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The U.S. derivatives watchdog has finalized the first federal guidelines for unregulated carbon offsets, as the Biden administration seeks to normalize a disorderly market in a bid to combat climate change.
The Commodity Futures Trading Commission adopted measures announced Friday requiring exchanges to validate carbon offset derivatives, which base their prices on financial instruments purchased by companies to offset their emissions.
Treasury Secretary Janet Yellen released a statement Friday welcoming the new guidance as a way to “promote the integrity of carbon credits and enable greater liquidity and pricing transparency.”
The unregulated carbon credit market is expected to reach $100 billion by 2030, up from $2 billion this year, according to Morgan Stanley. But the market for voluntary carbon derivatives is in decline, with only a handful of contracts attracting substantial trading volume due to concerns about their credibility.
“We actually have a legal responsibility to ensure the health and transparency of the derivatives side, but also the underlying cash market,” CFTC Chairman Rostin Behnam told the Financial Times.
The guidelines, initially proposed in December, aim to combat price manipulation and distortions by pushing exchanges to ensure that voluntary carbon credit derivatives comply with CFTC regulations as well as U.S. law.
“With any project of the scale that the carbon market is looking for, you’re going to have error rates and bad actors,” Behnam said.
The CFTC voted 4-1 to adopt the guidelines, with Summer Mersinger, one of the agency’s two Republican commissioners, voting against.
Improving the reputation of carbon markets is a policy priority of the administration of U.S. President Joe Biden, who sees carbon credits as a way to attract more private-sector money to renewable energy and conservation.
While the credits were initially popular with businesses, they also drew criticism for failing to eliminate the carbon emissions they promised.
Earlier this summer, Treasury Secretary Janet Yellen guidelines unveiled for developers who sell credits and for companies that buy them to offset emissions. Former U.S. climate envoy John Kerry has also thrown his support behind carbon credit markets, launching a State Department-led initiative in 2022 aimed at decarbonizing regional energy sectors.
Despite the political momentum behind efforts to develop voluntary carbon markets, Behnam warned that the energy transition would “take decades.”
“The idea that we’re going to be able to transition to renewable energy in the near future and not rely on carbon-based energy sources… that’s not the reality, is it?” Behnam said. “The transition is going to take time.”
These guidelines impose on exchanges registered with the agency the responsibility of ensuring the integrity of products derived from voluntary carbon credits.
Exchanges should ask whether a contract guarantees that a project generates emissions reductions that would not otherwise occur. They should also ensure that there is no “double counting,” as occurs when multiple carbon credits are secured by the same trees, for example.
According to Mark Carney, the UN special envoy for climate action and finance and former governor of the Bank of England, the guidance “will help professionalise and scale up voluntary carbon markets. Other global regulators should now follow the CFTC’s lead.”
Guidelines are not the same as regulations, which are a more powerful tool. But “it was pretty clear that a guidance document would be the best place to start … and that it would get the support of a broad coalition of stakeholders,” Behnam said.
The unregulated carbon market has been plagued by greenwashing concerns for years, and the guidance comes as the market shrinks. On Aug. 30, derivatives exchange CME Group announced it would delist one of its carbon-offset futures products, which it launched just two years ago.
Recent surveys of carbon credit users found that concerns about the credibility of carbon offsets have discouraged companies from buying them, MSCI said in a Sept. 19 report.
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