Climate 411

Future(s) of the Voluntary Carbon Market: How CFTC Guidance Can Shift Carbon Credits Toward Higher Integrity

During COP28, the Commodity Futures Trading Commission (CFTC) issued proposed guidance applicable to voluntary carbon credit (VCC) derivative contracts listed on designated contract markets (DCMs). DCMs are self-regulating exchanges that operate under the oversight of the CFTC. By law, they must take measures to protect market participants from abusive practices, promote fair and equitable trading, and ensure that listed contracts are not susceptible to fraud or manipulation. 

CFTC’s latest guidance sets the expectation that when regulated exchanges list voluntary carbon credit futures contracts, that the credit represents an actual ton of carbon dioxide removed or reduced, and there is no double counting. The draft guidance adapts terminology, concepts and standards from the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles, a global benchmark for high-integrity carbon credits that set rigorous thresholds on disclosure and sustainable development. The CFTC guidance also suggests that designated contract markets assess carbon crediting programs and registry policies to source only high-integrity carbon credits.  

Carbon market oversight by financial market regulators like the CFTC is a new—but promising—development in a market that has experienced increased media and public scrutiny in the past year.

This oversight can help boost integrity, improve transparency and build back trust in the voluntary carbon market as a viable tool for carbon finance.

While there’s more to be done, this is a significant step in the right direction. 

How could the CFTC’s guidance help accomplish these goals? We break down the guidance in this blog and answer key questions about the impact it might have:  

Why Does the Guidance Focus on Futures Contracts and DCMs and How does this relate to the VCM? 

CFTC has jurisdiction over secondary or futures markets and oversees them through regulation and guidance applicable to designated contract markets. Futures contracts are legal agreements to buy or sell assets (usually commodities or shares) at a fixed price for delivery at some later date.  

Futures allow sellers and buyers to manage risk by locking in prices, and then scheduling delivery around actual needs. Because futures contracts are accessible to a diverse group of investors, and due to their forward-looking nature, futures markets can be more liquid than spot markets. This means they provide important price signals for buyers and sellers in a given asset class.  

The voluntary carbon market, as typically understood, represents the primary, or spot market. The majority of voluntary carbon credits trade “over the counter” (i.e. party to party in private transactions) or to a more limited extent on platforms that connect sellers with prospective buyers. In most jurisdictions, including the U.S., these markets are not regulated except for limited enforcement of fraud and misrepresentation.  

The secondary market for voluntary carbon credits, in which traders buy and sell credits that meet certain criteria at a set price for delivery on a future date, is nascent but projected to grow. Last month, 18 futures contracts featuring voluntary carbon credits had been submitted to the Commission for listing, including NYMEX CBL’s Global Emissions Offset (GEO), Nature-Based Global Emissions Offset (N-GEO) and .Core Global Emissions Offset (C-GEO).  

Companies that make net zero commitments may use voluntary carbon credit futures contracts to lock in guaranteed prices for carbon credits, with delivery scheduled to coincide with target commitments. Project developers and brokers may also use futures markets to predict carbon credit sale prices for use in financing, or to predict future revenue and supply availability. For all stakeholders, the specific characteristics of the voluntary carbon credits eligible for delivery into a futures contract will affect the price, its ability to satisfy the intention motivating purchases, and ultimate environmental impact.  

What does the CFTC’s Draft Guidance Do? 

CFTC’s proposed guidance for the voluntary carbon market sets forth the Commission’s expectations for how DCMs should develop terms and conditions for carbon credit derivatives contracts. Building on existing CFTC guidance, which requires that the terms and conditions of a listed futures contract “describe or define all of the economically significant characteristics or attributes of the commodity underlying the contract,” the latest guidance suggests that those characteristics include, among other things, (1) the quality of the underlying carbon credit; (2) delivery point(s) and facilities; and (3) inspection provisions.  

For each of these characteristics, the CFTC outlines considerations and criteria that can help promote fair and equitable trading, ensure high integrity, and avoid fraud and manipulation. 

