The CFTC as a market regulator has a significant role to play in the voluntary carbon markets (VCMs). As we have seen the listing of listed futures on voluntary carbon credits (VCCs), the Agency’s relationship and responsibility is real. These markets present an opportunity for the agricultural economy that historically underpins the need for derivatives markets for risk management and price discovery, but they also provide a useful tool throughout the financial markets and the real economy.  And today, the Agency takes the most significant step of a financial regulator to promote fundamental standards for high integrity VCCs. 

Market participants from across all asset classes will increasingly turn to the derivatives markets as they manage the impact of physical and transition risks related to extreme weather events and climate-related financial risk. The CFTC’s role is to ensure that these developing derivatives markets, including those for VCCs, have integrity, adhere to basic market regulatory requirements, and remain resilient as we most certainly will continue to experience extreme and dramatic weather events that will impact pricing and volatility. 

The Commission’s proposed guidance for designated contract markets (DCMs) that list derivatives contracts with voluntary carbon credits (VCC) as the underlying commodity is an important step in shaping the development of high-integrity voluntary carbon markets. For the first time ever, the CFTC is proposing regulatory guidance for exchanges listing products aimed at providing tools to manage risk, promote price discovery, and help channel capital to support decarbonization. The publication of this proposed guidance and request for public comment marks the culmination of years of work with stakeholders such as farmers, foresters, end users, energy traders and associations, emission-trading focused entities, carbon-credit rating agencies, crediting programs, CFTC-registered exchanges and clearinghouses, and derivatives trade associations. This proposal also represents a whole-of-government approach in coordination with our partners across the federal complex.

Each step has been intentional. My sponsorship of the Market Risk Advisory Committee’s Climate-Related Market Risk Subcommittee, which issued a report on Managing Climate Risk in the U.S. Financial System Report in 2020 identified putting a price on carbon as a fundamental element for financial markets to efficiently channel capital to reduce greenhouse gas emissions (GHGs).[1] My establishment of the CFTC’s Climate Risk Unit in March 2021 allowed the Commission to build its subject matter expertise regarding the role that climate-related derivatives will have in pricing and managing climate-related financial risk.[2] I hosted two VCM Convenings to gather information from a wide variety of market participants to better understand the potential role of the official sector in these markets, particularly as we began to see the emergence of listed futures products that reference VCC cash markets.[3] The CFTC, with the support of my fellow commissioners, issued a Request for Information on Climate-Related Financial Risk that received 80 comments on ten priority areas of interest including VCMs and product innovation.[4] I have also testified before Congress on several occasions specifically on the role of financial markets in addressing the climate crisis and my views on the CFTC’s role in supporting solutions.[5]

The primary takeaway from this research and public engagement is clear; the Commission should act, consistent with its statutory authority under the Commodity Exchange Act (CEA), to strengthen market integrity, transparency, and liquidity for derivatives with an underlying VCC that are real, additional, permanent, verifiable, and represent unique metric tons of GHG emissions reduced or removed from the atmosphere. 

While VCC derivatives are a comparatively new and evolving class of products, DCMs must ensure that any listed derivatives comply with the CEA and Commission regulations. The proposed guidance outlines factors that DCMs should consider when listing products including: DCM Core Principle 3, which requires DCMs to list only contracts that are not readily susceptible to manipulation; DCM Core Principle 4, which requires DCMs to have the capacity and responsibility to prevent manipulation, price distortion, and other market disruptions through market surveillance, compliance, and enforcement practices and procedures; the Commission’s regulations promulgated for these DCM Core Principles; and the product submission provisions set forth in CEA section 5c(c) and Part 40 of the Commission regulations. 

