The Voluntary Carbon Market, Environmental Derivatives, Environmental Cryptos and How to Avoid Regulatory Pitfalls in These Markets

Reprinted with permission from Futures and Derivatives Law Report , Vol ume 42, Issue 7, K 2022 Thomson Reuters. Further reproduction without permission of the publisher is prohibited. For additional information about this publication, please visit https://legal.thomsonreuters.com/.

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THE VOLUNTARY CARBON MARKET, ENVIRONMENTAL DERIVATIVES, ENVIRONMENTAL CRYPTOS AND HOW TO AVOID REGULATORY PITFALLS IN THESE MARKETS by Lorita Ivanova Lorita (Lori) Ivanova is an associate attorney in the energy practice group of Bracewell, LLP. Her career started in business litigation, but she has worked in a variety of energy-related roles, on and off the trade floor, for the past six years. Lori’s current practice focuses on trade and regulatory compliance in energy markets. Her interest in energy was sparked after winning an energy ethics and compliance competition dur ing her law school days at the University of Illinois College of Law. What do two of today’s most trending topics, climate change and cryptocurren cies, have in common? The answer is vol untary carbon offsets. A carbon offset or a carbon offset credit is a digital certificate or receipt representing that one tonne of carbon dioxide (“CO2”) attributed to hu man activity has been removed from or kept out of the Earth’s atmosphere. There are voluntary and compliance-based car bon offsets, but this article will focus on

the U.S. voluntary carbon market (“VCM”) and the relevant federal enforce ment agencies. 1 The market for voluntary carbon offsets and its blockchain based spin-offs are gaining popularity in today’s political climate and are developing thanks to new technology. Corporations looking to combat climate change are at the forefront of these market innovations and federal agencies like the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commis sion (“SEC”) are encouraging market based solutions to climate change. The development of these new markets may also be spurred by the SEC’s recently proposed regulations regarding public disclosures of climate risks for publicly traded companies, the Biden administra tion’s net zero initiatives for reducing U.S. emissions, and transformative technology allowing digital asset representations of the credits, called crypto tokens, to trade on the blockchain. The VCM is projected to reach $700.5 million by 2027, up from $305.8 million in 2020. 2 The market capi talization of the most well-known envi ronmental crypto token, the Base Carbon Tonne (“BCT”), was over $61 million in April of 2022, although it has temporarily fallen since then due to market conditions impacting most crypto markets. 3 This market growth and evolution has not gone unnoticed by regulatory agencies, which are closely evaluating how much govern ment oversight is needed and what form that oversight needs to take. Anyone in

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the solution to climate change. 8 The commitment of the U.S. to GHG emission reductions has also been renewed as it recently rejoined the Paris Agreement 9 and President Biden declared a 2050 net-zero goal with an intermediate target of achieving a 50-52% reduction in GHG emissions below 2005 levels by 2030 in order to help the world meet the no more than 1.5°C temperature rise target. 10 The international agreement to reduce GHGs, as reflected in the Kyoto Protocol and the Paris Agreement, led to a variety of regional and local markets for trading GHG emission reduction products worldwide. These products were cre ated for the purpose of meeting government mandated GHG emission reduction targets for certain industries. Because they were meant to comply with a mandatory government-imposed obligation, the market for them is referred to as the compliance market. 11 The compliance market has generated a variety of compliance emission reduction products that could be traded between parties to meet their emission obligations and one of these products is the carbon offset. 12 A carbon offset represents the reduction of GHG emissions in one place used to compensate emissions occurring somewhere else. A carbon offset credit is the actual digital certificate issued by the government entity imposing the emission cap requirements. The credit certificate guaran tees that one metric tonne of CO2 or its equiva lent amount of other GHGs has been removed from or kept out of the atmosphere as a result of projects which actively eliminate GHG emissions. Examples of such projects include re THE COMPLIANCE CARBON MARKET

volved or looking to participate in these markets will need to closely follow SEC and CFTC regu latory changes. THE ORIGINS OF CARBON MARKETS: THE KYOTO PROTOCOL AND THE PARIS AGREEMENT In 1988 the Intergovernmental Panel on Cli mate Change (“IPCC”), a United Nations (“UN”)-backed organization, released findings that human activities resulted in emissions which substantially increased greenhouse gasses (“GHGs”) in the atmosphere. This prompted a conference on climate change and calls for a global treaty on the subject. As a result, the United Nations created a Framework Convention on Climate Change (“UNFCCC”), which estab lished the Conference of the Parties (“COP”), an annual conference for world leaders to negotiate multilateral responses to climate change. The third of these COPs (“COP3”), held in 1997, led to the adoption of the Kyoto Protocol. This was the first international agreement that called for countries to reduce their GHG emissions, and it allowed some flexibility for the trading of emis sion reduction credits. 45 The Kyoto Protocol eventually set the ground for the adoption of the Paris Agreement in 2015, which was signed by 195 countries 6 and required all countries to set targets to reduce emissions such that they can try to meet the aspirational goal of limiting global temperature rise to 1.5°C of pre-industrial levels. 7 During COP26 last year, countries finally adopted the Rulebook for Article 6 of the Paris Agreement. The article implements rules on international cooperation for carbon markets thereby demonstrating a global consensus to em brace the markets for emission trading as part of