Quality of the Underlying VCC 

Listed futures contracts must outline the characteristics or attributes of whatever asset is being promised, in an effort to ensure the buyer gets to assess whether they are paying a fair price and ultimately receive what they expect. In the draft guidance, the Commission clarified its expectation that DCMs provide detailed information about voluntary carbon credits that are eligible for delivery under listed futures contracts. It also defined the economically and environmentally significant traits that determine a carbon credit’s quality, including transparency, additionality, permanence and risk of reversal, and robust quantification.  

Notably, the Guidance suggests that DCMs can assess and articulate the quality of the carbon credits through eligible carbon crediting programs and project categories. The Commission offers factors that DCMs should consider when evaluating the sufficiency of carbon crediting programs to deliver specified carbon credits, such as whether the crediting programs:  

  • make policies and procedures publicly available and transparent;  
  • assess credits for additionality, and whether methods for assessing additionality are sufficiently rigorous and reliable;  
  • provide reasonable assurance that, in the event of a reversal, the voluntary carbon credits will be replaced, potentially through the use of buffer pools; and  
  • demonstrate that the quantification methodology or protocol used to calculate emission reductions or removals is “robust, conservative and transparent.” 

With these expectations, the Commission aligned the quality standards for listed VCC contracts on regulated exchanges with the generally recognized principles for high-integrity carbon credits, including ICVCM Core Carbon Principles 3, 5, 6, and 7.   

Delivery points  

For physical commodities such as corn, soy or oil, the delivery point location can dramatically impact pricing, and is therefore a critical component of any futures contract. For the first time publicly, the Commission clarified in this draft guidance that registries operated by carbon crediting programs may be construed as “delivery points” to facilitate settlement of carbon credit futures transactions.  

CFTC suggests that in selecting the eligible delivery point (or registry) in a VCC futures contract, designated contract markets should evaluate the registry’s governance framework, tracking mechanisms and measures to prevent double counting. These expectations align with ICVCM’s Core Carbon Principles 1, 2, and 8. 

Inspection Provisions 

Inspection provisions in futures contracts outline the methods used to verify compliance with quality standards. In the draft Guidance, the CFTC suggests that designated contract markets use the inspection provision terms and conditions to incorporate robust independent third-party validation and verification procedures to ensure that the voluntary carbon credits accurately reflect the quality intended. This expectation aligns with ICVCM Core Carbon Principle 4.  

What’s the takeaway? Will it work? 

CFTC’s proposed guidance is an important step towards more transparent, liquid, and robust markets that trade in carbon credits, and may build confidence in the market at a time when its potential to deliver on climate finance potential is in doubt. While the CFTC’s leadership in this area appears to be universally welcomed, the draft guidance has pros and cons.   


  • Speed. The draft Guidance carefully interprets – but does not change, amend or expand on – existing CFTC authority, statutory Core Principles or established regulations. This means that the Commission can act quickly, without requiring additional Congressional approval or lengthy regulatory review processes. Speed has value. If finalized as anticipated in early 2024, the CFTC will have rapidly responded to legitimate concerns about VCM integrity, and if successful may help catalyze investment to contribute to the estimated $6.2 trillion of climate finance required annually between now and 2030 to deliver on net zero targets. 

  • Consistency with Existing Integrity Efforts. The VCM is evolving rapidly, and so are stakeholders’ understanding of, and strategies for, achieving environmental and social integrity. Because the draft Guidance is written in such a way to dovetail with ICVCM’s Core Carbon Principles, DCMs may be able to use ICVCM’s Assessment Framework, CCP-eligibility and eventually the CCP label to demonstrate that contracts comply with CFTC expectations for listed contracts. Leveraging ICVCM’s CCP assessment and label should significantly streamline the burden of compliance for DCMs, as well as the supervisory and oversight obligation of the Commission, eliminating the need for extensive new subject matter expertise and capacity.  


