2024-23105
[Federal Register Volume 89, Number 199 (Tuesday, October 15, 2024)]
[Rules and Regulations]
[Pages 83378-83407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23105]
[[Page 83377]]
Vol. 89
Tuesday,
No. 199
October 15, 2024
Part VI
Commodity Futures Trading Commission
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17 CFR Part 38
Commission Guidance Regarding the Listing of Voluntary Carbon Credit
Derivative Contracts; Final Rule
Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 /
Rules and Regulations
[[Page 83378]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 38
RIN 3038-AF40
Commission Guidance Regarding the Listing of Voluntary Carbon
Credit Derivative Contracts
AGENCY: Commodity Futures Trading Commission.
ACTION: Final guidance.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') is issuing this guidance to outline factors for
consideration by designated contract markets (``DCMs''), when
addressing certain provisions of the Commodity Exchange Act (``CEA''),
and CFTC regulations thereunder, that are relevant to the listing for
trading of voluntary carbon credit (``VCC'') derivative contracts. The
Commission recognizes that VCC derivatives are a comparatively new and
evolving class of products, and believes that guidance that outlines
factors for consideration by a DCM, in connection with the contract
design and listing process, may help to advance the standardization of
such products in a manner that promotes transparency and liquidity.
DATES: Issued on October 15, 2024.
FOR FURTHER INFORMATION CONTACT: Lillian A. Cardona, Assistant Chief
Counsel, (202) 418-5012, [email protected]; Steven Benton, Industry
Economist, (202) 418-5617, [email protected]; Samantha Li, Industry
Economist, (202) 418-5622, [email protected], Nora Flood, Chief Counsel,
(202) 418-6059, [email protected]; Division of Market Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581, or Julia Wood, Assistant Chief
Counsel, (202) 853-4877, [email protected], Division of Market Oversight,
Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800,
Chicago, Illinois 60604.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The Regulatory Framework for DCMs
B. Voluntary Carbon Markets
1. Overview of Voluntary Carbon Markets
2. Initiatives To Promote Transparency, Integrity and
Standardization in the Voluntary Carbon Markets
C. The Commission and Voluntary Carbon Markets
1. Derivative Contracts on Environmental Commodities, Including
VCCs
2. CFTC Initiatives Relating to Voluntary Carbon Markets
D. Proposed Guidance Regarding the Listing of VCC Derivative
Contracts
II. Comments on the Proposed Guidance
A. Overview
B. Specific Comments
1. Scope and Application of Guidance
2. A DCM Shall Only List Derivative Contracts That Are Not
Readily Susceptible to Manipulation--VCC Commodity Characteristics
3. A DCM Shall Monitor a Derivative Contract's Terms and
Conditions as They Relate to the Underlying Commodity Market
4. A DCM Must Satisfy the Product Submission Requirements Under
Part 40 of the CFTC's Regulations and CEA Section 5c(c)
5. Foreign Boards of Trade
III. Guidance Regarding the Listing of VCC Derivative Contracts
A. A DCM Shall Only List Derivative Contracts That Are Not
Readily Susceptible to Manipulation
B. A DCM Shall Monitor a Derivative Contract's Terms and
Conditions as They Relate to the Underlying Commodity Market
C. A DCM Must Satisfy the Product Submission Requirements Under
Part 40 of the CFTC's Regulations and CEA Section 5c(c)
I. Background
A. The Regulatory Framework for DCMs
The CFTC's mission is to promote the integrity, resilience, and
vibrancy of the U.S. derivatives markets through sound regulation.\1\
An independent agency of the U.S. Federal Government, the CFTC
exercises the authorities granted to it under the CEA to promote market
integrity, prevent price manipulation and other market disruptions,
protect customer funds, and avoid systemic risk, while fostering
responsible innovation and fair competition in the derivatives
markets.\2\
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\1\ CFTC Mission Statement, available at: https://www.cftc.gov/About/AboutTheCommission.
\2\ See CEA section 3(b), 7 U.S.C. 5(b).
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DCMs are CFTC-regulated exchanges that provide participants in the
derivatives markets with the ability to execute or trade derivative
contracts with one another.\3\ In order to obtain and maintain
designation with the CFTC, DCMs must comply with statutory ``Core
Principles'' that are set forth in the CEA,\4\ as well as applicable
CFTC rules and regulations.\5\ The statutory Core Principles for DCMs
reflect the important role that these exchanges play in promoting the
integrity of derivatives markets. DCMs are self-regulatory
organizations, and each DCM has Core Principle obligations to, among
other things, establish and enforce rules for trading on the DCM; \6\
provide a competitive, open and efficient market for trading; \7\ and
monitor trading activity.\8\ For example, DCM Core Principle 4 requires
a DCM to have the capacity and responsibility to prevent manipulation,
price distortion, and disruptions of the delivery or cash settlement
process, through market surveillance, compliance, and enforcement
practices and procedures.\9\ DCM Core Principle 5 requires a DCM to
adopt for each contract that it lists for trading, as is necessary and
appropriate, position limitations or position accountability for
speculators, in order to reduce the potential threat of market
manipulation or congestion, especially during trading in the delivery
month.\10\ DCM Core Principle 12 requires a DCM to establish and
enforce rules to protect markets and market participants from abusive
[[Page 83379]]
practices, and to promote fair and equitable trading on the DCM.\11\
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\3\ See CEA section 1a(6), 7 U.S.C. 1a(6). (The term ``board of
trade'' means any organized exchange or other trading facility); CEA
section 1a(51)(A), 7 U.S.C. 1a(51)(A) (The term ``trading facility''
means a person or group of persons that constitutes, maintains, or
provides a physical or electronic facility or system in which
multiple participants have the ability to execute or trade
agreements, contracts, or transactions-- (i) by accepting bids or
offers made by other participants that are open to multiple
participants in the facility or system; or (ii) through the
interaction of multiple bids or multiple offers within a system with
a pre-determined non-discretionary automated trade matching or
execution algorithm); and CEA section 5(d)(1)(A), 7 U.S.C.
7(d)(1)(A) (To be designated, and maintain a designation, as a
contract market, a board of trade shall comply with--(i) any core
principle described in this subsection; and (ii) any requirement
that the Commission may impose by rule or regulation pursuant to CEA
section 8a(5)).
\4\ See, generally, CEA section 5(d), 7 U.S.C. 7(d). There are
23 statutory Core Principles for DCMs.
\5\ CEA section 5(d)(1)(A), 7 U.S.C. 7(d)(1)(A).
\6\ DCM Core Principle 2 requires, among other things, that a
DCM establish, monitor, and enforce compliance with the rules of the
DCM, including access requirements, the terms and conditions of any
contracts to be traded on the DCM, and rules prohibiting abusive
trade practices on the DCM. DCM Core Principle 2 also requires a DCM
to have the capacity to detect, investigate, and apply appropriate
sanctions to any person that violates any rule of the DCM. CEA
section 5(d)(2), 7 U.S.C. 7(d)(2). See also 17 CFR 38.150 through
38.160. DCM Core Principle 13 requires that a DCM establish and
enforce disciplinary procedures that authorize the DCM to
discipline, suspend, or expel members or market participants that
violate the DCM's rules. CEA section 5(d)(13), 7 U.S.C. 7(d)(13).
See also 17 CFR 38.700 through 38.712.
\7\ DCM Core Principle 9 requires, among other things, that a
DCM provide a competitive, open, and efficient market and mechanism
for executing transactions that protects the price discovery process
of trading in the centralized market of the DCM. CEA section
5(d)(9), 7 U.S.C. 7(d)(9). See also 17 CFR 38.500.
\8\ See, e.g., DCM Core Principles 4, 5, and 12, discussed
infra.
\9\ CEA section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR
38.250 through 38.258.
\10\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5). See also 17 CFR
38.300 through 38.301.
\11\ CEA section 5(d)(12), 7 U.S.C. 7(d)(12). See also 17 CFR
38.650 through 38.651.
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Additionally, each DCM has a specific statutory obligation, under
DCM Core Principle 3, to only list for trading derivative contracts
that are not readily susceptible to manipulation.\12\ As discussed in
greater detail below, a DCM may elect to list a new derivative contract
for trading either by certifying to the Commission that the contract
complies with the CEA and CFTC regulations,\13\ or by seeking
Commission approval of the contract.\14\ In either case, the DCM must
submit the contract's terms and conditions, and other prescribed
information relating to the contract, to the Commission prior to
listing.\15\
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\12\ CEA section 5(d)(3), 7 U.S.C. 7(d)(3). See also 17 CFR
38.200 through 38.201.
\13\ CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1). See also 17 CFR
40.2.
\14\ CEA sections 5c(c)(4) through (5), 7 U.S.C. 7a-2(c)(4)
through (5). See also 17 CFR 40.3.
\15\ See, generally, 17 CFR 40.2 and 40.3. Amendments to
contract terms and conditions also must be submitted to the
Commission in accordance with procedures set forth at CEA section
5c(c), 7 U.S.C. 7a-2(c), and part 40 of the Commission's
regulations.