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selves as “green” or have investors who require them to take emission reduction measures, or even regular people who wish to offset their carbon footprint. THE FUTURE OF THE VOLUNTARY CARBON MARKET Potential Market Growth: Most recently, the SEC has proposed rule changes that would re quire public companies to include climate-related disclosures, 16 including disclosing the use of carbon offsets and their role in the company’s climate-related business strategy. 17 If the pro posed SEC rule is implemented, companies cur rently not subject to mandatory emission reduc tion regulations will need to disclose information about any voluntary emission reduction action they are taking. This has the potential to incentiv ize participation in the voluntary offset market, thereby potentially increasing its liquidity and generating interest in new carbon offset projects resulting in increased reduction of worldwide GHG emissions. The SEC’s proposal is a regula tory response that builds on voluntary declara tions from many companies to become carbon neutral . 18 Moreover, the recently enacted Bipartisan Infrastructure Bill specifically dedi cates funding to projects advancing the energy transition, 19 many of which could be eligible to produce voluntary carbon offsets. Exchange Traded Futures Contracts for Volun tary Carbon Offsets: Exchanges have begun embracing the VCM and creating CFTC jurisdic tional derivatives products for such commodities. For example, the Chicago Mercantile Exchange (“CME”) announced last year the Global Emis sions Offset (“GEO”), a physically settled futures contact composed of voluntary offset credits

forestation or forest conservation, clean energy, landfill methane reduction, and biomass projects to name a few. The terms carbon offset and carbon offset credit are often used interchangeabl y . 13 THE VOLUNTARY CARBON MARKET Given the recent push toward reduction of emissions, it is not surprising that many people and companies did not view mandatory GHG emission reduction obligations for certain indus tries enforced by the government as sufficient. This led to a whole new market, designed espe cially for carbon offsets, that is wholly voluntary. Individuals, companies, or other entities volunta rily calculate their carbon footprint and purchase carbon offsets to mitigate their GHG emissions. This voluntary carbon market or VCM does not have obligations imposed by a government entity which issues carbon offset certificates; instead, independent repositories have been created to serve as registries for non-government carbon offset projects. 14 These registries developed their own specific standards as to which projects could be registered on their online platforms based on UN guidance and issue their own voluntary carbon offsets digital certificates after projects are verified. The offsets are traded over-the counter (“OTC”) between parties via the relevant registry platform, the most popular one being the Verified Carbon Standard (“VCS” or “Verra”). 15 Many companies have also sprung up as interme diaries between the registries and customers. Some bypass the registries and claim to directly verify and buy the offsets from the companies engaging in the carbon offsetting activity and then sell the offsets to customers. These custom ers can be companies who want to market them

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eligible for the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA). CORSIA was originally adopted by the UN’s International Civil Aviation Organization (“ICAO”) 20 to meet the international aviation’s industry carbon neutral growth goal. 21 The GEO futures contract reflects the market price of the CORSIA-eligible carbon offsets, but may also be of interest to market participants beyond those in the aviation industry as the CORSIA-eligible offsets could be utilized by any industry desiring to voluntarily lower emissions. The GEO futures contract currently has an open interest of a couple of thousand contracts (with each contract repre senting 1,000 carbon offsets). 22 The physical delivery of the GEO futures contract involves the short seller picking between three voluntary carbon registries to deliver the remainder CORSIA-eligible voluntary carbon offsets to the buyer. The registries are Verra, American Carbon Registry (“ACR”), and the Climate Action Re serve (“CAR”). 23 In addition, the CME also offers a Nature Based Global Emissions Offset (“N-GEO”) fu tures contract based on Agricultural, Forestry, and Other Land Use (“AFOLU”) projects. The offsets for the N-GEO futures contract are based on the Verra Registry standards for carbon offset projects and require additional certification under the Climate Community and Biodiversity 24 (“CCB”) Standards. 25 This futures contract is cur rently the most popular carbon offset-based futures contract with an open interest of over 19,000 contracts as of early June of 2022. 26 The Intercontinental Exchange (“ICE”) launched its own version of a futures contract with these stan dards called the Nature-Based Solutions carbon credit futures contract (“NBS future”) on May 9, 2022, as well. 27 In March, 2022, CME launched a