  • Additional Market Infrastructure Issues Remain Unaddressed. In the preamble, CFTC cites Core Principle 12, which requires DCMs 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 statutory obligation closely aligns with ICVCM Core Carbon Principle 9, which pertains to sustainable development benefits and safeguards. However, the body of the draft Guidance, and specific expectations for DCMs, did not articulate CFTC’s expectation that carbon crediting programs eligible to generate and deliver voluntary carbon credits into listed derivatives contracts have clear guidance, tools and compliance procedures to ensure mitigation activities conform or exceed best practices on social and environmental safeguards. 

    This is a significant omission. Social safeguards and transparency around benefit sharing provisions and broker/intermediary fee structures are economically significant attributes of the carbon credits. Sustainable development benefits and safeguards materially influence contract pricing, directly impact the extent to which the credit will be delivered and influence the political durability of those credits. In omitting guidance around Core Principle 12, CFTC is missing a critical opportunity to ensure that farmers, foresters, ranchers and local community members are protected from abusive practices including conflicts of interest and misrepresentation.

    Additionally, as Commissioner Kristin Johnson articulated in her statement accompanying the draft guidance release, climate-related financial risk assessment is an important component of market oversight. See here for more on EDF’s work on climate related financial risk at CFTC.  

  • Enforcement and Efficacy to Be Determined. Compliance with the expectations expressed in the draft Guidance is voluntary and subject to interpretation of, and application by, DCMs. CFTC reminds DCMs that contract submission for CFTC approval must include “an explanation and analysis of the contract and its compliance with applicable [laws] … and the documentation relied upon to establish the basis for compliance.” 

    Whether DCMs will submit requested information, whether that information will be sufficient or rigorously assessed by the Commission, and what the Commission will do in the event terms and conditions are inadequate are outstanding questions. Tracking will be essential to assess whether the caliber of carbon credits delivered into VCC futures contracts improves, and whether this results in a spill over improvement in carbon credit quality in the broader markets. 

  • Reliance on Carbon Crediting Programs. The approach outlined in the draft Guidance relies heavily on assessment of carbon crediting programs, and to a lesser degree categories of carbon credits, rather than due diligence performed on specific carbon credits or project/program development. Given the integrity questions levied around specific registries, this approach indicates that carbon crediting programs and registries are systemically important entities. Success will thus depend on whether these entities are fit for purpose. Seven major carbon crediting programs recently announced plans to coordinate approaches; they would be wise to heed this guidance, lest DCMs lack viable sources for VCCs that satisfy expectations for terms and conditions specifying quality standards, delivery points and inspection.  

Overall, this is a strong proposal, and we welcome the CFTC’s acknowledgment of the importance of high-integrity carbon credits in a robust, transparent and well-functioning market. EDF will continue to engage with stakeholders across the VCM to develop feedback to the Commission, due February 16, 2024.  

Posted in Carbon Markets / Comments are closed

An Opportunity to Strengthen Climate Risk Management in the Derivatives Market

(This post was co-authored by EDF Climate Risk Attorney Elle Stephens)

Disasters that are fueled by climate change, like fires, floods, and hurricanes, increasingly pose risks to the U.S. financial system, including the derivatives market.

The U.S. Commodity Futures Trading Commission (CFTC) regulates the derivatives market and is now considering updates to its risk management regulations. These updates are an important opportunity to ensure that market participants properly manage climate-related financial risks.

Read More »

Posted in News, Partners for Change, Policy / Comments are closed

The Hydrogen Hubs are here. What do communities think about them?

In October, the White House announced the selection of seven Hydrogen Hubs around the U.S. to be a part of the Department of Energy (DOE)’s Regional Clean Hydrogen Hubs Program (H2Hubs), which will deploy $7 billion toward projects over eight to twelve years (or sooner). Launched under the Bipartisan Infrastructure Law, the Hydrogen Hubs program aims to create networks of hydrogen producers, consumers and infrastructure – and is likely to set many precedents that may scale-up in a clean hydrogen economy, ranging from technological strategies to the standard approaches for community engagement. Hub developers now enter their next, more in-depth planning phases to secure the coveted DOE funding and to eventually start building out the Hubs.

