Letters to Regulators: CFTC Should Finalize Guidance and Continue Close Monitoring of Risks of Voluntary Carbon Credit Derivatives Contracts

Americans for Financial Reform Education Fund (AFREF) submitted a comment letter to the Commodity Futures Trading Commission (“CFTC”) on its proposed guidance for designated contract markets (“DCMs”) on commodity characteristics that should be considered in terms and conditions for the listing of voluntary carbon credit (“VCC”) derivative contracts.

The letter recommends that first, the CFTC should strengthen and finalize this guidance as soon as possible. Second, the CFTC should continue dialogue with DCMs on the risks of VCC derivatives and the underlying VCM to monitor developments and determine if further guidance is necessary. Finally, the CFTC should monitor for, and intervene robustly, in cases of nonadherence to existing regulations pursuant to this guidance for VCC derivative contracts.

Among other recommendations, AFREF believes that final guidance from the CFTC should urge DCMs to evaluate the potential for leakage associated with VCCs, as well as environmental and social safeguards – safeguards to improve the chances that financed projects will not create and be undermined by violations of human, land, and labor rights and their related risks. 

There are significant shortcomings in the unregulated voluntary carbon markets (VCM)’s quality standards, verification processes, and incentive structure that create significant potential for fraud and manipulation, and that would compromise corresponding VCC derivatives contract markets. AFREF and partners have previously recommended that the CFTC disallow VCC derivatives trading generally unless and until the integrity problems within the underlying markets are reasonably resolved. The CFTC instead decided to acknowledge the challenges and provide guidance for DCMs to navigate this new class of products. This action, while important, is a small step in dealing with the persistent problems within the VCMs, which will require further action from the CFTC, Congress, and other regulators to address.