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For a number of the statutory Core Principles for DCMs, the
Commission has adopted rules that establish the manner in which a DCM
must comply with the Core Principle.\16\ These implementing rules are
set forth in part 38 of the Commission's regulations.\17\ The
Commission has also adopted, in appendix B to part 38,\18\ guidance and
acceptable practices for DCMs to consider with respect to certain of
the Core Principles.\19\
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\16\ Unless otherwise determined by the Commission by rule or
regulation, a DCM has reasonable discretion in establishing the
manner in which it complies with a Core Principle. CEA section
5(d)(1)(B), 7 U.S.C. 7(d)(1)(B).
\17\ 17 CFR part 38.
\18\ 17 CFR part 38, appendix B.
\19\ Guidance provides contextual information regarding a Core
Principle, including important concerns which the Commission
believes should be considered in complying with the Core Principle.
The guidance for a DCM Core Principle is illustrative only of the
types of matters that a DCM may address, and is not intended to be
used as a mandatory checklist. Acceptable practices are more
detailed examples of how a DCM may satisfy particular requirements
of a DCM Core Principle. Similar to guidance, acceptable practices
are for illustrative purposes only, and do not establish a mandatory
means of Core Principle compliance. 17 CFR part 38, appendix B.
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With respect to the DCM Core Principle 3 requirement that a DCM
only list for trading derivative contracts that are not readily
susceptible to manipulation, the Commission has adopted guidance that
is set forth in appendix C to part 38--Demonstration of Compliance That
a Contract is Not Readily Susceptible to Manipulation (the ``Appendix C
Guidance'').\20\ The Appendix C Guidance outlines certain relevant
considerations for a DCM when designing a derivative contract, and
providing supporting documentation and data in connection with the
submission of the derivative contract to the Commission.\21\ The
Commission takes the considerations outlined in the Appendix C Guidance
into account when determining whether, with respect to the contract,
the DCM is satisfying its DCM Core Principle 3 obligation only to list
derivative contracts that are not readily susceptible to manipulation.
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\20\ See 17 CFR part 38, appendix C. Guidance set forth in
appendix B to part 38 states that a DCM may use the Appendix C
Guidance as guidance in meeting DCM Core Principle 3 for both new
product listings and existing listed contracts. 17 CFR part 38,
appendix B, Core Principle 3 Guidance.
\21\ See Core Principles and Other Requirements for Designated
Contract Markets, 77 FR 36612 at 36632 (June 19, 2012). The Appendix
C Guidance is also relevant to swap execution facilities (``SEFs''),
another category of CFTC-regulated exchange that provides eligible
contract participants with the ability to execute or trade
derivative contracts that are swaps with one another. Like DCMs,
SEFs are obligated by statute only to permit trading in contracts
that are not readily susceptible to manipulation. See CEA section
5h(f)(3), 7 U.S.C. 7b-3(f)(3); 17 CFR 37.301.
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Among other things, the Appendix C Guidance outlines, for both
physically-settled and cash-settled derivative contracts, certain
considerations in connection with the design of the contract's rules
and terms and conditions.\22\ With respect to physically-settled
derivative contracts, the Appendix C Guidance states, among other
things, that the contract's terms and conditions should conform to the
most common commercial practices and conditions in the cash market for
the underlying commodity.\23\ The Appendix C Guidance also states that
the contract's terms and conditions should be designed to avoid
impediments to the delivery of the underlying commodity, so as to
promote convergence between the price of the contract and the cash
market value of the underlying commodity at the expiration of trading
in the contract.\24\ The Appendix C Guidance outlines certain criteria
for a DCM to consider addressing in the contract's terms and
conditions,\25\ including contract size, the period for making and
taking delivery under the contract, delivery points, quality standards
for the underlying commodity, and inspection/certification procedures
for verifying compliance with those quality standards or any other
related delivery requirements under the contract.\26\
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\22\ Physically-settled derivative contracts are contracts that
may settle directly into the commodity underlying the contract. If
the holder of a position in a physically-settled derivative contract
still has an open position at the expiration of trading in the
contract, then the position holder must, in accordance with the
rules for delivery set forth in the contract, make or take delivery
(as applicable) of the underlying commodity. By contrast, cash-
settled derivative contracts are, at the expiration of trading in
the contract, settled by way of a cash payment instead of physical
delivery of the underlying commodity.
\23\ Appendix C Guidance, paragraph (b)(1).
\24\ Id.
\25\ Appendix C Guidance, paragraph (b)(2)(1) (nothing that for
physical delivery contracts, an acceptable specification of terms
and conditions would include, but may not be limited to, rules that
address, as appropriate, the following criteria).
\26\ Appendix C Guidance, paragraph (b)(2).
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The criteria outlined in the Appendix C Guidance that relate to the
quality and other attributes of the underlying commodity that would be
delivered under a physically-settled derivative contract upon the
expiration of trading, inform the pricing of the derivative contract.
Addressing these criteria clearly in the derivative contract's terms
and conditions, in a manner that reflects the individual
characteristics of the underlying commodity, helps to ensure that
trading in the derivative contract is based on accurate information
about the underlying commodity. This, in turn, helps to promote
accurate pricing and helps to reduce the susceptibility of the
derivative contract to manipulation. Further, when a derivative
contract's terms and conditions help to ensure that, upon delivery, the
quality and other attributes of the underlying commodity will be as
expected by position holders, this helps to prevent price distortions
and fosters confidence in the contract that can incentivize trading and
enhance liquidity.
With respect to cash-settled derivative contracts, the Appendix C
Guidance states that an acceptable specification of the cash settlement
price would, among other things, include rules that fully describe the
essential economic characteristics of the underlying commodity, as well
as how the final settlement price is calculated.\27\ The Appendix C
Guidance states that the utility of a cash-settled contract for risk
management and price discovery purposes would be significantly impaired
if the cash settlement price is not a reliable or robust indicator of
the value of the underlying commodity.\28\ The Appendix C Guidance
states that, accordingly, careful consideration should be given to the
potential for manipulation or distortion of the cash settlement price,
as well as the reliability of that price as an indicator
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of cash market values.\29\ Appropriate consideration also should be
given to the commercial acceptability, public availability, and
timeliness of the price series that is used to calculate the cash
settlement price.\30\
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\27\ Appendix C Guidance, paragraph (c)(1).
\28\ Appendix C Guidance, paragraph (c)(2).
\29\ Id.
\30\ Id.
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B. Voluntary Carbon Markets
1. Overview of Voluntary Carbon Markets
As discussed further below, this final Commission guidance
addresses an emerging class of climate-related derivative contracts
listed for trading by DCMs, where the underlying commodity is a
VCC.\31\
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\31\ This guidance uses the term ``voluntary carbon credits''
rather than ``verified carbon credits,'' since the guidance is
focused on the quality and other attributes of the intangible
commodity underlying a derivative contract. The Commission
recognizes that market participants in the cash or secondary market
for voluntary carbon credits may choose to use a set of standardized
terms for the trading and retirement of ``verified carbon credits,''
as defined by the International Swaps and Derivatives Association
(``ISDA''), in the market participants' physically-settled spot,
forward or option transactions. See 2022 ISDA Verified Carbon Credit
Transactions Definitions (``VCC Definitions'') Frequently Asked
Questions, available at: 2022-ISDA-Verified-Carbon-Credit-
Transactions-Definitions-FAQs-061323.pdf.
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In addition to direct greenhouse gas (``GHG'') emissions reduction
initiatives, market-based mechanisms, such as carbon markets,\32\ have
developed to support emissions reduction efforts. A carbon market
generally refers to an economic mechanism to support the buying and
selling of environmental commodities \33\ that represent GHG emission
reductions or removals from the atmosphere. Carbon markets are intended
to harness market forces to incentivize carbon mitigation activities.
Carbon markets generally fall into two categories: (i) mandatory (or
compliance) markets, and (ii) voluntary carbon markets.
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\32\ While the term ``carbon'' is generally intended to also
include other GHGs, such as methane, nitrous oxide, sulfur
hexafluoride, hydro fluorocarbons and perfluorocarbons, most
emissions trading involves emissions trading of carbon dioxide.
\33\ An agreement, contract or transaction in an environmental
commodity may qualify for the forward exclusion from the ``swap''
definition set forth in section 1a(47) of the CEA, 7 U.S.C. 1a(47),
if the agreement, contract or transaction is intended to be
physically-settled. For further discussion of the Commission's
interpretation of whether agreements, contracts, or transactions in
environmental commodities fall within the forward exclusion from the
swap definition, see Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208
(August 13, 2012).
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Mandatory markets, such as cap-and-trade programs, emissions
trading systems and allowance trading systems, are established and
regulated by national, regional, or international governmental
bodies.\34\ Entities subject to the requirements of a mandatory market
generally must demonstrate compliance by directly reducing their
emissions from their own operations or activities, or by purchasing
eligible compliance credits representing emission reductions or
removals achieved by others.
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\34\ See, for example, the United Nation's Clean Development
Mechanism (``CDM''), the California Compliance Offset Program, the
Regional Greenhouse Gas Initiative (``RGGI''), the Alberta Emission
Offset System (``AEOS''), and the EU Emissions Trading System
(``ETS'').
