CFTC Issues Landmark Guidance on Voluntary Carbon Credit Derivatives

Implications and Future Outlook

On September 20, 2024, the Commodity Futures Trading Commission (CFTC) released its long-awaited, non-binding guidance on voluntary carbon credit (VCC) derivative contracts. This pivotal document aims to provide regulatory clarity for designated contract markets (DCMs) without imposing new obligations or altering existing rules.

Why "regulate" VCMs?

The CFTC's move to provide guidance on VCMs stems from the growing importance of carbon markets in climate finance and the need to ensure their integrity. By addressing potential issues such as fraud, manipulation, and quality concerns, the CFTC aims to enhance the credibility and effectiveness of these markets as tools for climate action.

What does the CFTC guidance say and do?

Key aspects of the guidance include:

1. Emphasis on quality standards for VCCs, focusing on transparency, additionality, permanence, and robust quantification.
2. Clarification that CFTC jurisdiction extends only to VCC derivatives, not spot or secondary markets.
3. Recognition of industry-led standards, such as those set by the Integrity Council for the Voluntary Carbon Market (IC-VCM).
4. Guidance for DCMs on contract design and listing processes, particularly for physically-settled VCC derivatives.

The guidance does not impose new obligations but provides a framework for DCMs to consider when listing VCC derivative contracts.

Who is impacted by the CFTC guidance?

While the guidance directly applies to CFTC-regulated DCMs, it has broader implications:

1. DCMs and futures contract drafters must consider the guidance when developing and listing VCC derivatives.
2. Carbon registries, though unregulated, may need to align their practices with the guidance to remain relevant in the market.
3. Market participants, including traders and investors, will be indirectly affected by the resulting changes in market structure and product offerings.

Implications and future outlook

1. Market integrity: The guidance is likely to enhance the credibility of VCC markets, potentially attracting more participants and capital.
2. Standardization: It may lead to greater uniformity in VCC quality and contract specifications across different platforms.
3. International influence: The CFTC's approach could shape global discussions on VCM regulation, particularly at the upcoming UNFCCC COP 29 conference.
4. Regulatory evolution: The guidance may be subject to Congressional review under the Congressional Review Act when the new Congress convenes in January 2025.
5. Broader regulatory landscape: This guidance, along with other recent CFTC actions, signals a more proactive approach to overseeing emerging markets related to climate finance.

As the voluntary carbon market continues to evolve, market participants should closely monitor regulatory developments and ensure their practices align with the CFTC's guidance to mitigate risks and capitalize on opportunities in this growing sector.

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Article by Euisung Lee, Asuene Global Business team. Asuene Global Business team, the global sustainability intelligence team at Asuene, acts as the guidepost through the evolving landscape of corporate sustainability. The Asuene Global Business team identifies emerging trends and regulations in decarbonization, climate policy, and broader ESG matters. This knowledge is translated into actionable insights through white papers, articles, webinars, and regular updates on our website and social media.