{"id":23774,"date":"2023-12-21T19:28:39","date_gmt":"2023-12-22T00:28:39","guid":{"rendered":"https:\/\/blogs.edf.org\/climate411\/?p=23774"},"modified":"2023-12-21T19:28:39","modified_gmt":"2023-12-22T00:28:39","slug":"futures-of-the-voluntary-carbon-market-how-cftc-guidance-can-shift-carbon-credits-toward-higher-integrity","status":"publish","type":"post","link":"https:\/\/blogs.edf.org\/climate411\/2023\/12\/21\/futures-of-the-voluntary-carbon-market-how-cftc-guidance-can-shift-carbon-credits-toward-higher-integrity\/","title":{"rendered":"Future(s) of the Voluntary Carbon Market: How CFTC Guidance Can Shift Carbon Credits Toward Higher Integrity"},"content":{"rendered":"

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.<\/span>\u00a0<\/span><\/p>\n

CFTC\u2019s 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 The draft guidance adapts terminology, concepts and standards from the Integrity Council for the Voluntary Carbon Market\u2019s Core Carbon Principles, a global benchmark for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.\u00a0<\/span>\u00a0<\/span><\/p>\n

Carbon market oversight by financial market regulators like the CFTC<\/a> is a new\u2014but promising\u2014development in a market that has experienced increased media and public scrutiny in the past year. <\/span><\/p>\n

This oversight can help boost integrity, improve transparency and build back trust in the voluntary carbon market as a viable tool for carbon finance. <\/span><\/p><\/blockquote>\n

While there\u2019s more to be done, this is a significant step in the right direction.<\/span>\u00a0<\/span><\/p>\n

How could the CFTC\u2019s guidance help accomplish these goals? We break down the guidance in this blog and answer key questions about the impact it might have: <\/span>\u00a0<\/span><\/p>\n

Why Does the Guidance Focus on Futures Contracts and DCMs and How does this relate to the VCM?<\/span><\/b>\u00a0<\/span><\/p>\n

CFTC has jurisdiction over secondary or futures markets and oversees them through regulation and guidance applicable to designated contract markets. <\/span>F<\/span>utures contracts are legal agreements to buy or sell assets (usually commodities or shares) at a fixed price for delivery at some later date.\u00a0<\/span>\u00a0<\/span><\/p>\n

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.\u00a0<\/span>\u00a0<\/span><\/p>\n

The voluntary carbon market, as typically understood, represents the primary, or spot market. The majority of voluntary carbon credits trade \u201cover the counter\u201d (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.\u00a0<\/span>\u00a0<\/span><\/p>\n

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 <\/span>NYMEX CBL\u2019s Global Emissions Offset (GEO), Nature-Based Global Emissions Offset (N-GEO) and .Core Global Emissions Offset (C-GEO).<\/span><\/a>\u00a0<\/span>\u00a0<\/span><\/p>\n

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.\u00a0<\/span>\u00a0<\/span><\/p>\n

What does the CFTC\u2019s Draft Guidance Do?<\/span><\/b>\u00a0<\/span><\/p>\n

CFTC\u2019s proposed guidance for the voluntary carbon market sets forth the Commission\u2019s expectations for how DCMs should develop terms and conditions for carbon credit derivatives contracts. Building on <\/span>existing CFTC guidance<\/span><\/a>, which requires that the terms and conditions of a listed futures contract \u201cdescribe or define all of the economically significant characteristics or attributes of the commodity underlying the contract,\u201d 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.\u00a0<\/span>\u00a0<\/span><\/p>\n

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.<\/span>\u00a0<\/span><\/p>\n

Quality of the Underlying VCC<\/span><\/i>\u00a0<\/span><\/p>\n

Listed futures contracts must outline the characteristics or attributes of whatever asset is being promised, in an effort to ensure the buyer gets to\u00a0assess 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\u2019s quality, including transparency, additionality, permanence and risk of reversal, and robust quantification.\u00a0<\/span>\u00a0<\/span><\/p>\n

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:\u00a0<\/span>\u00a0<\/span><\/p>\n