I am pleased to support today’s proposed guidance regarding the listing of voluntary carbon credit derivatives.  I want to recognize Chairman Behnam’s leadership in the voluntary carbon credit space.  The proposed guidance follows efforts by the Commission to develop capacity in understanding and regulating voluntary carbon credits.[1]

The physical effects of climate change are amplifying.  2023 is likely to go down as the warmest year on record.[2]  The intensifying physical impacts of climate change pose serious risks to commodities derivatives markets and potentially systemic risk to the financial system if not effectively managed.  Our mission includes promoting resilience in derivatives markets that can play a critical role in managing climate risk.

Many market participants are seeking opportunities in derivatives markets to promote resilience to climate risk, including through voluntary carbon credits.  The CFTC oversees voluntary carbon credit derivatives listed and trading on CFTC-registered exchanges.  In addition to regulatory authority over derivatives, the CFTC also has antifraud authority in the spot voluntary carbon credit markets given the potential for impact to the derivatives markets.

In response to our public consultation, various market participants, public interest groups, and U.S. Senators have asked the CFTC to take a leading role in promoting the integrity of voluntary carbon markets.[3]  I was pleased to help launch the CFTC’s Environmental Fraud Task Force that will pursue individual cases of fraud related to carbon credits, weeding out bad actors, and promoting market integrity.[4]  Today’s proposed guidance is the next step in promoting market integrity.

I have met with exchanges to discuss their process for listing these emerging products, and found differing approaches to these products and due diligence in the underlying credit.  CFTC-registered exchanges have certain requirements under the Commodity Exchange Act including to list only contracts that are not readily susceptible to manipulation, to have the capacity and responsibility to prevent manipulation, price distortion and other market disruptions, and other requirements aimed at market integrity.

Commission guidance, like what is proposed today, can help exchanges understand what compliance means in a still rapidly evolving market for voluntary carbon credits, one where there can be concerns about integrity, including for carbon credits listed on some of the largest registries,[5] a lack of transparency, and uncertainty related to pricing.  These concerns in the spot market could affect the regulated derivatives market.  For a market to work well, market participants need to be confident they have credible information about the product, that there are appropriate levels of pricing, and that the market has integrity, so that they do not face legal, reputational and regulatory risks.

I continue to believe that bringing more of this market onto regulated exchanges could increase integrity, transparency, and bring greater confidence to the market.  I agree with a response to our consultation which said that “the expansion of exchanges offering products…would help grow liquidity and therefore the value of the market for price discovery and risk shifting.”[6]  CFTC-regulated exchanges have important responsibilities under the Commodity Exchange Act, and stand as the first line of defense to ensure market integrity.  The market should signal through pricing which carbon credits are high quality compared to credits reflecting projects that do not achieve the requisite level of one ton of greenhouse gases removed or reduced.

However, one of the biggest challenges in voluntary carbon markets is fragmentation with different projects, registries, and standards, that can impact derivatives markets and harm market confidence.  A lack of transparency through consistent, comparable data can present challenges to proper functioning of markets, including price discovery.  There are important and welcome efforts by voluntary bodies like the Integrity Council on Voluntary Carbon Markets (“ICVCM”) to create voluntary standards to address concerns about credibility and to develop a common understanding of a high-quality credit, efforts that are ongoing.

In March, I proposed that the Commission work with regulated exchanges to develop common baseline standards for listing voluntary carbon credit derivatives.[7]  At a conference held by ISDA, I proposed that the Commission consider requiring exchanges to take certain actions to increase confidence that underlying voluntary carbon credits reliably remove or avoid the amount of carbon claimed of one ton of greenhouse gases per credit.  I proposed that such actions could include information sharing agreements with carbon registries and baseline standards for carbon credits that could reference either the ICVCM core carbon principles once they became final or the basic principles on which they are based.  I thank the Chairman for working with me on these efforts.

Today’s guidance adapts terminology, concepts and standards from the ICVCM’s Core Carbon Principles and its recently issued Assessment Framework.  I support the Commission’s recognition of the efforts made by this body that could improve integrity, transparency, and price discovery, and thereby improve confidence in these markets.

The Commission’s guidance adapts ICVCM concepts and standards that commenters told us were needed for integrity in voluntary carbon markets.  The guidance sets an expectation for exchanges to ensure that underlying VCC’s represent an actual ton of carbon dioxide removed or reduced and that there is no double counting of those reductions or removals.[8]  It also sets an expectation that underlying VCC’s are subject to a meaningful independent evaluation and verification before issuance.[9]  Aligning the CFTC’s expectations with the ICVCM’s work also recognizes the global nature of this market and of the challenges posed by climate-related financial risk.

I am interested in hearing from commenters if the guidance adapts the right parts of the ICVCM standards to encourage integrity and transparency in these markets and if the Commission’s adaptation provides clear, workable expectations.  As the ICVCM standards have only been recently released, it will be important to monitor the adoption of these standards.

I am also interested in hearing more from commenters about whether market integrity can be improved by exchanges relying on a crediting program’s processes and diligence, as assumed in the proposed guidance, or if there is a benefit to exchanges conducting additional due diligence into specific categories, protocols, or projects.

I am interested to hear from commenters, including participants in our previous public consultation, if this guidance meets their needs and helps address concerns they have raised.  I especially hope to hear from farmers and others in the agricultural community, several of whom encouraged the CFTC to play a role in ensuring integrity in carbon markets in response to last year’s public consultation.[10]

As derivatives markets evolve, it is important that the Commission remain nimble and aware of changes, and continue to work with exchanges in listing products.  I applaud the staff for their hard work on this guidance and I thank them for working with me to incorporate feedback I have heard in meetings with exchanges, market participants and public interest groups over the past 18 months.