third futures contract called the Core Global Emissions Offset Futures (“C-GEO”) contract. 28 This contract is based on carbon offsets meeting the requirements of the emerging Core Carbon Principals developed by the Taskforce on Scaling Voluntary Carbon Markets. 29 The C-GEO con tract will be physically settled in Verra and will exclude AFOLU and large hydro projects (with the exception of Run-of-River hydro). 30 Shortly after being released, the C-GEO futures had over 150 contracts of open interest. 31 Voluntary Carbon Offsets-Based Crypto Tokens: Much like exchanges are taking notice of the VCM, so are blockchain companies. Some try to tokenize voluntary carbon offsets by en crypting a carbon offset contract from a registry like Verra and creating a crypto token based on that carbon offset which can then be tracked and traded on either their blockchain or a more well known blockchain like Ethereum. The goal is to make transactions in carbon offsets more ef ficient, cheaper, and transparent, as well as ac cessible to non-sophisticated, non-merchant customers. Trading an environmental token on a blockchain eliminates the bureaucratic hassle of making every customer register for an account at a carbon registry and having to manually utilize the accounts every time they want to purchase, sell, or retire (use up) the carbon offset. Trading such tokens would save on registration fees charged by the registries for an account. In addi tion, customers will be able to view the transac tion ledger of each token, which might improve transparency and potentially provide a means to determine that the projects behind their environ mental tokens are legitimate and the tonnes of carbon removed from the atmosphere represented by each token are not claimed by anyone else when they retire them on the blockchain to offset

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THE ROLES OF THE CFTC AND SEC IN THE VOLUNTARY CARBON MARKET CFTC JURISDICTION OVER VOLUN TARY CARBON OFFSETS: Futures, Swaps, and Options: The CFTC has jurisdiction over futures, swaps, and options on underlying commodities. Acommodity is broadly defined to include (with the exception of onions and motion picture box office receipts and indi ces of such receipts), “all . . . goods and articles” and “all services, rights and interests . . . in which contracts for future delivery are presently or in the future dealt in. 41 ” Commodity futures contracts like the GEO futures, N-GEO futures, C-GEO futures, and NBS futures and any swaps on environmental commodities fall under the CFTC’s direct regulatory jurisdiction and also are subject to the agency’s anti-fraud and anti manipulation enforcement authority. Spot markets : The underlying commodity mar ket, namely the spot VCM, is not directly regu lated by the CFTC. However, the agency does have enforcement jurisdiction to police these spot markets for fraud and manipulation. Delayed or Deferred Delivery Contracts : Off exchange contracts for the sale and deferred or delayed delivery of voluntary carbon offsets contracts, often labeled “forwards” by the mar ket, should be analyzed to determine if they qualify as “forwards” that are excluded from the statutory definition of swaps and, hence from the reporting requirements for swaps. 42 To qualify for the statutory exclusion, a carbon offset first has to qualify as an intangible non-financial commodity. Specifically, the CFTC has declared that “an intangible commodity (that is not an

their own emissions (usually by transferring them to a wallet that makes them unusable in the future). A recent example of one such crypto token is the Moss Carbon Credit (“MCO2”) token, which represents one voluntary carbon offset equal to one metric tonne of CO2 or its equivalent re moved from the atmosphere (1 MCO2=1 volun tary carbon offset = 1 metric tonne of CO2 re moved from the atmosphere). 32 There are different offshoots of this environmental crypto token concept, like Toucan’s Base Carbon Tonne (“BCT”), 33 NORI’s Carbon Removal Tonne (“NRT”), 34 Veridium’s CARBON/VERDE to ken 35 (backed by IBM) to name a few. Most are in their early stages of development. Some, like the Climatecoin Foundation’s ClimateCoin, have stopped trading. 36 Others, like Toucan’s BCT, are becoming underlying assets for new blockchain products. For example, BCT is backing another crypto token known as Klima Dao (“Klima”). 37 Klima is minted when someone deposits a Toucan BCT representative of a carbon offset into the Klima Dao treasury where it is locked away. 38 BCT has also recently been infused into certain non-fungible tokens (“NFTs”). 39 Specifically, NFTs are blockchain-based unique digital assets (usually non-replicable digital art) often sold as collectables (think virtual baseball cards, but here the collector owns the unique code behind the digital image instead of a physical card 40 ). An NFT infused with BCT is designed to represent a digital image of a certain amount of carbon offsets. They are usually sold on the Ethereum blockchain.

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would only have fraud and manipulation investi gative and enforcement authority over them. Companies involved in the sale and delayed or deferred delivery of carbon credits may wish to consult with legal counsel with respect to the ap plication of the CFTC’s swaps regulation to their particular circumstances. CFTC action pertaining to environmental commodities: Finding ways to support and fur ther develop the environmental commodity mar ket is one of the central objectives of current CFTC Chairman Rostin Behnam’s regulatory agenda. In one of his first acts upon taking over leadership at the agency, Chairman Behnam cre ated a Climate Risk Unit (“CRU”) to focus on the role of derivatives in mitigating climate related risk. The CRU is tasked with engaging with market participants, offset registries, Non Governmental Organizations, and other multilat eral bodies to understand where government may need to play a role and help with developing derivatives markets that will properly hedge physical and transition risk for emission reduc tion products. 46 In particular given international emissions reduction efforts, Chairman Behnam has directed the CRU to examine how the agency can assist the development of and have a role in the voluntary offset markets and carbon offset derivatives. 47 Chairman Behnam also recently held a roundtable with the industry to establish how the CFTC can help facilitate derivative markets to manage climate change risk 48 and is sued a Request for Information (“RFI”) seeking comments on climate related financial risks 49 and on the development of the VCM. 50 CFTC and environmental crypto tokens: As to blockchain-based assets, the CFTC has decreed that digital asset currencies such as Bitcoin are

