FOR IMMEDIATE RELEASE
Sept. 23, 2024
CONTACT
Carter Dougherty
carter@ourfinancialsecurity.org
CFTC Provides Carbon Market Guidance to Exchanges, But More Needs to Be Done
WASHINGTON, D.C. — The Commodity Futures Trading Commission (CFTC) issued final guidance that outlines the terms and conditions that should be considered by designated contract markets (“DCMs”) when they list voluntary carbon credit (“VCC”) derivative contracts. The CFTC has rightly acknowledged the serious transparency and integrity challenges in the underlying, unregulated VCC market, but the guidance alone cannot prevent fraud and manipulation.
AFREF and partners have previously recommended that the CFTC disallow VCC derivatives trading unless and until the integrity problems in the underlying markets are resolved. This guidance could provide a potentially useful tool for enhanced oversight for VCC’s that underlie derivatives. But, it alone will not solve the persistent and broad problems within the voluntary carbon markets, which demands further action from the CFTC, Congress, and other regulators to address.
“The transparency and accountability challenges of the voluntary carbon market will likely persist despite a recent round of voluntary efforts to clean up the market, particularly when it comes to the climate and social impacts of carbon credit projects, leaving the derivatives market open to fraud and manipulation,” said Jessica Garcia, senior policy analyst for climate finance at Americans for Financial Reform Education Fund. “Though the VCC derivatives market is small at the moment, there are many efforts underway to scale up VCC markets, and the CFTC was prudent to provide guidance within its jurisdiction. But as long as the markets exist, more regulation will be needed to ensure these credits actually reduce emissions.”
The CFTC excluded “leakage” from the guidance as a commodity characteristic for DCMs to consider when addressing quality standards. Leakage occurs when efforts to reduce emissions in one place simply shift emissions to another location or sector where they remain uncontrolled or unaccounted for.
The CFTC also failed to provide an explicit definition for “additionality,” which refers to the concept that credited projects or activities would not have been developed and implemented in the absence of the VCCs, but importantly provided examples in the guidance that DCMs should consider regulatory as well as financial additionality. Critically, the CFTC recognized that social and environmental safeguards, and net zero alignment, are considerations in crediting programs and can be considered in quality standards for VCC derivatives.
The CFTC should continue dialogue with DCMs on the risks of VCC derivatives and the underlying voluntary carbon markets and monitor developments. The CFTC should also monitor for and intervene robustly in cases of non-adherence to existing regulations pursuant to this finalized guidance for VCC derivative contracts.
The U.S. government must focus on providing and marshaling aid and below market rate finance—including from private investors—to emerging markets and developing economies for clean energy and other climate mitigation and adaptation efforts, which have proven to be much more meaningful contributions to global decarbonization efforts and reduce systemic climate-related financial risks.
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