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On September 20, 2024, the United States Commodity Futures Trading Commission (CFTC) approved the Final Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts (VCC Guidance) (CFTC Release Link). The VCC Guidance outlines key factors for consideration by CFTC-regulated exchanges, such as Designated Contract Markets (DCMs) regarding the listing and trading of voluntary carbon credit (VCC) contracts.

The VCC Guidance outlines characteristics for DCMs to consider in connection with VCC derivative contract design and listing, including physically delivered and cash-settled futures contracts. The characteristics include:

Quality standards for carbon credits must consider transparency, additionality, permanence, and the accounting for the risk of reversal and robust quantification of emissions reductions or removals
Governance, tracking mechanisms, and measures to prevent double counting should be considered when addressing delivery procedures, including registry transfers
Inspection and certification procedures for third-party validation and verification of carbon credits must be considered

Consideration of these characteristics is intended to promote market confidence and accurate pricing while reducing susceptibility of VCC contract manipulation.

What does the CFTC’s VCC Guidance regulate?

The Final Guidance issued by the CFTC is applicable to the CFTC-regulated exchanges, including the Designated Contract Markets (DCMs), which list exchange-traded VCC derivative contracts. However, the CFTC does not have the statutory authority, whether in the United States or globally, to directly impose standards across the VCC market or overall carbon markets.

While not directly impacting the broad carbon markets, the VCC Guidance does imply suggestions for over-the-counter (OTC) markets and spot markets for voluntary carbon credits. The standards being imposed on the derivatives market, which represents a key part of the VCC market infrastructure, promote further structure and standards that influence the development of the global carbon markets. This is driven by the relationship between the derivatives markets and the definitions of the underlying commodities being traded.

Where can markets be enhanced?

Xalte feels strongly in the role that voluntary carbon credits should play in achieving net-zero goals and advancing the carbon ecosystem. While CFTC’s VCC Guidance is a step forward to promote carbon credit quality standards and clarify the roles of the DCMs, registries, and verification bodies, additional work is required on global program definitions and establishing credit equivalencies.

At Xalte, we believe the following enhancements would increase market trust, user adoption, and the infusion of private capital:

Buyers should not have exposure to the project generating the credit (“one-degree anonymized”) - Environmental commodity units should be reclassified in accordance with the futures contract definition and defined with corresponding serialization. This would enable one-degree anonymization to the trader (buyer) to support capital market trading while maintaining market transparency to the original carbon credit on a recognized registry.
Trade security may be enhanced with alternatives to current buffer pool procedures - Evaluate alternative risk mitigation approaches that may include the basis of insurance and re-insurance at the levels of both individual projects and bundled pools. Mitigating risk through market infrastructure provides a common understanding and security for investor confidence.
Technology should deliver transparency through aggregation of issued carbon credits and security of physical settlement - Define a common data model and standards that is published and periodically updated to normalize the platform requirements within the carbon ecosystem. Promote market infrastructure standardization for data models and operations by enhancing CFTC reporting requirements.

Conclusion: How will the carbon markets evolve?

U.S. derivative markets will adhere to the principles of the CFTC’s VCC Guidance as they list VCC derivative contracts, such as futures contracts, for trading. This will require alignment on classifications and definitions of carbon credits across the global community to enable the required scalability.

At Xalte, we believe partnerships will continue to emerge between regulated exchanges, market infrastructure, operators of credit generating projects, and the investment community. Leveraging the VCC Guidance, there is an opportunity to define and list products with the market confidence required to secure private capital to achieve the objective of net-zero emissions.

Xalte is excited to drive transformative approaches for financial products and further the evolution of carbon markets.

CFTC Final Guidance and Carbon Market Evolution

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