excluded commodity), which can be physically delivered qualifies as a nonfinancial commodity if ownership of the commodity can be conveyed in some manner and the commodity can be consumed. One example of an intangible nonfi nancial commodity that qualifies under this inter pretation . . . is an environmental commodity, such as an emission allowance, that can be physi cally delivered and consumed (e.g., by emitting the amount of pollutant specified in the allow ance [or by retiring it without emitting the permit ted amount of pollutant]). 43 ” In other words an intangible non-financial commodity is a com modity that 1) is not financial, 2) can be physi cally delivered (such as to a registry), 3) its ownership can be transferred, and 4) is consumed. While most carbon offsets contracts for deferred delivery meet the first three elements of intangible non-financial commodity, some market participants have questioned whether the fourth element—consumption—requires that the product be consumed by the buyer or just that the product be consumable. Once an environmental commodity is found to be an intangible non-financial commodity the CFTC’s forward contract exclusion may apply. Specifically, the CFTC allows an exception for forward contracts to swap reporting because they are considered commercial merchandising trans actions meant to transfer ownership of a product and not just price risk. 44 It has stated that the forward exception to swaps, “should not apply to private commercial merchandising transactions which create enforceable obligations to deliver but in which delivery is deferred for reasons [other than] of commercial convenience or necessity. 45 ” If voluntary carbon offsets contracts are deemed to fall under the “forwards” exclu sion to the definition of swap, then the CFTC

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qualify as investment contracts, which would make them a security and therefore subject to SEC registration requirements. An investment contract is “an investment of money in a com mon enterprise with profits to come solely from the efforts of others . . . 58 ” Most voluntary carbon offsets are issued by registries after the producer spent the capital for the project and eliminated the corresponding carbon dioxide volumes from the atmosphere. In other words, contracts for the purchase and sale of voluntary carbon offsets are usually not asking for prelimi nary investment for the purpose of profits. Rather they sell a final product/commodity to buyers. While it might seem unlikely that carbon offset contracts will be considered securities by the SEC, unless they are marketed as financial invest ments, companies engaged in voluntary carbon offsets projects that could be considered an investment contract may wish to consult with legal counsel regarding compliance with SEC rules and regulations. SEC action impacting environmental commodities: Even if voluntary carbon offsets contracts are not considered securities, the SEC still plays a role in the VCM as it regulates disclosures for many public companies which produce and/or utilize carbon offsets. As previ ously discussed above, the agency recently pro posed a rule to mandate climate-risk disclosures for public companies, which may have a positive impact on the development of the VCM. SEC and environmental crypto tokens: The SEC may have jurisdiction over environmental blockchain tokens depending on how they are structured. The SEC already found that it has jurisdiction over initial coin offerings (“ICOs”) for cryptocurrencies designed to raise capital to

commodities subject to the agency’s anti-fraud and anti-manipulation enforcement authority. 51 Given the CFTC’s enforcement investigations and actions involving transactions in crypto as sets, development of the VCM through the use of blockchain technology and crypto tokens may result in closer CFTC enforcement scrutiny. 52 Demonstrating this concern, in a speech refenc ing the crypto markets earlier this year, the Chair man stated that the digital asset market presents many novel issues which may raise conflict of interest and deceptive trading practices issues for retail customers, but there is no federal or state agency with enough visibility into those markets to ensure customers are not deceived. 53 While the underlying “digital asset market” has not been formally defined and underlying spot digital commodity assets are not currently CFTC regu lated (except in cases of fraud/manipulation), Chairman Behnam has suggested that such a mar ket would “benefit greatly from CFTC oversight. 54 ” The Chairman specifically called upon Congress to grant the CFTC additional authority to directly regulate spot markets for digital assets that are commodities. 55 Congress has proposed various bills, including the Respon sible Financial Innovation Act, which would provide the CFTC with such authority. 56 It is unclear whether such legislation will be passed, or if it is, whether it will address the definition of digital asset commodities and blockchain envi ronmental crypto tokens. Companies should watch this space carefully to ensure they can quickly adopt to any new regulations. SEC jurisdiction over voluntary carbon offsets: The SEC regulates the securities markets in the US. While the definition of a security 57 is broad, for purposes of voluntary carbon offsets con tracts, the concern centers around whether they