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Voluntary carbon markets are not established by any government
body. They enable market participants to purchase, on a voluntary
basis, carbon credits that upon retirement represent reductions or
removals of GHG emissions. A voluntary carbon credit, or ``VCC,'' is a
tradeable intangible instrument that is issued by a carbon crediting
program (``crediting program'').\35\ The general industry standard is
for a VCC to represent a GHG emissions reduction to, or removal from,
the atmosphere equivalent to one metric ton of carbon dioxide.\36\
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\35\ See, e.g., The Integrity Council for the Voluntary Carbon
Market Carbon Core Principles, Section 5 Definitions, available at:
https://icvcm.org/wp-content/uploads/2023/07/CCP-Section-5-R2-FINAL-26Jul23.pdf.
\36\ This is calculated as the difference in GHG emission
reductions or removals from a baseline scenario, to the emission
reductions or removals occurring under the carbon mitigation project
or activity, with any adjustments for leakage. See The Integrity
Council for the Voluntary Carbon Market Carbon Core Principles,
Section 5 Definitions, available at: https://icvcm.org/wp-content/uploads/2023/07/CCP-Section-5-R2-FINAL-26Jul23.pdf.
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A participant in the voluntary carbon markets may purchase a VCC,
representing an emissions reduction or removal by another party, to
supplement emissions reductions or removals achieved from the
participant's own operations or activities. Liquid and transparent
markets in high-integrity VCCs may serve as a tool to facilitate
emissions reduction efforts.\37\
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\37\ The Board of the International Organization of Securities
Commissions (``IOSCO'') published, in November 2022, a Voluntary
Carbon Markets consultation for public comment. The IOSCO
consultation paper sought feedback on a potential approach that
regulatory authorities and market participants could take to foster
sound and well-functioning voluntary carbon market structure and, as
a consequence, scale up these markets to allow them to achieve their
environmental objectives. See, Voluntary Carbon Markets, Discussion
Paper, CR/06/22, November 2022, available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD718.pdf. In December 2023, IOSCO
published its Voluntary Carbon Markets Consultation Report, CR/06/
23, December 2023 (outlining a proposed set of good practices to
promote the integrity and orderly functioning of voluntary carbon
markets) available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD749pdf. See also, Voluntary Carbon Markets Joint Policy
Statement and Principles (``Joint Policy Statement on Voluntary
Carbon Markets''), U.S. Department of the Treasury, May 2024,
available at: https://home.treasury.gov/system/files/136/VCM-Joint-Policy-Statement-and-Principles.pdf.
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The process by which VCCs are issued deserves careful
consideration, as that process informs VCC quality and, by extension,
the overall integrity and effective functioning of voluntary carbon
markets. Generally, parties that play a role in the issuance of a VCC
include: (1) the developer of a mitigation project or activity that is
intended to reduce or remove GHG emissions from the atmosphere
(``project developer''); (2) a crediting program that, among other
things, issues VCCs for mitigation projects or activities that satisfy
the crediting program's standards; \38\ and (3) an independent third
party that verifies and validates the mitigation project or activity.
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\38\ Currently, the four main crediting programs in the
voluntary carbon markets are the American Carbon Registry, the
Climate Action Reserve, the Gold Standard and the Verified Carbon
Standard.
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A project developer must first select the crediting program with
which it seeks to certify its mitigation project or activity. The
crediting program will certify the project or activity if it satisfies
the crediting program's standards for issuing VCCs. A crediting program
generally engages an independent third party to review project or
activity documentation, including, among other things, to verify the
accuracy of the estimated amount of emission reductions or removals
that are expected to be associated with the project or activity, based
on the project's or activity's baseline scenario \39\ and the crediting
program's methodology or protocol for quantifying reduction or removal
levels. The estimated emission reductions or removals serve as the
basis for the determination of the number of VCCs to be issued for the
project or activity.
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\39\ A baseline scenario is the predicted or assumed outcome in
the absence of the incentives created by carbon credits, holding all
other factors constant. See, e.g., The Integrity Council for the
Voluntary Carbon Market, Core Carbon Principles Section 5:
Definitions; January 2024, Version 2, at 104.
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Once the crediting program determines that the mitigation project
or activity satisfies the crediting program's standards for issuing
VCCs, the project or activity will be certified. The crediting program
typically operates or makes use of a registry, which serves as a
central repository for tracking certified mitigation projects or
activities and their associated VCCs. Once registered, VCCs associated
with a certified mitigation project or activity may be
[[Page 83381]]
bought and sold to end users (businesses or individuals) or to
intermediaries such as brokers or aggregators that provide liquidity to
voluntary carbon market participants.\40\
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\40\ Funding by investors for a mitigation project or activity
could begin as early as the planning stage. Early investors may
enter into agreements with a project developer for funding in
exchange for discounted VCCs, if and when issued.
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2. Initiatives To Promote Transparency, Integrity and Standardization
in the Voluntary Carbon Markets
As the voluntary carbon markets have continued to develop and
mature, private sector and multilateral initiatives have sought to
address certain issues--relevant to both the supply side (generation of
VCCs from carbon mitigation projects or activities), and the demand
side (businesses or individuals purchasing VCCs)--impacting the speed
at which transparent, robustly traded markets for high-integrity VCCs
are scaled.
On the supply side, a key focus has been on the quality of VCCs,
and particularly, whether they accurately represent the nature and
level of GHG emission reductions or removals that they are intended to
represent. Given the current absence of a standardized methodology or
protocol to quantify emissions reduction or removal levels, there is a
possibility that methodologies or protocols of differing degrees of
robustness may calculate different reduction or removal impacts for two
projects that are identical in type and size (or even for the same
project). This could result in different amounts of carbon credits
being issued for each project, despite their actual reduction or
removal impact being the same. It may also create incentives for
project developers to seek to apply the quantification protocol or
methodology, or to seek to certify with the crediting program, that
would result in the issuance of the most credits. Among other things,
these possibilities create challenges for accurately pricing VCCs.
Further, it can be difficult to discern the extent to which the price
of any particular VCC reflects the price of one metric ton of carbon
dioxide equivalent reduced or removed from the atmosphere, and the
extent to which the price of the VCC reflects understandings or
concerns relating to the mitigation project or activity for which the
VCC was issued, or other aspects of the process for issuing the
VCC.\41\
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\41\ Factors that may affect the price of VCCs issued for any
particular mitigation project or activity may include the type of
the project or activity, the geographic location of the project or
activity, and the methodology or protocol used to measure the levels
of emission reductions or removals associated with the project or
activity. Types of carbon mitigation projects or activities for
which VCCs are issued include renewable energy, industrial gas
capture, energy efficiency, forestry initiatives (avoiding
deforestation), regenerative agriculture, wind power, and biogas.
The location of a mitigation project or activity may, for example,
impact the cost of implementing and/or operating the project or
activity. Mitigation projects and activities for which VCCs are
issued are located in countries worldwide. See Berkeley Voluntary
Registry Offsets Database, available at: https://gspp.berkeley.edu/research-and-impact/centers/cepp/projects/berkeley-carbon-trading-project/offsets-database.
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Challenges with respect to accurately ascertaining VCC quality, and
associated pricing challenges,\42\ can erode confidence in voluntary
carbon markets. Furthermore, opaque or inadequate calculation
methodologies or protocols, which can obscure or mischaracterize the
carbon impact of a mitigation project or activity, can undermine both
the integrity and purpose of voluntary carbon markets.
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\42\ Observed trading of VCCs is not as readily transparent as
for other financial instruments. Spot markets for VCCs are still
largely bespoke, with buyers purchasing directly from project
developers or via intermediaries. Some exchanges for trading VCCs
have been established and are evolving. For example, the AirCarbon
Exchange (https://acx.net/acx-singapore/), located in Singapore;
Carbon Trade Exchange (https://ctxglobal.com/), located in the
United Kingdom; and Xpansiv CBL (https://xpansiv.com/cbl/), located
in the United States.
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On the demand side, concerns have been raised that, in connection
with meeting their carbon mitigation goals, businesses or individuals
may be utilizing low integrity VCCs which do not accurately reflect the
nature or level of GHG emission reductions or removals that are
associated with the projects or activities for which the VCCs have been
issued.\43\ This can raise questions not only about the business's or
individual's progress towards their carbon mitigation goals, but also
about whether any claims related to those goals are misleading.\44\
Market participants that are purchasing VCCs to help meet their carbon
mitigation goals may be focused largely or primarily on price, and also
may not have ready access to all of the information that they need to
make informed evaluations, and comparisons, of VCC quality. All of this
may incentivize, intentionally or not, the purchase of lower quality
VCCs. This may be facilitated by the opaque pricing of VCCs.
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\43\ See, e.g., Forbes, Carbon Neutral Claims Under
Investigation In Greenwashing Probe (June 16, 2023), available at:
https://www.forbes.com/sites/amynguyen/2023/06/16/carbon-neutral-claims-under-investigation-in-greenwashing-probe/?sh=2a6170466431.
\44\ See, e.g., Federal Trade Commission, Guides for the Use of
Environmental Marketing Claims, Regulatory Review Notice and Request
for Public Comment, 87 FR 77766 (December 20, 2022) (Federal Trade
Commission request for public comment on updating its Green Guides
to include claims made regarding carbon offsets).
