The Commission’s final guidance for designated contract markets (DCMs or Contract Markets) that list derivatives on voluntary carbon credits (VCCs) as the underlying commodity is a critical step in support of the development of high-integrity voluntary carbon markets (VCMs). For the first time ever, a U.S. financial regulator is issuing regulatory guidance for contract markets that list financial contracts aimed at providing tools to manage risk, promote price discovery, and foster the allocation of capital towards decarbonization efforts.

The publication of this final guidance marks the culmination of over five years[1] of work with a diverse group of market participants, including agricultural stakeholders, ranchers, foresters, landowners, commercial end users, energy market stakeholders, emission-trading focused entities, carbon-credit rating agencies, crediting programs, CFTC-registered exchanges and clearinghouses, public interest groups, academics, and others. This guidance also represents a whole-of-government approach in coordination with our partners across the U.S. federal complex.

Each step has been intentional. I sponsored the Market Risk Advisory Committee’s Climate-Related Market Risk Subcommittee, which issued a first-of-its-kind report on Managing Climate Risk in the U.S. Financial System in September 2020, that identified pricing carbon as a fundamental element for financial markets to efficiently allocate capital to reduce greenhouse gas emissions (GHGs).[2] I established the CFTC’s Climate Risk Unit in March 2021 to support the Commission’s building of subject matter expertise through external engagement, cooperation, and coordination regarding the role that climate-related derivatives play in pricing and managing climate-related financial risk.[3] I hosted two Voluntary Carbon Markets Convenings in June 2022 and July 2023 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 underlying VCC cash markets.[4] The CFTC issued a Request for Information on Climate-Related Financial Risk in June 2022 that received 80 comments on ten priority areas of interest including VCMs and product innovation.[5] The Commission then issued proposed guidance with a request for public comment in December 2023, that received over 85 comments,[6] the majority of which generally supported the proposal. 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 market-based solutions.[7]

The primary takeaway from this research, public engagement, and consultation 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 underlying voluntary carbon credits that are real, additional, permanent, verifiable, and each represent a unique metric ton of GHG emissions reduced or removed from the atmosphere. 

While VCC derivatives are a comparatively new and evolving class of products, Contract Markets must ensure that any listed derivatives comply with the CEA and Commission regulations. The guidance outlines factors that Contract Markets may consider in connection with the VCC derivative contract design and listing process including: Core Principle 3, which requires Contract Markets to list only contracts that are not readily susceptible to manipulation; Core Principle 4, which requires Contract Markets 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 Core Principles; and the product submission provisions set forth in CEA section 5c(c) and Part 40 of the Commission regulations. 

The guidance is not intended to modify or supersede existing statutory or regulatory requirements, or existing Commission guidance that addresses a Contract Market’s listing of derivative contracts, such as Appendix C to Part 38 of the Commission’s regulations. Instead, the guidance outlines VCC characteristics for a Contract Market to consider in connection with the contract design and listing process for VCC derivatives to address certain requirements under the CEA and the Commission’s rules.

These voluntary carbon credit characteristics are: (i) transparency, additionality, permanence and accounting for the risk of reversal, and robust quantification of emissions reductions or removals, for consideration when addressing quality standards; (ii) governance, tracking mechanisms, and measures to prevent double counting, for consideration when addressing delivery procedures; and (iii) third-party validation and verification, for consideration when addressing inspection or certification procedures. A Contract Market’s consideration of these characteristics in connection with the design of the contract and the listing process should promote accurate pricing, reduce susceptibility of the contract to manipulation, help prevent price distortions, and foster confidence in the voluntary carbon credit contracts. Consistent with the current statutory and regulatory requirements, Contract Markets would retain reasonable discretion to comply with the DCM Core Principles and the Commission’s regulations.

This guidance is the product of a strong public-private partnership that I have strived to achieve with both the CFTC’s traditional stakeholders, as well as a variety of new stakeholders, including carbon market participants to support transparency, liquidity, market integrity, and ultimately scale in these markets. Today’s guidance outlines well-researched VCC commodity characteristics that build on several mature private sector and multilateral initiatives that have made great strides to strengthen VCC credit integrity standards through technical analysis, expertise, and broad coalition building. With the benefit of public comment, the CFTC’s final guidance specifically recognizes that private sector recognized standards for high-integrity VCCs can serve as tools for CFTC Contract Markets in connection with their consideration of the VCC commodity characteristics.

Recognizing the global nature of derivatives markets, the VCC guidance complements the important work underway by the International Organization of Securities Commissions (IOSCO) through its Sustainable Finance Task Force’s Carbon Market Workstream, which I am leading with Verena Ross, the Chair of the European Securities and Markets Authority. While this Commission guidance focuses on what Contract Markets may consider in designing and monitoring their proprietary listed VCC derivative contracts, IOSCO’s work over nearly three years has been 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. IOSCO is hard at work reviewing the many helpful comments received in response to the December 2023 VCM Consultation Report. I am looking forward to the next deliverable of that workstream, which is expected later this year.[8]

The CFTC’s unique mission focused on risk mitigation and price discovery 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 a thoughtful and deliberate step toward building a financial system that provides effective tools in achieving emission reductions.

I thank my fellow commissioners for enabling the Commission to issue this final guidance. I greatly appreciate the expertise and the tremendous work done by staff in the Division of Market Oversight, the Office of the General Counsel, and in my office on this final guidance.