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ernment supervision as the CFTC has already deemed products, like voluntary carbon offsets, to be commodities and therefore subject to its anti-fraud and anti-manipulation enforcement powers. Furthermore, any companies trading off exchange derivatives of voluntary carbon offsets also may be subject to the CFTC’s reporting regulations for swaps and should have adequate procedures governing such reporting if it is required. As part of such procedures, companies should carefully analyze whether any delayed or deferred delivery contracts for the sale of volun tary carbon offsets fall under the exclusion from the swap definition and, hence, the swap report ing requirements. In addition, any company conducting business in this space should pay close attention to regulatory developments for blockchain tokens based on voluntary carbon offsets as the CFTC has expressed particular interest in and scrutiny of markets for blockchain products. Publicly traded companies which are already producing, trading, or plan to utilize voluntary carbon offsets to mitigate climate change risk should monitor the developments around the SEC’s new proposed climate change disclosures to ensure compliance with their public reporting obligations and analyze their potential impact on the VCM. Moreover, if any companies sell or uti lize voluntary carbon offsets for investment purposes or are engaging in ICOs or decentral ized finance activities related to environmental blockchain tokens, they may wish to review with legal counsel the application of SEC regulations to their products and transactions. Finally, any companies in the VCM or trading and developing carbon offset spin-off products should be aware that the regulatory space in this

launch their product, as well as in the Decentral ized Finance (“DeFi”) space which allows people to borrow and lend cryptocurrencies on online platforms. 59 Other blockchain based tokens have also been labeled securities and therefore subject to the SEC registration requirements. Specifi cally, In the Matter of Munchee Inc., the SEC found tokens for a company’s restaurant review mobile application to be securities because the company had solicited investors to purchase its tokens with cryptocurrencies, which were “the type of contribution of value that can create an investment contract” and the investors had “a rea sonable expectation of profits from their invest ment in the Munchee enterprise” as the company had projected that the tokens would increase in value as their utilization for services and pur chases in the application’s ecosystem increased. 60 Similarly, if any carbon offset blockchain tokens are marketed as investments in an enterprise and are deemed to be securities, then the SEC will have jurisdiction over the spot markets in these products. Companies considering developing and marketing products in this space may wish to consult with legal counsel regarding any potential application of the SEC’s security registration requirements. CONCLUSION The VCM is global and likely to grow expo nentially given recent legal and technical developments. Companies developing or trading voluntary carbon offsets, as well as those trading voluntary carbon offsets futures contracts or of fering environmental blockchain tokens in the U.S., should be aware of agencies like the CFTC and SEC which may potentially regulate their activities.

The VCM is not entirely without federal gov

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area is continually and rapidly evolving. Ensur ing compliance programs are not just established but updated with regulatory changes will likely be needed. Disclaimer: The information contained in this article does not, and is not intended to, constitute legal advice. Persons seeking legal advice with respect to any matters discussed in this article should contact their legal counsel to address their particular circumstances. ENDNOTES: 1 Certain states have regulatory agencies which regulate carbon offsets for compliance purposes at the state level, but they are not the subject of this article. 2 Voluntary Carbon Offsets Market Size [2022-2027] is Projected to Reach USD 700.5 Million, with 11.7% CACR/Growth Rate, Share, Emerging Technologies, Key Players, Regional and Global Industry Forecast to 2027 Say’s Market Reports World. GlobeNewswire, (Febru ary 3, 2022, 2:35 PM), https://www.globenewswi re.com/news-release/2022/02/03/2378160/0/en/ Voluntary-Carbon-Offsets-Market-Size-2022 2027-is-Projected-to-Reach-USD-700-5-Millio n-with-11-7-CAGR-Growth-Rate-Share-Emergi ng-Technologies-Key-Players-Regional-and-Glo bal-Indust.html#:˜:text=%E2%80%9CGlobal %20Voluntary%20Carbon%20Offsets%20marke t ,%25%20dur ing%202021%2D2027.%E 2%80%9D. 3 Toucan Protocol: Base Carbon Tonne. Coin MarketCap, https://coinmarketcap.com/currencie s/toucan-protocol-base-carbon-tonne/ (last vis ited April 21, 2022). 4 UNFCCC - 25 Years of Effort and Achieve ment: Key Milestones in the Evolution of International Climate Policy, United Nations Framework Convention on Climate Change (“UNFCCC”), (1988-1998), https://unfccc.int/ti meline/ (last visited April 8, 2022). 5 Johnson, Toni, The Debate over Greenhouse

Gas Cap-and-Trade, Council on Foreign Rela tions (November 3, 2011, 8:00 AM), https://ww w.cfr.org/backgrounder/debate-over-greenhouse gas-cap-and-trade#:˜:text=Defining%20Cap%2 Dand%2DTrade%20Programs,%2C%20trifluoro methane%2C%20and%20nitrous%20oxide. (It should be noted that nowadays most emission trading schemes are set up as cap-and-trade programs, whose idea is that industries respon sible for GHG emissions would be allocated a certain amount of emission allowances per year and those who go over the allowed amount will have to purchase allowances from those who exceeded expectations and emitted less compared to their emission allowances cap. In other words, the purpose of a cap-and-trade system is to put a price on emissions to encourage GHG emission reduction activities.) 6 UNFCCC - 25 Years of Effort and Achieve ment: Key Milestones in the Evolution of International Climate Policy, United Nations Framework Convention on Climate Change, (2015-2016), https://unfccc.int/timeline/ (last visited April 8, 2022). 7 FAQ Chapter 1, The Intergovernmental Panel on Climate Change (“IPCC”), https://ww w.ipcc.ch/sr15/faq/faq-chapter-1/ (last visited April 11, 2022). (Specifically, the Paris Agree ment’s aim is to create a global response against the threat of climate change by preventing a global average temperature increase of more than 2°C above pre-industrial levels (1850-1900), but aiming to limit temperature increase to no more than 1.5°C. In 2017 human activity reached about 1°C increase compared to pre-industrial levels and is expected to reach 1.5°C by 2040. Per the IPCC’s “Special Report on Global Warming of 1.5°C” such a temperature increase would have drastic negative impacts on the human popula tion, countries, economies, weather events, food security, ecosystems, and vulnerable natural areas. The IPCC report contains more about the negative impacts of global warming on natural and human systems: https://www.ipcc.ch/sr15/ch apter/chapter-3/) 8 COP26 Outcomes: Market mechanisms and non-market approaches (Article 6), United Na tions Framework Convention on Climate Change