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Private sector and multilateral efforts have spearheaded the
development of various initiatives to address the above challenges, and
to promote transparency, integrity and standardization in the voluntary
carbon markets. To support and promote VCC quality, these private
sector and multilateral initiatives have focused on developing
standards for high-integrity VCCs.\45\ Among other things, these
standards are intended to help provide assurance that the VCCs that
have been issued for a carbon mitigation project or activity accurately
reflect the actual GHG emissions reduction or removal levels associated
with that project or activity. These standards also generally highlight
the importance of effective crediting program processes, procedures,
and governance arrangements, in ensuring that a crediting program is
issuing high-integrity VCCs.
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\45\ See, e.g., The Integrity Council for the Voluntary Carbon
Market's Core Carbon Principles (July 2023), available at: https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL-26Jul23.pdf;
the International Civil Aviation Organization's Carbon Offsetting
and Reduction Scheme for International Aviation (``CORSIA'') (2023),
available at: https://www.icao.int/environmental-protection/CORSIA/Pages/default.aspx; the G7 Principles of High Integrity Carbon
Markets (2023), available at: https://www.meti.go.jp/information/g7hirosima/energy/pdf/Annex004.pdf. See also, Joint Policy Statement
on Voluntary Carbon Markets, available at: https://home.treasury.gov/system/files/136/VCM-Joint-Policy-Statement-and-Principles.pdf.
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Standards that assist market participants in making informed
evaluations, and comparisons, of VCC quality may promote accurate
pricing and enhance confidence that the voluntary carbon markets can
serve as a tool to assist in emissions reduction efforts. Such
standards can thereby play a valuable role in supporting market
transparency and liquidity, and the scaling of high-integrity voluntary
carbon markets.
Such standards may also support initiatives being developed to
address concerns about the accuracy of claims made by purchasers of
VCCs regarding the role that VCCs play in the purchasers' progress
toward carbon mitigation goals.\46\ Such standards could serve as a
foundation for criteria that purchasers of VCCs could
[[Page 83382]]
voluntarily adhere to, in order to demonstrate their commitment to
using high-integrity VCCs to support their carbon mitigation goals, and
to being transparent in their progress towards those goals.
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\46\ See, e.g., the World Wildlife Fund (``WWF''), Environmental
Defense Fund (``EDF'') and Oeko-Institut's Carbon Credit Quality
Initiative (https://carboncreditquality.org/); the Tropical Forest
Credit Integrity Guide for Companies: Differentiating Tropical
Forest Carbon Credit by Impact, Quality, and Scale (https://tfciguide.org/); and the Voluntary Carbon Markets Integrity
Initiative's Claims Code of Practice (https://vcmintegrity.org/vcmi-claims-code-of-practice/).
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C. The Commission and Voluntary Carbon Markets
1. Derivative Contracts on Environmental Commodities, Including VCCs
Derivative contracts on environmental commodities have been trading
on CFTC-regulated exchanges for decades. Derivative contracts on
mandatory emissions program instruments have been trading since 2005,
with GHG emissions-related instruments first listed for trading in
2007.\47\ There are currently over 150 derivative contracts on
mandatory emissions program instruments listed for trading on DCMs.\48\
As of August 2024, twenty-nine derivative contracts on voluntary carbon
market products have been listed for trading by DCMs.\49\ Three of
those contracts currently have open interest.\50\
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\47\ The Chicago Climate Futures Exchange (``CCFE'') listed a
Sulfur Financial Instruments Current Vintage Delivery futures
contract in 2005. In 2006, the New York Mercantile Exchange
(``NYMEX'') listed a nitrogen oxide (``NOX'') Emissions
Allowance futures contract. In 2007, CCFE listed the first Carbon
Financial Instrument futures contract and other emission contracts.
In 2008, NYMEX listed the first RGGI futures contract. In 2011,
Green Exchange listed its European Union Allowance futures contract.
In 2012, NYMEX listed its California Carbon Allowance futures
contract. To date, there have been over 1,500 futures and options
contracts on mandatory emissions program instruments listed for
trading on various DCMs. The vast majority of these contracts are no
longer listed for trading.
\48\ Examples of derivatives contracts on mandatory emissions
program instruments, such as renewable energy credits (``RECs'') and
renewable fuel standards (``RFS''), that currently have open
interest include: the ICE Futures US (``ICE US'') PJM Tri Qualified
Renewable Energy Certificate Class I futures contract; the ICE US
Texas Compliance Renewable Energy Certificate from CRS Listed
Facilities Front Half Specific futures contract; the ICE US New
Jersey Compliance Renewable Energy Certificate Class II futures
contract; the Chicago Mercantile Exchange (``CME'') Ethanol T2 FOB
Rotterdam Including Duty (Platts) futures contract; the ICE US
Biofuel Outright--D4 RINS (OPIS) futures contract; the ICE US RGGI
Vintage 2024 futures contract; and the ICE US California Carbon
Allowance Current Auction futures contract.
\49\ NYMEX lists the following physically-settled futures
contracts on voluntary carbon market products: (1) the CBL Global
Emissions Offset (GEO) futures contract; (2) the CBL Nature-Based
Global Emissions Offset (N-GEO) futures contract; (3) the CBL Core
Global Emissions Offset (C-GEO) futures contract; (4) the CBL
Nature-Based Global Emissions Offset Trailing futures contract; and
(5) the CBL Core Global Emissions Offset Trailing futures contract.
Nodal Exchange (``Nodal'') lists the following physically-settled
futures and options contracts on voluntary carbon market products:
(1) Verified Emission Reduction--Nature-Based Vintage 2017 futures
and options contracts; (2) Verified Emission Reduction--Nature-Based
Vintage 2018 futures and options contracts; (3) Verified Emission
Reduction--Nature-Based Vintage 2019 futures and options contracts;
(4) Verified Emission Reduction--Nature-Based Vintage 2020 futures
and options contracts; (5) Verified Emission Reduction--Nature-Based
Vintage 2021 futures and options contracts; (6) Verified Emission
Reduction--Nature-Based Vintage 2022 futures and options contracts;
(7) Verified Emission Reduction--Nature-Based Vintage 2023 futures
and options contracts; (8) Verified Emission Reduction--Nature-Based
Vintage 2024 futures and options contracts; (9) Verified Emission
Reduction--Nature-Based Vintage 2025 futures and options contracts;
(10) Verified Emission Reduction--Nature-Based futures and options
contracts; (11) Verified Emission Reduction--CORSIA-Eligible futures
and options contracts; (12) Carbon Removal futures contract; and
(13) Global Emission Reduction futures contract.
\50\ The NYMEX CBL GEO futures contract; the NYMEX CBL N-GEO
futures contract; and the NYMEX CBL C-GEO futures contract are
currently the only futures contacts listed for trading on DCMs with
open interest and trading volume. Information is available at:
https://www.cmegroup.com/markets/energy/emissions/cbl-global-emissions-offset.volume.html.
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Physically-settled derivative contracts on VCCs base their price on
the spot price of VCCs. If the holder of a position in a physically-
settled VCC derivative contract still has an open position at the
expiration of trading in the contract, then the position holder must,
in accordance with the rules for delivery set forth in the contract,
make or take delivery (as applicable) of VCCs that meet the contract's
rules for delivery eligibility.\51\
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\51\ For example, NYMEX's CBL Global Environmental Offset
futures contracts, and Nodal's Verified Emission Reduction futures
and options contracts, are physically-settled contracts. The NYMEX
futures contracts permit VCCs to be delivered from the Verified
Carbon Standard (``VCS'') Verra Registry, and the registries of the
American Carbon Registry (``ACR''), and the Climate Action Reserve
(``CAR''). The Nodal futures and options contracts permit VCCs to be
delivered from VCS's Verra Registry and from the Gold Standard
Impact Registry, as well as from the ACR registry for certain
contracts.
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2. CFTC Initiatives Relating to Voluntary Carbon Markets
i. First Voluntary Carbon Markets Convening
In June 2022, Chairman Behnam held the first-ever Voluntary Carbon
Markets Convening to discuss issues related to the supply of and demand
for high-quality carbon credits, including product standardization and
the data necessary to support the integrity of carbon credits' GHG
emissions removal and reduction claims.\52\ A further goal of the
convening was to gather information from a wide variety of participants
in the voluntary carbon markets to better understand the potential role
of the official sector in these markets, particularly in connection
with the emergence of CFTC-regulated derivatives referencing VCCs. The
convening included participants from carbon credit standard setting
bodies, a crediting program, private sector integrity initiatives, spot
platforms, DCMs, intermediaries, end-users, public interest groups, and
others.
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\52\ For the official announcement of the convening and related
materials, see CFTC Announces Voluntary Carbon Markets Convening,
available at: https://www.cftc.gov/PressRoom/Events/opaeventcftccarbonmarketconvene060222.
