Derivatives regulator sets basic standards amid concerns about greenwashing and ineffective offsets
The U.S. Commodity Futures Trading Commission (CFTC) adopts the first guidelines to regulate the voluntary carbon offset derivatives market.
This is a significant step by the Biden administration to standardize an unregulated market that plays a key role in climate change mitigation. The guidelines aim to promote transparency and integrity by ensuring that exchanges validate carbon offset derivatives, which are financial instruments companies use to offset emissions.
Key points include:
- The market for carbon credits is predicted to grow from $2 billion today to $100 billion by 2030, despite concerns about its credibility.
- The CFTC’s new guidelines seek to prevent manipulation and price distortions, and ensure compliance with both CFTC regulations and U.S. law.
- Exchanges are encouraged to verify that carbon offset projects actually reduce emissions and to prevent double-counting of carbon credits.
- Treasury Secretary Janet Yellen praised the guidelines as a way to foster transparency and liquidity in the market, while former Bank of England governor Mark Carney urged global regulators to follow the CFTC’s lead.
- The Biden administration sees carbon credits as a way to attract private capital for renewable energy and conservation, though there are still concerns about greenwashing and the effectiveness of offsets in delivering genuine carbon reductions.
Previously during the Summer, Treasury secretary Janet Yellen unveiled guidelines for developers selling credits, and for the companies buying them to offset emissions.
The voluntary carbon market is vital in the push toward renewable energy, but its credibility challenges have hindered its growth. These new guidelines are aimed at addressing those concerns while acknowledging that the transition to renewable energy will take time.
The unregulated market for carbon credits is estimated to grow to $100bn by 2030, up from $2bn this year, according to Morgan Stanley. But the voluntary carbon derivatives market has languished, with only a handful of contracts attracting substantial trading volume due to concerns about credibility.
“We actually have a legal responsibility to ensure the health and transparency of both the derivative side, but also the underlying cash market,” CFTC chair Rostin Behnam told the Financial Times.
The guidance puts the onus on exchanges registered with the agency to ensure the integrity of voluntary carbon credit derivatives. Exchanges should consider whether a contract ensures that a project creates emission reductions that would not occur without it. They should also seek to ensure there is no “double-counting”, which occurs when multiple carbon credits are backed by the same trees, for example.
The guidance “will help professionalise and scale voluntary carbon markets,” said Mark Carney, the UN special envoy on climate action and finance and former Bank of England governor. “Other global regulators should now follow the CFTC’s lead.”
The Commission’s final guidance announced today is the product of a strong public-private partnership that I have strived to achieve with both the CFTC’s traditional stakeholders as well as a variety of voluntary carbon market stakeholders to support transparency, liquidity, and market integrity in the VCC derivatives markets as well as ultimately drive standardization and efficient capital allocation to scale the underlying cash market for high integrity VCCs.
Rostin Behnam, CFTC Chairman
“The CFTC’s unique mission focused on risk mitigation and price discovery puts us on the front lines of the now global nexus between financial markets and decarbonization efforts. Leveraging the CFTC’s personnel and expertise demonstrates our commitment to taking a thoughtful and deliberate step toward building a financial system that provides effective tools in achieving emission reductions.” said CFTC Chairman Rostin Behnam.
Source: CTFC Press Release, September 20, 2024
