’s proposed terms of trade are about protecting the standards setting organizations that verify carbon credit integrity from liability for credit buyer, seller or supplier losses incurred either as a result of Force Majeure events or as a result of violations by offset project developers in the terms of use for standards contracts. Force Majeure is a contract clause according to which parties to the contract are released from their obligations in the event of an unexpected and unpredictable natural disaster or political/social upheaval. IATP suggested that the definition of Force Majeure would likely have to be modified due to the great likelihood that emissions offsets would be “reversed” by natural disasters, such as forest fires destroying projects claiming to avoid GHGs increases by protecting forests. We also insisted that standards contract terms of use be strengthened so that offset project developers violating verification requirements, e.g., not to use child or slave labor, immediately lose their access to earn offsetting credits if the violations were proven.

According to a June 2 article in Bloomberg Green, there are major disagreements among the TSVCM’s 400 plus members to be resolved before its offset contract enters into trade at the end of 2021. There is a great deal of pressure on TSVCM members to resolve their disagreements to be able enter into trade an offset contract stipulated according to their terms that would find commercial success on the exchanges. Presenters from the CME Group, the Intercontinental Exchange’s subsidiary in London and the Nodal Exchange at a June 3 meeting of the Commodity Futures Trading Commission’s Energy and Environmental Markets Advisory Committee said that there was huge corporate interest in using offset contracts to claim to investors that they were reducing their emissions to meet Net Zero objectives in accord with government voluntary commitments in the UNFCCC Paris Agreement.

The SEC announced in mid-June that it will propose a rule to require all SEC registered companies to report their emissions, climate-related financial risks and plans to reduce those risks. The TSVCM plans to release a final phase II report at the end of July that would offer draft terms for a model contract for exchange trading by the end of 2021. Both proposals require greater public scrutiny and input.

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