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ii. Commission Request for Information
In June 2022, the Commission issued for public comment a Request
for Information (``RFI on Climate-Related Financial Risk'') \53\ in
order to better inform the Commission on how, consistent with its
statutory authority, to address climate-related financial risk as
pertinent to the derivatives markets and underlying commodities
markets.\54\
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\53\ Request for Information on Climate-Related Financial Risk,
87 FR 34856 (June 8, 2022) (``RFI on Climate-Related Financial
Risk'').
\54\ In addition to soliciting public feedback on all aspects of
climate-related financial risk as it may pertain to the derivatives
markets, underlying commodities markets, registered entities,
registrants, and other related market participants, the RFI on
Climate-Related Financial Risk requested feedback on specific
questions relating to: (1) Data, (2) Scenario Analysis and Stress
Testing, (3) Risk Management, (4) Disclosure, (5) Product
Innovation, (6) Voluntary Carbon Markets, (7) Digital Assets, (8)
Financially Vulnerable Communities, (9) Public-Private Partnerships/
Engagement, and (10) Capacity Coordination. The RFI on Climate-
Related Financial Risk stated that the Commission may use
information provided in response to the RFI on Climate-Related
Financial Risk to inform potential future actions including, but not
limited to, the issuance of new or amended guidance,
interpretations, policy statements, or regulations, or other
potential Commission action. Id.
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The responsive comments that the Commission received included
feedback on specific questions relating to product innovation and
voluntary carbon markets.\55\ Several commenters expressed support for
the Commission to take steps that could support transparency and
confidence in the
[[Page 83383]]
voluntary carbon markets, particularly through recognition or support
of private sector and multilateral initiatives to promote
standardization and integrity.\56\ In connection with product
innovation, certain commenters expressed the view that the Commission's
current statutory framework and regulations are sufficient to regulate
voluntary carbon market derivatives products.\57\ While there were
comments expressing different views on the reach of the Commission's
jurisdiction to regulate voluntary carbon markets,\58\ many commenters
supported the Commission utilizing its spot market anti-fraud and anti-
manipulation authority in the voluntary carbon market space.\59\
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\55\ Twenty-five commenters on the RFI on Climate-Related
Financial Risk responded to questions regarding product innovation
and 44 commenters on the RFI on Climate-Related Financial Risk
responded to questions regarding the voluntary carbon markets.
\56\ See, e.g., International Swaps and Derivatives Association
(``ISDA'') response to the RFI on Climate-Related Financial Risk, at
6; American Petroleum Institute (``API'') response to the RFI on
Climate-Related Financial Risk, at 4; Center for American Progress
response to the RFI on Climate-Related Financial Risk, at 10;
Environmental Defense Fund (``EDF'') response to the RFI on Climate-
Related Financial Risk, at 12; Futures Industry Association
(``FIA'') response to the RFI on Climate-Related Financial Risk, at
9; Intercontinental Exchange, Inc. (``ICE'') response to the RFI on
Climate-Related Financial Risk, at 4.
\57\ See, e.g., CME Group (``CME'') response to the RFI on
Climate-Related Financial Risk, at 10, FIA response to the RFI on
Climate-Related Financial Risk, at 3; ISDA response to the RFI on
Climate-Related Financial Risk, at 7.
\58\ See, e.g., Heritage Foundation response to the RFI on
Climate-Related Financial Risk, at 7; API response to the RFI on
Climate-Related Financial Risk, at 2-4; Commercial Energy Working
Group (``CEWG'') response to the RFI on Climate-Related Financial
Risk, at 2-3.
\59\ See, e.g., API response to the RFI on Climate-Related
Financial Risk, at 3; ISDA response to the RFI on Climate-Related
Financial Risk, at 6; Verra response to the RFI on Climate-Related
Financial Risk, at 2. With respect to the Commission's spot market
anti-fraud and anti-manipulation authority, as well as its spot
market authority with respect to false reporting, see, e.g., CEA
section 6(c)(1), 7 U.S.C. 9(1), which among other things prohibits
any person from using or employing, or attempting to use or employ,
in connection with a contract for sale of any commodity in
interstate commerce, any manipulative or deceptive device or
contrivance, in contravention of rules and regulations promulgated
by the Commission; CEA section 9(a)(2), 7 U.S.C. 13(a)(2), which
among other things makes it a felony for any person to manipulate or
attempt to manipulate the price of any commodity in interstate
commerce; and implementing Commission rules at part 180 of the
CFTC's regulations, 17 CFR part 180. In June 2023, the CFTC's
Whistleblower Office issued an alert notifying the public about how
to identify and report potential CEA violations connected to fraud
or manipulation in the carbon markets. See CFTC Whistleblower Alert,
available at: https://www.whistleblower.gov/sites/whistleblower/files/2023-06/06.20.23%20Carbon%20Markets%20WBO%20Alert.pdf. Also in
June 2023, the CFTC's Division of Enforcement announced the creation
of an Environmental Fraud Task Force to combat environmental fraud
and misconduct. Specifically, the Task Force's mission is to address
fraud and other misconduct in both the derivatives markets and the
relevant spot markets (e.g., voluntary carbon markets) and to
examine, among other things, fraud with respect to the purported
environmental benefits of purchased carbon credits. See CFTC Release
Number 8736-23 (``CFTC Division of Enforcement Creates Two New Task
Forces''), available at: https://www.cftc.gov/PressRoom/PressReleases/8736-23.
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iii. Second Voluntary Carbon Markets Convening
In July 2023, Chairman Behnam held the Second Voluntary Carbon
Markets Convening. The purpose of this convening was to discuss recent
private sector initiatives for high quality carbon credits; current
trends and developments in the cash and derivatives markets for carbon
credits; public sector initiatives related to carbon markets; and
market participants' perspectives on how the CFTC can promote integrity
for high quality carbon credit derivatives.\60\
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\60\ For the official announcement of the convening and related
materials, see CFTC Announces Second Voluntary Carbon Markets
Convening on July 19, available at: https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923.
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D. Proposed Guidance Regarding the Listing of VCC Derivative Contracts
On December 4, 2023, the Commission issued proposed guidance
outlining factors for consideration by DCMs when addressing certain
provisions of the CEA, and CFTC regulations thereunder, that are
relevant to the listing for trading of VCC derivative contracts (the
``Proposed Guidance'').\61\ In developing the Proposed Guidance, the
Commission considered those public comments on the RFI on Climate-
Related Financial Risk that addressed product innovation and voluntary
carbon markets. The Commission stated in the Proposed Guidance that,
taking into account those public comments, it believed that guidance
outlining factors for a DCM to consider in connection with the design
and listing of VCC derivative contracts would further the mission of
the CFTC, ``and may help to advance the standardization of VCC
derivative contracts in a manner that fosters transparency and
liquidity, accurate pricing, and market integrity.'' \62\
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\61\ Commission Guidance Regarding the Listing of Voluntary
Carbon Credit Derivative Contracts; Request for Comment, 88 FR 89410
(Dec. 27, 2023).
\62\ Id. at 89416.
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With a focus, primarily, on the design and listing of physically-
settled VCC derivative contracts, the Proposed Guidance addressed
certain Core Principle compliance considerations, as well as certain
requirements relating to the submission of new contracts, and contract
amendments, to the Commission. More specifically, the Proposed Guidance
addressed certain considerations with respect to Core Principles 3 and
4 for DCMs, and the contract submission provisions set forth in CEA
section 5c(c) and part 40 of the Commission regulations.
The Proposed Guidance addressed, first, the DCM Core Principle 3
requirement that a DCM only list for trading derivative contracts that
are not readily susceptible to manipulation.\63\ As discussed above,
the Appendix C Guidance outlines certain relevant considerations for a
DCM when developing a contract's terms and conditions, and providing
supporting documentation and data in connection with the submission of
the contract to the Commission. The Commission takes these
considerations into account when determining whether, with respect to
the contract, the DCM is satisfying its DCM Core Principle 3
obligations.
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\63\ CEA section 5(d)(3), 7 U.S.C. 7(d)(3).
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In connection with a physically-settled derivative contract, the
Appendix C Guidance states that the terms and conditions of the
contract ``should describe or define all of the economically
significant characteristics or attributes of the commodity underlying
the contract.'' \64\ In the Proposed Guidance, the Commission noted
that, among other things, failure to specify the economically
significant attributes of the underlying commodity may cause confusion
among market participants, who may expect a commodity of different
quality, or with other features, to underlie the contract. This may
render the precise nature of the commodity that the contract is pricing
ambiguous, and make the contract susceptible to manipulation or price
distortion.\65\
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\64\ Appendix C Guidance, paragraph (b)(2)(i)(A).
\65\ 88 FR 89410 at 89416.
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The Appendix C Guidance further states that, for any particular
contract, the specific attributes of the underlying commodity that
should be described or defined in the contract's terms and conditions
``depend upon the individual characteristics of the commodity.'' \66\
The Commission stated in the Proposed Guidance that, in its view, the
very fact that standardization and accountability mechanisms for VCCs
are still developing is, itself, ``an individual characteristic of the
commodity'' that a DCM should take into account when designing a VCC
derivative contract and addressing the underlying commodity--the VCC--
in the contract's terms and conditions.\67\ The Commission additionally
recognized in the Proposed Guidance that, while standardization and
accountability mechanisms for VCCs are currently still being
[[Page 83384]]
developed, there are certain characteristics that have been identified
broadly--across both mandatory and voluntary carbon markets--as helping
to inform the integrity of carbon credits.\68\ The Commission
identified what it preliminarily believed these characteristics to be--
referring to them, for purposes of the Proposed Guidance, as ``VCC
commodity characteristics''--and stated that it believed that a DCM
should take these VCC commodity characteristics into consideration when
designing a physically-settled VCC derivative contract, and addressing
in the contract's terms and conditions the underlying VCC.\69\
---------------------------------------------------------------------------
\66\ Appendix C Guidance, paragraph (b)(2)(i)(A).
