CFTC’s Guidance on Carbon Credit Derivatives

As carbon credits grow in popularity as a means for purchasers to claim they have offset their emissions, a growing market of derivatives based on carbon credits has emerged. These derivatives, even more than the credits themselves, are vulnerable to fraud and manipulation. The inability to verify carbon credits can make some of the derivatives products designed on top of the underlying assets suspect or unreliable.

To respond to this growing problem, the Commodity Futures Trading Commission has issued proposed guidance, laying out how the agency’s rules apply to the emerging asset class. The proposed guidance outlines certain factors a CFTC-regulated exchange, or designated contract market, should consider when addressing requirements of the Commodity Exchange Act (CEA) and CFTC regulations that are relevant to the contract design and listing process. The guidance aims to advance the standardization of voluntary carbon credit derivative contracts in a manner that fosters transparency and liquidity, accurate pricing, and market integrity.

The CFTC will take public feedback on the plan until Feb. 16, 2024, and then offer a final set of guidelines.