The US Commodity Futures Trading Commission (CFTC) has proposed the first federal guidelines for voluntary carbon credit derivatives, as reported by Reuters on December 5. The guidance outlines how the CFTC’s rules apply to the nascent market of voluntary carbon credit derivatives, aiming to advance the standardization of this emerging asset class to enhance transparency, risk management, liquidity, accurate pricing, and market integrity. According to CFTC chair Rostin Behnam, the agency aims to ensure that such derivatives are “real, additional, permanent, and verifiable”, and can represent unique tons of greenhouse gas emissions reduced or removed from the atmosphere.

The existing USD414bn global voluntary carbon market has been criticized as lacking transparency and easy to be manipulated by fraudsters without legislation in place. Many carbon offsetting companies selling carbon credits overstate or intentionally miscalculate the amount of carbon offset, raising concerns about the reliability and credibility of derivative products built upon these underlying assets. The CFTC’s guidance is seen as the first step toward promoting the integrity of the carbon credit market and could pave the way for crafting new rules. Recently, the International Organization of Securities Commissions (IOSCO) also proposed 21 safety measures to improve integrity, transparency, and enforcement in voluntary carbon markets, seeking to standardize terminology in this emerging market.

Sources:

https://www.reuters.com/world/us/us-commodity-regular-proposes-plan-boost-scrutiny-carbon-credit-markets-2023-12-04/

https://www.cftc.gov/PressRoom/PressReleases/8829-23

https://www.ft.com/content/00068301-9d06-433b-8832-26a40639e658

https://www.reuters.com/sustainability/global-regulators-propose-tougher-scrutiny-voluntary-carbon-markets-2023-12-03/