\67\ 88 FR 89410 at 89416.
\68\ Id.
\69\ Id.
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The Proposed Guidance stated that, as a general matter, the
Commission believed that a DCM should consider the VCC commodity
characteristics when selecting one or more crediting programs from
which eligible VCCs, meeting the contract's specifications, may be
delivered at the contract's expiration.\70\ More specifically, the
Commission stated that it preliminarily believed that a DCM should, at
a minimum, consider the VCC commodity characteristics when addressing
the following criteria in connection with contract design:
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\70\ For additional clarity, the final guidance states that a
DCM should consider the VCC commodity characteristics when selecting
one or more crediting programs from which eligible VCCs, meeting the
contract's specifications, may be delivered at the contract's
``settlement,'' rather than expiration.
Quality standards
Delivery points and facilities
Inspection provisions
These are among the criteria identified in the Appendix C Guidance
as criteria relating to the underlying commodity that a DCM should
consider addressing in the terms and conditions of a physically-settled
derivative contract.\71\ As discussed above, addressing these criteria
clearly in the contract's terms and conditions, in a manner that
reflects the underlying commodity's individual characteristics, helps
to ensure that trading in the contract is based on accurate information
about the underlying commodity. This, in turn, helps to promote
accurate contract pricing and reduce the susceptibility of the contract
to manipulation. Moreover, when a contract's terms and conditions help
to ensure that, upon delivery, the quality and other attributes of the
underlying commodity will be as expected by position holders, this
helps to prevent price distortions and fosters confidence in the
contract that can incentivize trading and enhance liquidity.
---------------------------------------------------------------------------
\71\ Appendix C Guidance, paragraph (b)(2)(1) (noting that for
physical delivery contracts, an acceptable specification of terms
and conditions would include, but may not be limited to, rules that
address, as appropriate, the following criteria).
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The Commission stated in the Proposed Guidance that, in connection
with derivative contract design, it preliminarily believed that a DCM
should consider the following VCC commodity characteristics when
addressing quality standards for underlying VCCs: (a) transparency, (b)
additionality, (c) permanence and accounting for the risk of reversal,
and (d) robust quantification.\72\ When addressing delivery procedures
for underlying VCCs, the Commission stated that it preliminarily
believed that a DCM should consider the following VCC commodity
characteristics: (a) governance, (b) tracking, and (c) no double
counting.\73\ When addressing inspection or certification procedures
for verifying compliance with quality requirements or any other related
delivery requirements under the contract for underlying VCCs, the
Commission stated that it preliminarily believed that a DCM should
consider the validation and verification procedures of the crediting
program.\74\
---------------------------------------------------------------------------
\72\ 88 FR 89410 at 89417.
\73\ Id. at 89418 and 89419.
\74\ Id. at 89419.
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In addition to the above-described considerations in connection
with DCM Core Principle 3, the Proposed Guidance also addressed
considerations in connection with the requirement, under DCM Core
Principle 4, for a DCM to prevent manipulation, price distortion, and
disruptions of the physical delivery or cash-settlement process through
market surveillance, compliance, and enforcement practices and
procedures. The Commission stated that it preliminarily believed that
the monitoring by a DCM of the terms and conditions of a VCC derivative
contract, as contemplated under DCM Core Principle 4 and Commission
regulations thereunder, should include continual monitoring of the
appropriateness of the contract's terms and conditions that includes,
among other things, monitoring to ensure that the delivery instrument--
that is, the underlying VCC--conforms or, where appropriate, updates to
reflect the latest certification standard(s) applicable for that
VCC.\75\
---------------------------------------------------------------------------
\75\ Id. at 89420.
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Finally, the Proposed Guidance highlighted certain requirements in
connection with the submission of a VCC derivative contract to the
Commission pursuant to CEA section 5c(c)(5)(C) and part 40 of the
Commission's regulations, and the Commission's expectation that
information submitted to it by a DCM--including supporting
documentation, evidence and data--to describe how the contract complies
with the CEA and applicable Commission regulations, will be complete
and thorough.\76\
---------------------------------------------------------------------------
\76\ Id.
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The Proposed Guidance was subject to a 75-day public comment
period. In addition to requesting comment on all aspects of the
Proposed Guidance, the Commission requested comment on 17 specific
questions relating to the listing of VCC derivative contracts. The
public comment period closed on February 16, 2024. The Commission
received approximately 90 comments on the Proposed Guidance, including
the specific questions posed by the Commission. After thorough agency
review of the comments received, the Commission has determined to
finalize the Proposed Guidance with certain clarifications and
revisions, as discussed below.
II. Comments on the Proposed Guidance
A. Overview
Comments on the Proposed Guidance were submitted by a variety of
interested parties, including derivatives exchanges, industry and trade
associations, public interest organizations, climate advocacy groups,
carbon credit rating agencies and standard setting bodies. Many
commenters expressed their general support for the Proposed Guidance.
For example, S&P Global Commodity Insights (``S&P Global'') stated that
the Proposed Guidance correctly noted that outlining factors for a DCM
to consider in connection with the design and listing of VCC
derivatives may help the standardization of such products in a manner
that promotes transparency and liquidity.\77\ Better Markets stated
that ``the Proposed Guideline is a good step in establishing a fair,
transparent, and efficient market for voluntary carbon credits.'' \78\
The Food, Agriculture Climate Alliance (``FACA'') stated that the
``CFTC can play a role in promoting integrity and building confidence
in high-quality carbon credits.'' \79\
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\77\ S&P Global at 2.
\78\ Better Markets at 3.
\79\ FACA at 2.
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A number of commenters were supportive of the VCC commodity
characteristics identified in the Proposed Guidance, or confirmed that
they are characteristics that have been identified broadly as helping
to inform
[[Page 83385]]
the integrity of carbon credits.\80\ Certain commenters suggested
additional characteristics that the Commission should recognize as
helping to inform carbon credit integrity, or clarifications or
revisions to the descriptions of the VCC commodity characteristics
preliminarily identified by the Commission.\81\
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\80\ See, e.g., Anew Climate at 3; Bipartisan Policy Center
(``BPC'') at 2; Woodwell Climate Research Center (``Woodwell'') at
1; WWF at 1.
\81\ See, e.g., Americans for Financial Reform Education Fund
(``AFREF'') at 9; The American Forest & Paper Association
(``AF&PA'') at 6; BeZero Inc. (``BeZero'') at 5; Clean Air Task
Force (``CATF'') at 12-13; Carbon Direct Inc. (``Carbon Direct'') at
2; California Climate Exchange at 1; Clean Energy Policy Institute
(``CEPI'') at 3; Kita Earth Ltd. (``Kita'') at 1; Institute for
Policy Integrity at NYU School of Law (``NYU Policy Integrity'') at
6-7; Sylvera at 2.
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Some commenters raised concerns related to the integrity of the
voluntary carbon markets more generally, discussing issues addressed at
a high level in Section I.B.2 hereto. Some commenters encouraged the
Commission to prescribe the specific attributes that a VCC must possess
in order to be eligible to serve as the underlying for a VCC derivative
contract.\82\ Other commenters encouraged the Commission to ensure that
the guidance was clearly tailored to reflect DCM obligations and
expertise.\83\ A number of commenters recommended that the Commission
acknowledge industry-recognized standards for high-integrity VCCs as
tools that DCMs could look to, or rely upon, when considering the VCC
commodity characteristics in light of a particular crediting program or
particular VCCs.\84\
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\82\ See, e.g., Business Alliance to Scale Climate Solutions
(``BASCS'') at 1; EDF at 9; The Nature Conservancy (``TNC'') at 1;
WWF at 1.
\83\ See, e.g., Better Markets at 13; CEWG at 3.
\84\ See, e.g., Center for Climate and Energy Solutions
(``C2ES'') at 2; International Emissions Trading Association
(``IETA'') at 2; ISDA at 2; Puro.earth Oy (``Puro'') at 2; Verra at
7.
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B. Specific Comments
1. Scope and Application of Guidance
Feedback from certain commenters indicated that their understanding
was that the Commission's guidance would establish new obligations for
DCMs.\85\ The Commission emphasizes that its guidance does not
establish new obligations for DCMs. The Commission's guidance is not
intended to modify or supersede existing statutory or regulatory
obligations, or existing Commission guidance that addresses the listing
of derivative contracts by CFTC-regulated exchanges, including the
Appendix C Guidance. Rather, in recognition that VCC derivative
contracts are a comparatively new and evolving class of products \86\
which have certain unique attributes, as do voluntary carbon markets
themselves, the Commission's guidance is intended to assist DCMs in
addressing existing obligations, when designing and listing such VCC
derivatives. For example, the guidance takes into account that
standardization and accountability mechanisms for VCCs are currently
still developing, and outlines how that may inform a DCM's contract
design and listing considerations. A DCM's obligations remain those
that are set forth in the CEA and the Commission's regulations,
including (but not limited to) those statutory and regulatory
requirements that are addressed in the Commission's guidance, such as
the obligation under DCM Core Principle 3 for a DCM only to list for
trading contracts that are not readily susceptible to manipulation.