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(“UNFCCC”), (2021), https://unfccc.int/process and-meetings/the-paris-agreement/the-glasgow-c limate-pact/cop26-outcomes-market-mechanism s-and-non-market-approaches-article-6#eq-1. 9 Blinken, Antony J., The United States Officially Rejoins the Paris Agreement, U.S. Department of State, (2021), https://www.state.g ov/the-united-states-officially-rejoins-the-paris-a greement/. 10 Fact Sheet: President Biden Renews U.S. Leadership on World Stage at U.N. Climate Conference (COP26), The White House Briefing Room, (2021), https://www.whitehouse.gov/brie fing-room/statements-releases/2021/11/01/fact-s heet-president-biden-renews-u-s-leadership-on world-stage-at-u-n-climate-conference-cop26/#: ˜:text=The%20framework%20will%20set%20th e,jobs%20and%20advances%20environmental %20justice. (The U.S. committed to help meet the 1.5°C goal by ensuring that by the year 2050, it removes as many emissions as it produces per year. It will try to achieve that goal in stages. The goal of the next stage is to reduce emissions to 50-52% of levels emitted in 2005 by the year 2030. These climate goals are being implemented via executive orders as Congress has yet to adopt the Paris Agreement.) 11 Mandatory & Voluntary Offset Markets, Greenhouse Gas Management Institute’s and Stockholm Environment Institute’s Carbon Off set Guide, https://www.offsetguide. org/understanding-carbon-offsets/carbon-offset programs/mandatory-voluntary-offset-markets/ (last visited April 11, 2022). 12 These Carbon offsets are mostly traded over-the-counter (“OTC”) on bilateral basis, meaning directly between parties. In addition to the OTC market for compliance emission reduc tion products, a derivatives market has also developed and is regulated by the Commodity Futures Trading Commission (“CFTC”), a sub ject not covered here. 13 What is a Carbon Offset?, Greenhouse Gas Management Institute’s and Stockholm Environ ment Institute’s Carbon Offset Guide, https://ww w.offsetguide.org/understanding-carbon-offsets/ what-is-a-carbon-offset/ (last visited April 11,

2022). 14 Voluntary Offset Programs, Greenhouse Gas Management Institute’s and Stockholm Environment Institute’s Carbon Offset Guide, https://www.offsetguide.org/understanding-carb on-offsets/carbon-offset-programs/voluntary-off set-programs/#:˜:text=Voluntary%20carbon%20 markets%20enable%20businesses,the%20volunt ary%20or%20compliance%20markets (last visited April 11, 2022). 15 The VSC Program, Verified Carbon Stan dard (Verra), https://verra.org/project/vcs-prog ram/ (last visited April 8, 2022). 16 Securities and Exchange Commission (“SEC”), The Enhancement and Standardization of Climate-Related Disclosures for Investors (“Proposed Rule”), at 1 (March 21, 2022), http s://www.sec.gov/rules/proposed/2022/33-11042. pdf. 17 Id. at 81. 18 Butler, Desmond, et. al., Can the Market Save the Planet? FedEx is the Latest Brand Name Firm to Say It’s Trying, Energy Policy Institute at the University of Chicago (“EPIC”) (March 5, 2021), https://epic.uchicago.edu/news/ more-than-50-companies-have-vowed-to-be-car bon-neutral-by-2040/. 19 DOE Fact Sheet: The Bipartisan Infrastructure Deal Will Deliver For American Workers, Families, and, Usher in the Clean Energy Future, Department of Energy (“DOE”) (November 9, 2021), https://www.energy.gov/art icles/doe-fact-sheet-bipartisan-infrastructure-dea l-will-deliver-american-workers-families-and-0. 20 Understanding the carbon offset market, CME Group, https://www.cmegroup.com/educat ion/courses/understanding-cbl-global-emissions offset-futures/cbl-global-emissions-offset-geo-fu tures-product-overview.html (last visited April 8, 2022). 21 CBL Global Emissions Offset futures (“GEO”) FAQ, CME Group, https://www.cmegr oup.com/education/articles-and-reports/cbl-glob al-emissions-offset-futures-faq.html#two (last visited April 8, 2022). 22 Daily Energy Volume and Open Interest,

