CFTC Proposes Guidance for Voluntary Carbon Credit Derivatives

On December 27, 2023, the Commodity Futures Trading Commission (CFTC) proposed guidance for derivative contract markets (DCMs) that are considering listing voluntary carbon credit (VCC) derivative contracts for trading.

The Commodity Exchange Act (“CEA”), and related CFTC regulations, set requirements for DCMs. While DCMs set many of their own rules for the derivative contracts that are traded or settled on their markets, these are bounded by a number of statutory and regulatory requirements. Among other relevant rules, the CEA requires DCMs to follow a set of statutory "Core Principles," which may be relevant to VCC derivative contracts. For example, these core principles require DCMs to set rules that prevent and monitor market manipulation and protect market participants from abusive or fraudulent practices.

CFTC's proposed guidance outlines compliance considerations for DCMs that list VCC derivative contracts. Among other recommendations, CFTC's proposed guidance states that DCMs must consider:

• The additionality of the underlying VCC project - "in other words, whether the VCCs are credited only for projects or activities that result in GHG emission reductions or removals that would not have been developed and implemented in the absence of the added monetary incentive created by the revenue from the sale of carbon credits;"
• The permanence of the underlying GHG removal activities, and any risk of reversal due to the failure of such activities; and
• Quantification methodologies used to calculate GHG removals or reductions associated with an activity underlying a VCC derivative contract.

CFTC is accepting comments on the proposed guidance until February 16, 2024.