{"id":23699,"date":"2023-12-04T18:40:48","date_gmt":"2023-12-04T23:40:48","guid":{"rendered":"https:\/\/blogs.edf.org\/climate411\/?p=23699"},"modified":"2023-12-04T18:48:22","modified_gmt":"2023-12-04T23:48:22","slug":"financial-market-regulators-release-vcm-guidance","status":"publish","type":"post","link":"https:\/\/blogs.edf.org\/climate411\/2023\/12\/04\/financial-market-regulators-release-vcm-guidance\/","title":{"rendered":"Financial Market Regulators Release Guidance Contemplating Oversight of VCM"},"content":{"rendered":"

This blog was authored by Holly Pearen<\/a>, Lead Counsel for People & Nature\u00a0at the Environmental Defense Fund.<\/em><\/p>\n

Proposed Guidance from Financial Market Regulators Could Improve Integrity and Transparency in the Voluntary Carbon Market<\/span><\/i><\/em><\/p>\n

Many of the world\u2019s largest companies<\/span><\/a> have committed to net zero, and high-quality carbon credits are increasingly<\/span> seen as a key tool<\/span><\/a> for meeting ambitious climate commitments. As a result, interest in voluntary carbon markets is surging: A<\/span> 2023 survey<\/span><\/a> found that nearly nine in 10 business leaders see carbon credits as an important component of corporate sustainability strategies.\u00a0<\/span><\/p>\n

However,<\/span> almost 40% of the companies surveyed<\/span><\/a> noted that the voluntary carbon market\u2019s \u201clack of regulation and transparency requirements\u201d prevented deeper investment and indicated that improvements in price and intermediary transparency would increase their use of carbon credits as part of a wider sustainability strategy. Financial market regulators are in a unique position to directly address this significant barrier to investment and help rebuild trust, boost integrity and add critical investor protections in the voluntary carbon market.<\/span><\/p>\n

Two proposals released in early December outline the important role of financial market regulators and offer specific suggestions for action.<\/p>\n

<\/p>\n

On Monday, December 4, 2023, the U.S. Commodity Futures Trading Commission (CFTC) released draft guidance for regulated exchanges that list carbon credit based derivatives. While voluntary, the guidance will clarify CFTC\u2019s expectations regarding the quality of carbon credits eligible for delivery into futures contracts.\u00a0<\/span><\/p>\n

Environmental Defense Fund has been deeply involved in, and supported work to raise the bar for carbon credit quality, and welcomes the engagement of the CFTC and other financial market regulators to further these efforts. Notably, the Integrity Council for Voluntary Carbon Markets, an independent governance body for the voluntary carbon market, recently released its <\/span>Core Carbon Principles<\/span><\/a>, a set of 10 criteria that serve as a global benchmark for high-integrity carbon credits. The CCPs set rigorous thresholds for carbon-crediting program governance, emissions impacts, and sustainable development.\u00a0<\/span><\/p>\n

To the extent that CFTC guidance mirrors these principles, and principles established by similarly diligent governance bodies, both buyers and sellers can benefit from a shared understanding of the characteristics of high-integrity carbon credits. This should raise the bar on credit quality, and foster transparency, liquidity, accurate pricing and market integrity as carbon credit derivative contracts become more standardized.<\/span><\/p>\n

The publication of CFTC\u2019s draft guidance coincides with the unveiling of a <\/span>Voluntary Carbon Markets Consultation Report from the International Organization of Securities Commissions<\/span><\/a> (IOSCO). The IOSCO Voluntary Carbon Markets Consultation Report identifies potential vulnerabilities in the primary and secondary voluntary carbon credit markets, and addresses the role financial regulators may play in promoting sound, liquid, fair and stable primary and secondary carbon credit markets.\u00a0<\/span><\/p>\n

IOSCO proposes a set of 21 Good Practices, based on insights from existing traded asset markets. While CFTC\u2019s draft guidance leverages existing authority over secondary markets to drive improvements in carbon credit integrity, IOSCO\u2019s proposed Good Practices suggest that relevant regulators consider a broader role in improving voluntary carbon market infrastructure. Examples of well-reasoned and potentially impactful activities include:\u00a0<\/span><\/p>\n