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\85\ See, e.g., CME at 2; ICE at 4; Nodal at 2-5.
\86\ In 2022, ISDA published a whitepaper providing background
on the cash and derivatives markets for voluntary carbon credits.
See Voluntary Carbon Markets: Analysis of Regulatory Oversight in
the US. (2022), available at: https://www.isda.org/2022/06/02/voluntary-carbon-markets-analysis-of-regulatory-oversight-in-the-us/.
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Some commenters asserted that the existing contract listing
framework for DCMs is both sufficient and appropriate for addressing
the listing of VCC derivative contracts. For example, Nodal stated that
it was not necessary for the Commission to adopt the Proposed Guidance
because ``the existing DCM regulatory framework . . . already provides
the appropriate requirements, guidance, and flexibility to manage the
listing of VCC derivatives.'' \87\ Intercontinental Exchange (``ICE'')
and CME similarly stated that the existing contract listing framework
is effective, and already enables DCMs to develop contract terms and
conditions that account for relevant market factors, and that are
appropriately designed to the characteristics of the underlying
asset.\88\ Both ICE and Nodal noted that the Appendix C Guidance does
not address a specific underlying asset class, with ICE adding that the
Appendix C Guidance ``does not mandate a set of criteria or attributes
for any particular asset class.'' \89\ In this regard, the Commission
reiterates that its guidance with respect to the listing of VCC
derivative contracts is not intended to establish new obligations for
DCMs, or modify or supersede existing statutory or regulatory
requirements or the Appendix C Guidance. Rather, at this juncture in
the evolution of VCC derivatives as a product class, and taking into
account certain unique attributes of VCC derivatives and the voluntary
carbon markets more generally,\90\ the Commission does believe that
there is a benefit to outlining certain factors for consideration by a
DCM in connection with the listing of VCC derivative contracts for
trading. The guidance is intended as a tool for DCMs, to facilitate
contract design, by helping to clarify how certain aspects of the
existing contract listing framework may apply in the context of this
particular class of products. The Commission believes that this can
help to ensure that, upon delivery, the quality and other attributes of
VCCs underlying a derivative contract will be as expected by position
holders. The Commission believes that this, in turn, can support
accurate pricing, help reduce the susceptibility of the contract to
manipulation, and foster confidence in the contract that can enhance
liquidity.
---------------------------------------------------------------------------
\87\ Nodal at 2.
\88\ See CME at 4; ICE at 5.
\89\ ICE at 5; Nodal at 4.
\90\ See supra, Sections I.B.1 and I.B.2.
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As discussed in more detail below, certain commenters expressed
concern that the Proposed Guidance, if adopted, could obligate a DCM to
independently confirm the sufficiency of a crediting program's policies
and procedures for ensuring high-integrity VCCs--a responsibility
which, these commenters asserted, extended beyond what was expected of
DCMs under the existing contract listing framework and for which DCMs
may not have the requisite expertise.\91\ For example, Nodal stated
that while the existing contract listing framework contemplates
consideration by a DCM of whether the commodities underlying a
derivative contract are subject to quality standards, ``DCMs are not
required to possess the expertise necessary to opine on the sufficiency
of these standards.'' \92\ BPC stated that, given their role within
financial markets, DCMs ``may not today have the in-house scientific or
technical expertise needed to comprehensively evaluate'' \93\ carbon
crediting programs. Likewise, Verra stated that performing an
evaluation of VCC quality ``requires substantial specialized technical
expertise that DCMs may not adequately possess or be reasonably
expected to acquire, given their specific roles. . . .'' \94\ Verra
observed that it was not realistic to expect a DCM, whose core
competency is derivatives
[[Page 83386]]
markets, to develop the same level of expertise in the complexities of
VCC issuance and certification as those that are directly involved in
the voluntary carbon market infrastructure, such as standard setting
bodies, crediting programs, and spot market participants.
---------------------------------------------------------------------------
\91\ See, e.g., Ceres at 2-3; CME at 7; ICE at 10; IETA at 1;
Nodal at 2; Public Citizen at 13; Terra Global Capital, LLC
(``Terra'') at 6; Verra at 6; Xpansiv Limited (``Xpansiv'') at 4.
\92\ Nodal at 2.
\93\ BPC at 3.
\94\ Verra at 2.
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Other commenters similarly identified standard setting bodies,
crediting programs, and/or market participants, as best positioned to
establish, or assess adherence with, VCC integrity standards.\95\ Some
of these commenters suggested that a DCM's primary focus should be on
whether the crediting program for underlying VCCs is making information
about its policies and procedures, and the projects or activities that
it credits, publicly available, to assist derivative market
participants in making their own informed evaluations, and comparisons,
of VCC quality. For example, CME expressed its belief that it is
``preferable for the crediting program to publish its methodology . . .
and for the market participants to render their own judgment.'' \96\
ICE stated that, while it is important for market participants to have
sufficient information to make an informed decision about the quality
of VCCs that may underlie a DCM contract, ``such information is best
created by the crediting program and reviewed in the context of other
information published by the program.'' \97\ CME asserted that the
``lion's share'' of the criteria identified by the Commission as
informing the integrity of a VCC is publicly available: ``As such,
participants in the VCC derivatives markets are free to transact, or
not, based on their assessment of the data points that matter to
them.'' \98\
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\95\ See, e.g., Ceres at 2-3; CME at 7; IETA at 1-2; Terra at 6;
Xpansiv at 4.
\96\ CME at 7.
\97\ ICE at 6.
\98\ CME at 8.
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A number of commenters recommended an acknowledgment, in the
Commission's guidance, that industry-recognized standards for high-
integrity VCCs are tools that may assist DCMs in their consideration,
with respect to a particular crediting program, of the VCC commodity
characteristics identified by the Commission in the guidance.\99\ For
example, ICE noted that certain crediting program operators and their
methodologies have been approved under standards set by private sector
initiatives that have been subject to open consultation.\100\ ICE also
noted the ongoing initiatives by the International Organization of
Securities Commissions (``IOSCO'') to develop a set of good practices
to promote the integrity and orderly functioning of voluntary carbon
markets.\101\ ICE recommended that the Commission permit DCMs to
reasonably rely on assurances by a crediting program or registry that
adheres to, and is audited against, threshold standards for high-
quality carbon credits established by ``international organizations
such as IOSCO, The Integrity Council for the Voluntary Carbon Market
(``ICVCM''), and International Civil Aviation Organization (``ICAO''),
or similar standard setting bodies.'' \102\ Verra similarly recommended
that the Commission permit DCMs ``to rely on VCC certification and
compliance set forth under relevant nongovernmental and governmental
initiatives.'' \103\ Some commenters recommended that the Commission go
so far as to require DCMs only to list VCC derivatives contracts whose
underlying VCCs are approved or certified by an industry-recognized
standards program for high-integrity VCCs.\104\
---------------------------------------------------------------------------
\99\ See, e.g., C2ES at 2; ICE at 7; IETA at 2; Puro at 5; Verra
at 7.
\100\ ICE at 7.
\101\ ICE at 8.
\102\ ICE at 7.
\103\ Verra at 7.
\104\ See, e.g., Duke Financial Economics Center at 9; Puro at
1; Terra at 2.
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In responding to the above-described comments the Commission first
addresses the suggestion that a DCM's primary focus, when listing for
trading a VCC derivative contract, should be on whether the crediting
program for underlying VCCs is making information about the program
publicly available. As discussed below, the Commission supports a DCM's
consideration of whether the crediting program for underlying VCCs is
making detailed information about its policies and procedures, and the
projects or activities that it credits, publicly available in a
searchable and comparable manner.\105\ The Commission believes that
making such information publicly available can assist market
participants in evaluating the substance and sufficiency of crediting
program policies and procedures, and making informed evaluations and
comparisons of VCC quality.
---------------------------------------------------------------------------
\105\ See discussion of the VCC commodity characteristic of
``Transparency,'' in section II.B.2.iii.1, infra.
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That said, DCMs do have statutory and regulatory obligations that
are relevant to the design and listing for trading of derivative
contracts, including an obligation under DCM Core Principle 3 to only
list contracts that are not readily susceptible to manipulation. As
discussed herein, the Appendix C Guidance outlines certain relevant
considerations for DCMs in this regard, and the considerations that are
outlined in the Appendix C Guidance are not limited to whether
information regarding the commodity underlying a derivative contract is
publicly available. For example, the Appendix C Guidance outlines
certain criteria for a DCM to consider addressing in a derivative
contract's terms and conditions, including quality standards for the
underlying commodity, delivery points and facilities, and inspection/
certification procedures for verifying compliance with quality
standards or related delivery requirements under the contract. This
guidance discusses certain characteristics that have been identified
broadly as helping to inform the integrity of carbon credits, and
addresses how consideration of these characteristics may inform the
manner in which a DCM addresses quality standards, delivery points and
facilities, and inspection/certification procedures--again, criteria
already identified in the Appendix C Guidance--in connection with the
design of a VCC derivative contract. The Commission further believes
that consideration of these characteristics will help a DCM ensure that
it understands economically significant attributes of the commodity--
the VCC--underlying the contract.
