By Mandy Rambharos, Vice President, Global Climate Cooperation
A high-integrity carbon market can play a significant role in reducing global greenhouse gas emissions. But carbon mitigation should not be the only ‘win’ that comes from the purchase of high-quality carbon credits. Benefits-sharing and social safeguards deliver the durability and longevity we need for any achieved emissions reductions, while paving the way for greater market integrity, effective environmental management, and empowerment of communities most vulnerable to the adverse effects of climate change.
Yet, the economic value of benefits-sharing is chronically overlooked, including within the latest draft guidance on fair and equitable trading of voluntary carbon credits from the Commodity Futures Trading Commission (CFTC).
Benefits-sharing omitted from key regulations
During COP28, the CFTC issued proposed guidance applicable to voluntary carbon credit derivative contracts listed on designated contract markets (DCMs). In the draft regulation, the CFTC requires designated contract markets to establish and enforce rules to protect markets and market participants from abusive practices, and to promote fair and equitable trading on the DCM. This is a positive and welcome move by the CFTC.
However, the draft guidance did not articulate the CFTC’s expectation that carbon crediting programs conform to or exceed best practices on social and environmental safeguards. This is a significant omission.
By leaving out social safeguards and benefits-sharing, the CFTC is missing a critical opportunity to ensure that farmers, foresters, ranchers and their communities are protected from abusive practices including conflicts of interest, misrepresentation, and exploitation.
What is benefits-sharing?
Benefits-sharing and social safeguards ensure that the people—from farmers, to Indigenous Peoples, to rural communities—who are directly impacted by carbon credit projects understand the terms of their engagement, are included in participatory processes, and receive tangible benefits, from shared revenue to improved livelihoods.
Revenue from the sale of carbon credits typically results in community investments such as improvements to critical infrastructure, increasing educational opportunities for youth, supporting economically resilient jobs, and providing training, upskilling and capacity-building opportunities. High-quality credits should reflect the importance of participatory decision-making processes, which is only possible with transparent contract terms.
It is critical that benefit-sharing provisions and clear broker/intermediary fee structures are prioritized – not peripheral. These are economically significant elements of carbon credits that foster long-term emissions reductions and community resilience.
Social safeguards: ‘must-haves’ for a high-integrity carbon market
For market integrity: Clearly defined contract terms and intermediary fee structures increase transparency, ensuring farmers, ranchers and foresters understand the terms of the contract, and what they stand to gain. Credibility may also be bolstered in the process. Crediting standards that establish robust safeguards against displacement, exploitation, and unfair deals benefit people on the ground, and can protect credit buyers from reputational risk and greenwashing. This can ultimately increase investment attractiveness for responsible investors and buyers who seek ethical, credible, and transparent credits.
For the climate: With community buy-in, producers are more invested in the project’s success and are more likely to follow through on commitments to continue lowering carbon emissions reductions long term. Long-term reductions can provide co-benefits like biodiversity conservation for broader positive environmental impacts, as well as the improvement of water quality and more efficient usage of water. Clear benefits-sharing plans may also prevent land disputes and protect farmer and producer rights, indigenous land rights, and cultural practices. These conditions foster a more stable environment for contract performance, ultimately bolstering the durability of the credit’s climate benefits.
For social justice: Sharing benefits ensures project developers are not the only ones who profit, fostering trust and long-term engagement with local communities. Communities affected by climate change, often those least responsible, deserve to share in the benefits of emissions reductions. These benefits should center around community empowerment, with beneficiaries having ownership over the distribution of funds to invest in development programs.
A pivotal moment for the carbon market and communities
CFTC guidance has come at a critical time for the voluntary carbon market. While interest in voluntary carbon markets is surging, business leaders are still reluctant to invest deeper due to the market’s lack of regulation and transparency requirements. Financial market regulators like CFTC are uniquely situated to help rebuild trust and boost integrity of the voluntary carbon market.
Now is the time for CFTC to include regulatory language on safeguards and benefits-sharing in its proposed guidance. By clarifying expectations for market transparency and benefits-sharing, CFTC can ensure that carbon credits in voluntary carbon markets deliver on their climate claims and contribute to a more just, equitable, and effective low-carbon future.