CFTC Guidance will Strengthen Voluntary Carbon Credits

Today, the Commodity Futures Trading Commission (CFTC) issued its finalized guidance for regulated exchanges listing carbon credit-based derivatives. While voluntary, this new guidance clarifies the CFTC's expectations for the quality of carbon credits eligible for delivery into futures contracts, representing a significant step toward strengthening integrity in the voluntary carbon market (VCM).

"Financial regulators like the CFTC play a crucial role in boosting trust, accountability, and fairness," said Holly Pearen, Lead Counsel at EDF. "It's clear that the Commissioners listened to the full spectrum of stakeholders, and deftly threaded the needle for oversight of a nascent market. This guidance lays important groundwork for protecting participants from fraud and manipulation, helping to build a transparent, reliable marketplace that can scale climate solutions and manage climate risk. EDF looks forward to working with partners and regulators to build on this momentum to accelerate global emissions reductions."

Background:

The CFTC's new guidance reflects two years of input gathering from stakeholders and public consultations and addresses key concerns around market transparency and credit quality, which are vital for ensuring long-term sustainability in the VCM.

The finalized guidelines for designated contract markets (DCMs) that list futures contracts based on voluntary carbon credits reflect the Core Carbon Principles established by the Integrity Council for the Voluntary Carbon Market (ICVCM) of additionality, permanence, robust quantification of emissions reductions and removals, no double counting, effective governance, tracking, transparency, and robust independent third-party validation and verification.

Importantly, to assist DCMs that lack specialized and technical expertise relevant to voluntary carbon credits, the Commission acknowledged that industry-recognized standards for high-integrity voluntary credits, such as the ICVCM, can serve as tools for evaluating the quality of underlying credits.

In response to comments from EDF and many others, the Commission noted that social and environmental safeguards and net zero alignment were important elements of credit quality. Therefore, when addressing quality standards, DCMs may consider "whether the crediting program for underlying VCCs has implemented measures to help ensure that credited mitigation projects or activities (i) meet or exceed best practices on social and environmental safeguards, and (ii) would avoid locking in levels of GHG emissions, technologies or carbon intensive practices that are incompatible with the objective of achieving net zero GHG emissions by 2050."