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CME Group (June 10, 2022), https://www.cmegr oup.com/market-data/volume-open-interest/ener gy-volume.html. 23 CBL Global Emissions Offset futures (“GEO”) FAQ, CME Group, https://www.cmegr oup.com/education/articles-and-reports/cbl-glob al-emissions-offset-futures-faq.html#two (last visited April 8, 2022). 24 The CBB Standards are an initiative by Conservative International, CARE, the Nature Conservancy, Rainforest Alliance, and Wildlife Conservation Society to promote land manage ment activities and they are the accepted stan dard for AFOLU projects. It enables investors and policymakers to evaluate land-based climate change mitigation projects and suggest best prac tices that also help local communities and biodi versity while providing carbon offsets. When combined with Verra, the CCB Standards provide a basis to evaluate a project’s social and environ mental impact, while Verra enables verification and registration of quantified GHG emission reductions. They ensure projects with unaccept able social and environmental impacts are screened out for additional investor assurances. The CCB Program, Verified Carbon Standard (Verra), https://verra.org/project/ccb-program/ (last visited April 11, 2022). 25 N-GEO Futures—ANatural Solution, CME Group (June 21, 2021), https://www.cmegroup.c om/education/articles-and-reports/geo-futures-a natural-solution.html. 26 Daily Energy Volume and Open Interest, CME Group (June 10, 2022), https://www.cmegr oup.com/market-data/volume-open-interest/ener gy-volume.html. 27 ICE Launches its Frist Nature-Based Solu tions Carbon Credit Future Contract, ICE (May 9, 2022), https://ir.theice.com/press/news-details/ 2022/ICE-Launches-its-First-Nature-Based-Solu tions-Carbon-Credit-Futures-Contract/default.a spx. 28 CME Group to Launch CBL Core Global Emissions Offset Futures, CME Group (“Feb 8, 2022), https://www.cmegroup.com/media-room/ press-releases/2022/2/08/cme_group_to_ launchcblcoreglobalemissionsoffsetfutures.html.

29 Taskforce on Scaling Voluntary Carbon Markets (“TSVCM”), Institute of International Finance, https://www.iif.com/tsvcm# (last visited April 11, 2022). (The Taskforce on Scaling Vol untary Carbon Markets is a private sector initia tive with over 450 members, including the Insti tute of International Finance, working to scale an effective voluntary carbon credit market to meet the Paris Agreement goals.) 30 Voluntary Emissions Offset Futures FAQs, CME Group (February 8, 2022), https://www.cm egroup.com/articles/2022/voluntary-emissions-o ffset-futures-faq.html 31 Daily Energy Volume and Open Interest, CME Group (June 10, 2022), https://www.cmegr oup.com/market-data/volume-open-interest/ener gy-volume.html. 32 MCO2 The world’s first and most liquid carbon credit token, Moss, https://mco2token.mo ss.earth/ (last visited April 11, 2022). 33 Base Carbon Tonne (“BCT): a new Web3 building block, Toucan Protocol (December 22, 2021), https://medium.com/toucan-nest/base-car bon-tonne-bct-a-new-web3-building-block-cae 76bca25fd. (“Toucan BCT”) 34 The Nori Token, Nori, https://nori.com/t oken (last visited April 11, 2022); Also see A blockchain-based marketplace for removing carbon dioxide from the atmosphere (“Whitepa per”), Nori, https://nori.com/resources/white-p aper (last visited April 11, 2022). 35 Unlocking the World’s Environmental Asset Markets Whitepaper, Veridium (January 23, 2019) https://www.veridium.io/static/whitepa per.pdf. Also see Veridium to Use IBM Blockchain Technology to Create Social and Environmental Impact Tokens, IBM (May 15, 2018) https://newsroom.ibm.com/2018-05-15-Ve ridium-to-Use-IBM-Blockchain-Technology-to Create-Social-and-Environmental-Impact-Token s-1; Bradi, Jay, Veridium To Launch Its New Crypto Token On Pancakeswape (December 11, 2021), https://thedial.co/news/331/veridium-to-l aunch-its-new-crypto-token-on-pancakeswape/; Veridium Frequently Asked Questions, Veridium (November 13, 2018), https://medium.com/verid ium-labs/veridium-frequently-asked-questions-b

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or other reporting obligations. Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement;” Mixed Swaps; Security-Based SwapAgreement Record keeping, Joint Final Rule, 77 Fed.Reg. 48208 at 48232-48235 (August 13, 2012).