The proposed guidance is not intended to modify or supersede existing statutory or regulatory requirements, or existing Commission guidance that addresses the DCMs’ listing of derivative contracts, such as Appendix C to Part 38 of the Commission’s regulations. Instead, the proposed guidance outlines particular VCC commodity characteristics that a DCM should consider in the design of a VCC futures contract’s terms and conditions such (i) quality standards, which include transparency, additionality, permanence and accounting for the risk of reversal, and robust quantification of emissions reductions or removals; (ii) delivery points and facilities which include effective governance at the carbon crediting program, tracking the issuance, transfer, and retirement of VCCs, and no double counting; and (iii) inspection provisions which includes independent third-party validation and verification. A DCM’s consideration of these factors during the design of a derivative product’s terms and conditions should promote accurate pricing, reduce susceptibility of the contract to manipulation, help prevent price distortions, and foster confidence in the VCC contracts. Consistent with the current statutory and regulatory requirements, DCMs would retain reasonable discretion in establishing the manner in which it complies with a DCM Core Principles and the Commission’s regulations.

I believe the proposed guidance outlines well-researched VCC commodity characteristics that build on several private sector and multilateral initiatives that have made great strides to strengthen VCC credit integrity standards. I also believe the proposed guidance supports transparency, liquidity, and market integrity. This effort is the product of a strong public-private partnership that I have strived to achieve with the CFTC’s traditional stakeholders as well as those VCM stakeholders that may be newer to the derivatives markets.

The Commission is cognizant that the derivatives markets are global markets and has crafted this proposed guidance to be complementary to the important work underway by the International Organization of Securities Commissions (IOSCO) through its Sustainable Finance Task Force’s Carbon Market Workstream, which I co-chair with Verena Ross, the Chair of ESMA. While this proposed Commission guidance focuses on the due diligence that DCMs should undertake when designing and monitoring their proprietary listed VCC derivative contracts, IOSCO’s work over nearly two years is focused on how regulators can promote sound market structure and enhance financial integrity in the VCMs so that high-quality carbon credits can be traded in an orderly and transparent way. I invite our stakeholders to also provide comment on IOSCO’s December 2023 publication of its VCM Consultation Report.[6]

The proposed guidance is not intended to suggest that the Commission has a role in creating or mandating compliance with any kind of climate policy. The CFTC’s unique mission focused on risk mitigation and price discovery, however, puts us on the front lines of the now global nexus between financial markets and decarbonization efforts. Leveraging the CFTC’s personnel and expertise demonstrates our commitment to taking thoughtful and deliberate next steps toward building a financial system that provides effective tools in achieving emission reductions.

I thank my fellow commissioners for enabling the Commission to publish this proposed guidance for public comment. I greatly appreciate the expertise and all of the hard work done by the staff in my office, the Division of Market Oversight, and the Office of the General Counsel on this proposed guidance. I look forward to reviewing the public comments on all aspects of the guidance as well as on the seventeen specific questions relating to the listing for trading of VCC derivative contracts.

[2]  CFTC Acting Chairman Behnam Establishes New Climate Risk Unit, Mar. 17, 2021, https://www.cftc.gov/PressRoom/PressReleases/8368-21.

[3]  CFTC, Event: Commission Meetings, CFTC Announces Voluntary Carbon Markets Convening (Jun. 2, 2022), https://www.cftc.gov/PressRoom/Events/opaeventcftccarbonmarketconvene060222; and CFTC, Event: Commission Meetings, CFTC Announces Second Voluntary Carbon Markets Convening, (July 19, 2023), https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923.

[4]  Request for Information on Climate-Related Financial Risk, 87 Fed. Reg. 34856 (Jun. 8, 2022), available at 2022-12302a.pdf (cftc.gov).

[5] See, e.g., Rostin Behnam, Chairman, CFTC, Testimony by Chairman Rostin Behnam Before the Subcommittee on Agriculture, Rural Development, Food and Drug Administration and Related Agencies Committee on Appropriations, U.S. House of Representatives (Mar. 28, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam35; Rostin Behnam, CFTC, Testimony of Commissioner Rostin Behnam before the House Select Committee on the Climate Crisis (Oct. 1, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam16.

[6]  International Organization of Securities Commissions (IOSCO), CR06/2023 Voluntary Carbon Markets, Consultation Report (Dec. 2023), CR06/2023 Voluntary Carbon Markets (iosco.org).