Honeycutt – Fall 2023

Incorporating Carbon Offsets into Agencies’ Sustainability Strategies

Joseph Honeycutt

In December 2021, President Biden signed Executive Order 14057, directing all federal agencies to adopt emissions reductions goals and measures “in order to achieve a carbon pollution-free electricity sector by 2035 and net-zero emissions economy-wide by no later than 2050.”[i] While ambitious, the order lacks any mention of carbon offsets as a method of achieving its net-zero emissions targets.

Carbon offsets are tradeable certificates which represent a reduction of carbon dioxide in the atmosphere.[ii] Owners of these certificates may factor that reduction into their calculation of the net carbon emissions to offset carbon-intensive activities.[iii] The Biden administration should direct the CEQ to issue directive guidance for agencies’ implementation and accounting of carbon offsets, which would ensure their transparency and effectiveness. The CEQ may develop its own interim standards, but should seek to synchronize that interim standard with ongoing efforts by the Commodity Futures Trading Commission (CFTC) to regulate carbon offset markets. Doing so will lend legitimacy to a CFTC-developed regulatory regime while enabling agencies to comply with the ambitious goals contained in EO 14057.

The White House Council on Environmental Quality’s (CEQ) August 2022 implementation memo for EO 14057 fails to provide any guidance on the proper use of offsets. It simply states that since the “CEQ and OMB have not yet provided guidance on the appropriate use of emissions removal technologies, agencies should not employ emissions removal strategies or offsets at this time.”[iv] As discussed below, the CFTC already has regulatory jurisdiction over derivatives markets of carbon offsets and has begun to develop regulatory strategies to curb abuses and challenges associated with privately available carbon offsets.[v]

Privately available carbon offset products suffer from myriad well-documented challenges. Many nature-based offsets are not guaranteed to have a permanent offsetting effect. That is, if the offset represents preservation of a natural asset, such as a forest, that carbon offset may be undone by natural forces such as forest fires.[vi] Alternatively, an offset’s impact relative to its dollar cost may be severely inflated, allowing corporate purchasers to grossly overestimate or exaggerate their emissions reductions.[vii] Often such carbon offsets will lack additionality by, for example, “preserving” land for the purposes of carbon storage that was not actually in danger of being developed.[viii] Finally, the many independent organizations that purport to certify legitimate carbon offset products suffer from the downward pressure placed upon the level of scrutiny by corporate consumers, who desire less stringent standards from those certifying bodies.[ix]

The CFTC is well aware of these challenges. In July 2023, the Commission held its second convening on voluntary carbon markets, calling for input from industry and environmental groups regarding potential standards for CFTC regulation.[x] By identifying responsible and irresponsible vendors of carbon offsets, the Commission restricts those vendors’ access to exchanges.[xi]

Though necessary, CFTC regulation alone is likely to be insufficient to curb abuses and “greenwashing” through use of carbon credits. The CFTC’s primary focus is to ensure accurate pricing and prevent fraud by offerors of carbon credits in derivatives markets.[xii] The success of those markets in contributing to the economy’s response to the climate crisis would merely be an indirect benefit.

Adopting a CFTC-developed standard for identification of transparency and effectiveness standards has advantages over developing one internally within federal agencies. The CFTC is statutorily required to be bipartisan, and its members enjoy insulation from removal by the President.[xiii] Its standards will thus have a level of protection from repeal by adverse future administrations that is not present for standards developed by comparatively less independent federal agencies. Yet, that independence may prevent a rapid development of a standard by the CFTC, especially given the involved role of industry in the Commission’s regulatory process. Because of this, CEQ should be prepared to adopt its own standards in the interim so that agencies can incorporate carbon offsets into their long-term planning.

