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On Dec. 4, the Commodity Futures Trading Commission (CFTC) proposed guidance on the listing of voluntary carbon credit (VCC) derivative contracts. This proposed guidance comes after two voluntary carbon market convenings, in June 2022 and July 2023, at which the CFTC received extensive input from industry stakeholders about the lack of a recognized universal standard for VCCs. Although the CFTC does not have the authority to directly regulate the quality of VCCs, the proposed guidance sets forth obligations that derivative contract markets (DCMs) must satisfy to list VCC derivative contracts.

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Under the proposal, DCMs would need to consider the VCC commodity characteristics when addressing the following criteria in the design of a VCC derivative contract:

Quality Standards: A DCM should consider factors such as (i) transparency, (ii) additionality, (iii) permanence and risk of reversal, and (iv) robust quantification when addressing quality standards in the development of the terms and conditions of a VCC derivative contract.

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Delivery Points and Facilities: A DCM should consider the governance framework and tracking mechanisms of the crediting program for the underlying VCCs, as well as the crediting program’s measures to prevent double counting. This includes consideration of who is responsible for administration of the program, reporting and disclosure procedures, public and stakeholder engagement processes, and risk management policies.

Inspection Provisions: A DCM should ensure that VCC derivative contracts specify inspection or certification procedures and consider how the crediting program for the underlying VCCs requires validation and verification that the projects or activities at issue meet the crediting program’s rules and standards. A DCM should also consider whether the crediting program has robust and transparent validations and verification procedures, including whether those procedures contemplate validation and verification by a disinterested third party that employs best practices.

This proposed guidance from the CFTC comes as stakeholders throughout the voluntary carbon industry clamor for a marketwide framework of standards and regulations that will establish integrity in the market and provide consistent guidance on the use of offsets in decarbonization.

The comment period for the CFTC’s proposed guidance will remain open until Feb. 16, 2024.

CFTC Proposes Long-Awaited Guidance on Voluntary Carbon Credit Derivative Contracts