CFTC finalizes carbon offset guidance

The US Commodity Futures Trading Commission (CFTC) finalized guidance Friday advising futures exchanges to examine the integrity of voluntary carbon credits tied to derivatives contracts, including whether those credits represent tangible emissions cuts.

CFTC commissioners finalized the guidance in a 4-1 vote, another step in a recent push to standardize and promote best practices for the voluntary carbon market and minimize fraud. While the guidance does not serve as binding rules that futures exchanges are obligated to follow, the latest guidance represents the CFTC's "views regarding factors that may be relevant" as it assesses compliance with federal law.

Carbon offsets are typically sold over the counter, though some exchanges allow for the trading of carbon offset futures.

The CFTC guidance directs futures exchanges to ensure that voluntary carbon offset credits tied to contracts on their platforms adhere to best practices, such as transparency over how greenhouse gas (GHG) emissions are calculated, accounting for risks over the cancellation or recalling of credits, and ensuring third-party verification and validation.

Futures exchanges are also instructed to note whether contracts for carbon offsets provide "additionality" — that is, whether the credits represent further emissions reductions that would not have occurred regardless of the offsets. Any changes to the offset registry or to the projects generating those offset credits should be reflected in the associated contract's terms and conditions, the guidance says.

CFTC first began planning its guidance for voluntary carbon credits in July 2023, with the proposed guidance released later that December. Some futures exchanges had expressed discontent with the proposal in February, saying that it placed too much of a burden on them to verify the integrity of carbon offset credits. The final guidance was initially planned to have been released in July.

CFTC commissioner Summer Mersinger, a Republican, wrote the lone dissent, arguing that the agency is issuing rules for commodities "that have very little open interest" and that the guidance is advancing an "ideology" rather than "simply offering guidance."

Public Citizen, a progressive nonprofit, gave the guidance mixed reviews, saying it would help prevent fraud but that the underlying market for voluntary carbon offsets "should not be greenlighted for trade in the first place."

CFTC chair Rostin Behnam affirmed his support for the guidance, calling it a "critical step" in the growth of voluntary carbon markets.

By Ida Balakrishna