Pro News

Greens, trade groups scrutinize CFTC effort to bring order to carbon credit trading

BY: AVERY ELLFELDT | 02/20/2024 07:05 AM EST

Federal regulators moved one step closer last week toward finalizing guidelines that are meant to curb fraud in the derivatives markets where voluntary carbon credits are traded.

The Commodity Futures Trading Commission on Friday ended its public comment on the proposed guidance, which the agency unveiled in December. The proposal targets “designated contract markets” with listed climate-related contracts.

The guidance wouldn’t carry the same weight as a regulation. But it’s designed to encourage derivatives markets to verify that climate-related derivatives are based on credits that permanently deliver emissions reductions by financing projects that otherwise would struggle to attract investment.

The public comment period drew input from green groups, trade associations, carbon market registries and more. Many welcomed the agency’s attention to the issue due to prevailing concerns that many carbon credits do not deliver the emissions reductions they promise, and that they can provide companies with cover to continue polluting.

But a range of groups also said the issue the CFTC is trying to address is related almost entirely to carbon credits themselves — as opposed to the derivatives markets they’re traded on.

Commenters said designated contract markets do not have the expertise required to evaluate the quality of carbon credits, and they warned the CFTC against pushing those markets in that direction.

Doing so, some organizations said, could unintentionally chill the market and cut off a key stream of climate finance as temperatures rise.

“Prosecution of market participants … that rely in good faith on the representations of purported third-party experts and validators as to the quality of [voluntary carbon credits] may chill the growth and development” of the markets, wrote the Futures Industry Association, a trade group, in its comment letter.

The CFTC has said its main goal is to prevent fraud and manipulation in derivatives markets by making clear that designated contract markets should consider a range of factors when developing the terms and conditions of a carbon credit-based contract.

Tracking mechanisms, for example, can help ensure underlying credits are credible. The CFTC also said the markets should consider whether underlying carbon credits support emissions reductions that would not have been developed otherwise — and whether those emissions reductions can be considered “permanent.”

There’s widespread agreement that high-quality carbon credits must offer both “additionality” and “permanence.”

But organizations ranging from carbon credit registries to environmental organizations say that verification should be left to external crediting programs. Those programs have been criticized for verifying shoddy credits, but they are working to solidify standards meant to shore up the markets.

Ceres, an environmental nonprofit, was among the groups who welcomed the CFTC’s proposed guidance as a positive step that would push designated contract markets to verify the quality of underlying carbon credits.

But Ceres also suggested the agency make clear that the markets “should rely on crediting programs to demonstrate they have the processes and procedures in place to ensure high-integrity underlying credits” — rather than doing so themselves.

Both the International Emissions Trading Association, a business group known as IETA, and Verra, one of the world’s largest carbon crediting programs, said the same.

Evaluating voluntary carbon credits “requires substantial specialized technical expertise that DCMs may not adequately possess or be reasonably expected to acquire, given their specific roles within the market ecosystem,” Verra wrote in its letter. “As a result, the Proposed Guidance may chill the development of VCMs, as DCMs may be incentivized to take an unnecessarily cautious approach to listing VCC contracts.”

The CFTC will need to review the public comments — and account for them in the proposal — before it can finalize the guidance in the coming months.

Copy link
Powered by Social Snap