Some conservation advocates have argued that an emphasis on carbon offsetting will provide an avenue for polluters to escape necessary emission reduction measures in favor of simply paying to offset their current emissions.[xiv] EO 14057 reflects these concerns and directs the federal government to adopt such reduction measures without using carbon offsetting.[xv] Promulgating a regulatory standard for offsetting schemes, however, would not negate those directives. Indeed, the EO’s repeated use of the term “net-zero” among the list of goals for emissions reductions implies the possibility of using offsets to cancel out unavoidable emissions.[xvi] In order to realistically achieve the goals set out by President Biden in the EO, carbon offsets must be viewed as part of a larger strategy by agencies to improve the nation’s transition to a sustainable economy. The private market is already engaged in buying and selling carbon offsets. Federal agencies should join in and, in doing so, play a leading role in reinforcing CFTC regulations that govern carbon offsets and which will exist either way.

Promulgating a federal standard for carbon offsets — regardless of whether it is developed by the CFTC or in-house — would allow federal agencies to better comply with EO 14057, particularly as it relates to government procurement and building. Agencies relying on bids from private entities are directed to assess the net emissions of their selected vendors, who may in turn utilize carbon offsetting to calculate their net emissions as part of their bid.[xvii] Assessing the net emissions of agency vendors without coherent guidance regarding acceptable levels of transparency and effectiveness for carbon offsets undermines agencies’ ability to achieve the outcomes directed by the EO. To remedy this, the administration could require that private companies seeking to bid on federal contracts conform to the CFTC’s published standards or purchase carbon credits from a CFTC-approved exchange. This will fulfill the EO’s intent to “catalyze private sector investment and expand the economy and American industry.”[xviii]

In sum, Executive Order 14070 represents an ambitious mission to use the federal government’s status as the largest employer and purchaser in the United States to accelerate the nation’s transition to a future with net-zero emissions. Yet, that plan may remain aspirational without a standard by which agencies and the private entities they do business with can account for the actual impact of their carbon offset measures. The Biden administration should direct agencies to incorporate carbon offsets into their procurement and operational planning, first according to a CEQ-promulgated standard as the CFTC finalizes its standards and later according to the CFTC regulatory framework.

Joseph Honeycutt is an Associate Editor with MJEAL. Joseph can be reached at jlhoney@umich.edu.

[i] Exec. Order No. 14057, 86 Fed. Reg. 70935 (Dec. 13, 2021).

[ii] Alex Fredman and Todd Phillips, The CFTC Should Raise Standards and Mitigate Fraud in the Carbon Offset Market, Center for American Progress (Oct. 7, 2022).

[iii] Id.

[iv] White House Council on Env’l Quality, Implementing Instructions for Executive Order 14057, 27, 73 (Aug. 2022), https://www.sustainability.gov/pdfs/EO_14057_Implementing_Instructions.pdf.

[v] Christy Goldsmith Romero, Opening Statement of Commissioner Christy Goldsmith Romero: The CFTC’s Role with Voluntary Carbon Credit Markets, Commodity Futures Trading Commission (Jul. 19, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement071923b.

[vi] Zeke Hausfather, Let’s Not Pretend Planting Trees Is a Permanent Climate Solution, N.Y. Times (Jun. 4, 2022), https://www.nytimes.com/2022/06/04/opinion/environment/climate-change-trees-carbon-removal.html.

[vii] Thales A.P. West et al., Overstated carbon emission reductions from voluntary REDD+ projects in the Brazilian Amazon, 117 Proc. of the Nat’l Acad. of Sci. 24188 (2020).

[viii] Fredman and Phillips, supra note 2.

[ix] Id.

[x] Goldsmith Romero, supra note 4.

[xi] Trevor Salter, Note, Carbon Cowboys: How to Rein in Deceptive Sellers in the Carbon Offset Market, 1 Geo. Wash. J. Energy & Envtl. L. 59, 72 (2010).

[xii] Goldsmith Romero, supra note 4.

[xiii] 7 U.S.C. § 2.

[xiv] Nicole Franki, Note, Regulation of the Voluntary Carbon Offset Market: Shifting the Burden of Climate Change Mitigation from Individual to Collective Action, 48 Colum. J. Env’t L. 177,199-201 (2022).

[xv] Exec. Order No. 14057, 86 Fed. Reg. 70935 (Dec. 13, 2021).

[xvi] Id.

[xvii] Id.

[xviii] Id.

Leave a comment

Your email address will not be published. Required fields are marked *