8c8a640d228. 36 Climatecoin Whitepaper. Climatecoin (September 2017) at 5, https://www.climateactio n.org/images/uploads/documents/CLIMATECOI N-WHITEPAPER-1.pdf 37 Toucan BCT. 38 Ecosystem, KlimaDAO, https://docs.klima dao.finance/klima-dao-ecosystem (last visited on April 11, 2022). 39 Carbonized.xyz (@CarbonizedNFT), Twit ter (December 2, 2021, 4:00 PM), https://twitter. com/CarbonizedNFT/status/ 1466512574095106052. 40 When buying NFTs representative of car bon offsets, clients should ensure they understand their copyright and trademark rights, since NFTs raise a variety of intellectual property issues not covered by this article. 41 17 C.F.R. § 1.3 (2022). 42 The CFTC published a 2012 Product Re lease in the aftermath of the Dodd-Frank Act, which clarified the application of the broad defi nition of the term “swap” in the Commodity Exchange Act to particular types of products and explained what fell under the forward exclusion from the definition of the swap. The CFTC Re lease discussed environmental commodities, like carbon offsets. Specifically, given the new defi nition of “swap,” many commentators wanted to know if environmental commodities were within the definition or fell within the forward contract exclusion. The CFTC did not define environmen tal commodities, but provided guidance as to when environmental commodities could be con sidered intangible commodities and would qualify for the forward contract exclusion as non financial commodities if physically delivered. The CFTC explained that if an environmental commodity qualifies as an intangible commodity and it is physically delivered pursuant to the contract of sale, then it would be excluded and not be subject to CFTC jurisdiction (except in cases of fraud and manipulation). If it does not meet the requirements for intangible commodity or is not otherwise excluded, it may come within the swap definition and be subject to CFTC swap

43 Id. at 48,233 & n. 267. 44 Id. at 48,228 & n. 212. 45 Id. at 48,228 & n. 213.

46 Keynote of Chairman Rostin Benham at the FIA Boca 2022 International Futures Industry Conference, Boca Raton, Florida, CFTC (March 16, 2022), https://www.cftc.gov/PressRoom/Spe echesTestimony/opabehnam21 [hereinafter “Boca Keynote”]; H.R. 4173, 111th Cong. (2010). 47 Id . 48 “CFTC Announces Voluntary Carbon Mar kets Convening,” CFTC (May 11, 2022), ht tps: / /www.cf tc. gov/PressRoom/PressReleases/8525-22. 49 Request for Information on Climate Related Financial Risk. Requestion for Informa tion, 87 Fed.Reg. 34856 at 34857 (June 8, 2022). 50 Id. at 34,860. 51 “Testimony of CFTC Chairman Timothy Massad before the U.S. Senate Committee on Agriculture, Nutrition & Forestry,” CFTC, De cember 10, 2014, http://www.cftc.gov/PressRoo m/SpeechesTestimony/opamassad-6. See also “CFTC Backgrounder on Oversight of and Ap proach to Virtual Currency Futures Markets,” CFTC, January 4, 2018, https://www.cftc.gov/sit es/default/files/idc/groups/public/@newsroom/d ocuments/file/backgrounder_virtualcurrency01.p df. 52 A large number of the more than 600 whistleblower tips the CFTC received between October 2021 and March 2022 concerned alleged cryptocurrency fraud. Since 2014 the CFTC has attempted to use its limited fraud and manipula tion authority in the digital assets space to bring 50 enforcement actions, oversee digital asset based derivatives products, and establish internal functions to keep up with the innovations in this

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space. See Boca Keynote . 53 Testimony of Chairman Rostin Behnam Regarding “Examining Digital Assets: Risks, Regulation, and Innovation,” U.S. Senate Com mittee on Agriculture, Nutrition, and Forestry, CFTC (February 9, 2022), https://www.cftc.gov/ PressRoom/SpeechesTestimony/opabehnam20). 54 Id. 55 Examining Digital Assets: Risks, Regula tion, and Innovation Before the S. Comm. On Agriculture, Nutrition, & Forestry, 117th Cong. (2022) (statement of Rostin Behnam, Chairman, CFTC), available at https://www.agriculture.sena te.gov/hearings/examining-digital-assets-risks-re gulation-and-innovation. 56 Lummis, Gillibrand Introduce Landmark Legislation to Create Regulatory Framework for Digital Assets. Press Release. Kirsten Gillibrand United States Senator For New York. (June 7,

2022), https://www.gillibrand.senate.gov/news/p ress/release/-lummis-gillibrand-introduce-landm ark-legislation-to-create-regulatory-framework-f or-digital-assets. 57 15 U.S.C.A. § 77(b) (2022). 58 S.E.C. v. W.J. Howey Co. , 328 U.S. 293 at 301, 66 S. Ct. 1100, 90 L. Ed. 1244, 163 A.L.R. 1043 (1946). Also see S.E.C. v. Edwards , 540 U.S. 389 at 393, 124 S. Ct. 892, 157 L. Ed. 2d 813, Fed. Sec. L. Rep. (CCH) P 92656 (2004). 59 Joy, John, The Race to Regulate Crypto: CFTC vs. SEC, Jurist (November 24, 2021, 7:44 AM) https://www.jurist.org/commentary/2021/ 11/john-joy-crypto-sec/ 60 Matter of Munchee Inc. , Release No. 33, 10445, Release No. 10445, 118 S.E.C. Docket 975, 2017 WL 10605969 (S.E.C. Release No. 2017)

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