Selected regional clean hydrogen hubs

A primary challenge for these programs lies in translating strong technological innovation practices into responsible and collaborative on-the-ground infrastructure projects. This requires extensive engagement and partnership with local communities – a core part of EDF’s BetterHubs objectives – to mitigate potential harms and ensure the projects deliver positive outcomes and avoid additional related burdens for local communities. This is especially salient in the case of environmental justice communities, which have borne the burden of decades of environmental impacts and are a stated priority for DOE’s engagement as part of the Hub’s program.

While all Hub developers are required to engage and negotiate a Community Benefits Plan with communities, there are many details yet to be determined for most Hub proposals – including how best to engage communities, which communities will be impacted, and how to design and populate Community Oversight Committees. Underlying the success of these processes is the assumption that communities are starting from a position of empowerment. Have they been provided with access to information about what hydrogen development is, what it requires, the context that brings these specific projects to their neighborhoods? Have they been made aware or included in the planning of Hub proposals in their area? If they desire additional information and outreach, how would they like to be involved, and what kind of information would they trust and prefer?

EDF partnered with Morning Consult to conduct a survey in early October, during the week when Hub selection announcements were made. We asked community members who were located in zip codes associated with the 22 final stage DOE applications (as identified by Rystad Energy) a range of questions related to their area’s Hydrogen Hub application and received 600 responses.

Read More »

Posted in News / Comments are closed

New York is developing a cap-and-invest program to cut climate pollution. How would it work?

As a major next step in achieving New York’s climate targets, Governor Hochul and state agency officials are developing rules for a cap-and-invest program. A bold and equitable program would aggressively cut climate pollution, while supporting and investing in clean and healthy communities around the state.

This rulemaking could be game-changing for New York — and for the nation.

New York would be the third state in the country to put a declining cap — or limit — on emissions across its economy, building on successful models from California and Washington state. And critically, this program is coming together right as new analysis underscores the need for leading states to follow through on their climate commitments and drive national climate progress.

Here’s what to know about how a cap-and-invest program would work in New York as these rules come together.

Read More »

Posted in Cities and states, Greenhouse Gas Emissions, News / Comments are closed

One year into its cap-and-invest program, Washington state looks to build upon its landmark climate law

Photo of mountain in Washington state

Results were released today for Washington’s fourth quarterly cap-and-invest auction, which was held on December 6th. The results from this sold-out auction show continued strong demand for allowances in the program, which has brought in substantial revenue for the state of Washington to reinvest in its communities. This is the final auction of 2023, marking the end of this program’s first year of auctions, which in total have generated close to $2 billion for Washington communities. The revenue has already begun to be distributed to different projects that benefit communities across the state, including expanding public transportation in rural areas and improving pedestrian and bicyclist safety, with much more investment to come.

December auction results

At the auction, administered by the Department of Ecology (Ecology), participating facilities submitted their bids for allowances. Washington’s major emitters are required to hold one allowance for every ton of greenhouse gas that they emit, with the total number of available allowances declining each year. This declining cap requires Washington’s businesses to reduce their climate pollution in line with the state’s climate targets. Here are the results, released today:

  • All 7,142,146 current vintage allowances offered for sale were purchased, resulting in the 4th consecutive sold out quarterly auction.
  • The current auction settled at $51.89, $29.69 above the floor price of $22.20, and $11.14 below Washington’s last quarterly auction price of $63.03.
  • This auction is projected to generate roughly $370 million in revenue, which will be invested into Washington communities to enhance climate resilience, create jobs, and improve air quality. A report from Ecology confirming the amount of revenue raised in this auction will be published on January 4.

What these results mean

The settlement price for this auction is a very promising indication of strong and stable demand in the Washington market. Covered entities are still eager to acquire allowances early in the program, but the fact that this auction settled below the Allowance Price Containment Reserve (APCR) trigger price shows that those entities also feel more confident in their ability to secure enough allowances or to further reduce their emissions.

