CFTC guidance on listing offset contracts – does it matter?

On 20 September, the US Commodity Futures Trading Commission (CFTC) approved guidelines for trading voluntary carbon credit (VCC) derivatives. These provide designated contract markets (DCMs) with a framework for assessing carbon offset-backed contracts before listing them. In other words, commodity exchanges offering carbon offset contracts should make sure - using the new guidance provided by the CFTC - that the underlying offsets are legitimate and have high integrity.

This intervention comes on the heels of the Biden-Harris Administration’s Voluntary Carbon Markets Joint Policy Statement and Principles back in May – see our analysis of that event here. The CFTC’s new guidelines reflect the US government’s seven principles for voluntary carbon markets as outlined in that administration initiative and are in line with its overall effort to portray trading of carbon credits as a legitimate corporate climate change mitigation effort rather than greenwashing.

Negative media portrayal of offsetting and carbon market activities in recent years has deterred some corporate entities from engaging in carbon credit purchases, even though just a few years earlier many observers had projected huge growth in the value of the global voluntary carbon market given the corporate trend of setting “net zero” and “carbon neutral” targets that offsets could be used to achieve. In 2021, the value (traded volume of credits times the price of each credit) of the global voluntary market was estimated at USD 2 billion and projected to grow to USD 100 billion by 2030. Exchanges had begun offering more standardised offset contracts, and expectations grew that liquidity would increase. Since then, news reports and academic studies about offset developers overestimating the amount of greenhouse gas reduction achieved by their projects have dampened private sector enthusiasm for voluntary carbon credits: traded volume is down, and prices are at historic lows.