The lower settlement price in this auction compared to recent auctions could be driven by a few factors; for one, this could be the result of previous APCR auctions fulfilling their role as price stabilizers in a market with high demand. APCR allowances were budgeted out ahead of time when the cap-and-invest program was originally designed, and they’re still under the overall allowance budget set by Ecology in order to keep Washington on track with its climate targets. Making these additional allowances available at a predetermined and transparent price point through the APCR helps to stabilize allowance prices in the program, and that’s precisely why Ecology designed this feature into the program from the start. Entities who were able to secure additional allowances at the two APCR auctions held this year may have felt more confident in this auction that they don’t need to scramble to out-bid other entities to buy up allowances.

Another factor that may have driven slightly calmer demand in this auction is the recent decision by Washington’s Department of Ecology to officially pursue linkage with the joint California-Quebec market, known as the Western Climate Initiative (WCI). The December auction was the first auction to be held following this decision, and this step towards a larger, linked market with greater access to more allowances may have given covered entities more confidence in their ability to obtain allowances in the future through this broader market. Read on for more information about this milestone decision, what it means, and what’s next!

Looking ahead: Linkage and the legislative session

In case you missed it, early last month the Department of Ecology officially announced its intention to pursue linkage with the California-Quebec market. This decision is a significant milestone in the linkage process, and if California and Quebec follow suit, it would lead to a tri-jurisdictional system operated jointly by all three parties. California, Quebec, and Washington would all be able to pool their supply of emission allowances and hold shared auctions. As we’ve written previously, these jurisdictions all stand to benefit from a linked market as it can drive faster cuts in climate pollution and support a more stable, predictable market for all participants.

Before that happens though, there are a lot of things to get done. California and Quebec each have their own processes to go through and there’s some legislative fine-tuning that Ecology is planning to request in order to make the linkage process as smooth as possible.

That means potentially making small, strategic updates to the Climate Commitment Act (CCA) to build alignment with the joint California-Quebec program, with the goal of making it easier to operate as a single, linked market. The CCA is the landmark climate policy that Washington passed in 2021 that placed a firm, declining limit on climate pollution while also providing new tools for tackling local air pollution and creating the cap-and-invest market. Thanks to the CCA, Washington is one of only a few states in the nation that’s actually on track to meet its targets. Now, state leaders have an opportunity to scale up the state’s climate action by ensuring that Washington’s cap-and-invest market is ready to deliver enhanced climate and cost-savings benefits as part of a linked market.

As things progress in the legislative session, we’ll be keeping an eye on all things CCA and linkage — stay tuned for our updates and analysis!

Posted in California, Carbon Markets, Cities and states, Economics, Energy, Greenhouse Gas Emissions, Policy / Comments are closed

Duke Energy’s proposed investment in fossil fuels will leave customers with higher bills and more pollution

In the last few years, North Carolinians have seen eye-popping electricity bills. Bill increase after bill increase has compounded, resulting in 20+ percent higher monthly bills for most ratepayers in our state. The main driver? The volatile cost of natural gas, which accounts for a larger and larger portion of the energy mix that North Carolinians depend on.

And yet, instead of curbing use of a risk-intensive fuel source that has had such a detrimental effect on customers, Duke Energy is proposing a huge investment to build even more gas power plants. Why? State policy guarantees Duke a profitable return on investment for its spending on infrastructure like power plants. The more costly the investment, the higher the return for the company and its shareholders.

There’s no free market for electricity in North Carolina. With no meaningful competitor to provide customers the option to choose a different energy provider, Duke dominates the market and the company’s expensive investment plans are entirely in line with what should be expected from a profit-seeking monopoly utility taking advantage of a captive customer-base.

North Carolinians deserve the facts about Duke’s decisions, how it impacts their lives and how their leaders can protect them. Here’s what you should know: 

Read More »

Posted in Cities and states / Comments are closed