Notwithstanding the foregoing, and as more fully discussed below,
the Commission has made certain revisions to this guidance to further
ensure that the guidance appropriately reflects DCM obligations and
expertise. Moreover, the Commission acknowledges the specialized,
technical nature of crediting program policies, procedures, and
technologies, as well as the fact that certain private sector and
multilateral initiatives have engaged in extensive undertakings,
involving public consultation, to develop standards for high-integrity
VCCs against which such policies, procedures and methodologies can be
assessed. The Commission is therefore clarifying its view that, as a
general matter, industry-recognized standards for high-integrity VCCs
can serve as tools for DCMs in connection with their consideration of
the VCC commodity characteristics outlined in this guidance.
2. A DCM Shall Only List Derivative Contracts That Are Not Readily
Susceptible to Manipulation--VCC Commodity Characteristics
i. General
A number of commenters expressed their support for the VCC
commodity
[[Page 83387]]
characteristics identified in the Proposed Guidance.\106\ For example,
API stated that it ``supports the CFTC's reference to the broad core
principles of additionality, permanence, robust quantification of
emissions reductions and removals, no double counting, effective
governance, tracking, transparency, and robust independent third-party
validation and verification in the Guidance.'' \107\ Similarly, a
number of commenters confirmed that the VCC commodity characteristics
identified in the Proposed Guidance were recognized broadly as helping
to inform the integrity of carbon credits.\108\ For example, BPC
expressed agreement that the Proposed Guidance ``identifies appropriate
VCC commodity characteristics that have also been part of the
[voluntary carbon markets] literature and policy discourse for many
years.'' \109\
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\106\ See, e.g., API at 2; Woodwell at 1; WWF at 1.
\107\ API at 2.
\108\ See, e.g., Carbon Direct at 2; Carbon Removal Alliance
(``CRA'') at 2.
\109\ BPC at 2.
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ii. Social and Environmental Factors
A number of commenters addressed the specific questions posed by
the Commission in the Proposed Guidance, regarding whether, in addition
to the VCC commodity characteristics preliminarily identified by the
Commission, there were other characteristics informing the integrity of
carbon credits that were relevant to the listing of VCC derivative
contracts--or whether there were VCC commodity characteristics that
were identified in the Proposed Guidance that were not relevant to the
listing of VCC derivative contracts. In response to these questions,
several commenters responded that the Commission should recognize the
social and environmental impacts of a mitigation project or activity,
beyond the project or activity's GHG reduction or removal benefits, as
characteristics that inform the integrity of the carbon credits issued
with respect to such project or activity.\110\ For example, Carbon
Direct stated that it considered avoidance of negative impact on
economic, social, and environmental systems, maximization of benefits
to local communities and ecosystems, and environmental justice
(equitable distribution of environmental benefits and harms resulting
from GHG removal projects) as characteristics that are ``essential to
evaluating the quality of a VCC.'' \111\ WWF recommended that the
Commission recognize a VCC commodity characteristic that explicitly
addresses project safeguards,\112\ stating that such safeguards ``are
common attributes of high integrity development projects and should be
included so that communities and surrounding ecology are not negatively
impacted. . . .'' \113\ TNC and ICVCM suggested that the Commission
should further align its guidance with ICVCM's Core Carbon Principles
by also including considerations with respect to social and
environmental safeguards, as well as net zero alignment.\114\ BASCS and
EDF also encouraged the Commission to consider guidance in this area
that aligned with the ICVCM's Core Carbon Principles.\115\
---------------------------------------------------------------------------
\110\ See, e.g., aDryada at 1; BASCS at 1; BCarbon Inc
(``BCarbon'') at 3; Carbon Direct at 2; EDF at 9; ICVCM at 6; Terra
at 7; TNC at 1; WWF at 1.
\111\ Carbon Direct at 2.
\112\ Project safeguards are policies, standards and operational
procedures designed to identify, avoid and mitigate adverse
environmental and social impacts that may arise in connection with a
carbon mitigation project or activity.
\113\ WWF at 1.
\114\ ICVCM at 6; TNC at 1.
\115\ BASCS at 5-6; EDF at 9.
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Similarly, the majority of commenters responding to a specific
question on this matter in the Proposed Guidance expressed support for
the consideration by a DCM, when designing a VCC derivative contract,
of whether the crediting program for underlying VCCs has implemented
measures to help ensure that credited mitigation projects or
activities: (i) meet or exceed best practices on social and
environmental safeguards and (ii) would avoid locking in levels of GHG
emissions, technologies or carbon intensive practices that are
incompatible with the objective of achieving net zero GHG emissions by
2050.\116\
---------------------------------------------------------------------------
\116\ See, e.g., AFF at 4-5; BASCS at 5-6; C2ES at 9; Flow
Carbon at 5-6; TNC at 4; WWF at 1.
---------------------------------------------------------------------------
Several commenters stated that there was an association between the
social and/or environmental impacts of a mitigation project or
activity, and the price of the related VCCs. EDF asserted that ``social
safeguards . . . are economically significant attributes of the carbon
credits. Sustainable development benefits and safeguards materially
influence contract pricing, directly impact the extent to which the
credit will be delivered and influence the political durability of
those credits.'' \117\ TNC asserted that the social and environmental
safeguards associated with a mitigation project or activity can
significantly influence contract pricing, as projects infringing on the
rights of local communities or adversely damaging ecosystems will be
shunned by market stakeholders.'' \118\ ICVCM stated that ``verifiable
social and environmental attributes beyond mitigation and credit
revenues are generally perceived by buyers as increasing the quality of
credits, driving higher market prices.'' \119\
---------------------------------------------------------------------------
\117\ EDF at 9.
\118\ TNC at 3.
\119\ ICVCM at 10.
---------------------------------------------------------------------------
Several commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives,
and adherence by a crediting program to such standards, when
considering the crediting program's measures with respect to social and
environmental safeguards and/or net zero alignment. For example, TNC
recommended that a DCM consider ``whether a crediting program has
procedures that follow the recommendations of CORSIA's safeguard
requirements,'' and whether the crediting program requires projects or
activities to generate net positive social and environmental
outcomes.\120\
---------------------------------------------------------------------------
\120\ TNC at 3.
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As noted above, TNC, as well as ICVCM, BASCS, and EDF, referenced
the ICVCM's Core Carbon Principles as a standard to inform
consideration of social and environmental safeguards and net zero
alignment. Charm Industrial (``Charm'') and CRA, meanwhile suggested
that a DCM consider whether a crediting program ensures that a
mitigation project or activity complies with applicable U.S.
regulations and legal requirements,\121\ and Forest Peoples Programme
Amerindian Peoples Association Rainforest Foundation US (``Forest
Peoples'') stated that a DCM should consider whether a crediting
program has social safeguard requirements that align with the rights of
indigenous persons under international law, such as the UN human rights
treaties and the UN Declaration on the Rights of Indigenous
Peoples.\122\
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\121\ See Charm at 5; CRA at 3.
\122\ Forest Peoples at 5.
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A few commenters expressed concerns associated with the
consideration, by a DCM, of a crediting program's measures with respect
to social and environmental safeguards and/or net zero alignment.
Iconoclast Industries, LLC (``Iconoclast'') stated that consideration
of a crediting program's measures with respect to net zero alignment
would ``make this a zero-sum game. Incremental steps should be
acceptable and . . . the market will continue facilitating the
evolution towards'' the 2050 goal.\123\ Terra similarly raised concerns
regarding a DCM's consideration of whether a crediting program has
measures with
[[Page 83388]]
respect to net zero alignment, and commented that ``the perfect has
been the enemy of the good over many years.'' \124\
---------------------------------------------------------------------------
\123\ Iconoclast at 5.
\124\ Terra at 7.
---------------------------------------------------------------------------
As discussed above, a number of commenters on the Proposed Guidance
stated that a crediting program's measures with respect to social and
environmental safeguards may have a bearing on how participants in the
voluntary carbon markets evaluate the quality--and by extension the
price--of the VCCs that are issued by the crediting program.\125\ Also
as discussed above, addressing in a derivative contract's terms and
conditions the quality of the underlying commodity that would be
delivered upon physical settlement, can help to promote accurate
pricing and reduce the susceptibility of the contract to
manipulation.\126\
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\125\ While certain commenters disagreed that a DCM should
consider such matters in connection with derivative contract design,
their comments did not contradict those commenters who stated that
market participants may recognize such matters as informing VCC
quality.
\126\ See section I.A, supra.
---------------------------------------------------------------------------
After consideration of the comments received, the Commission agrees
that a crediting program's measures with respect to social and
environmental safeguards may be relevant to how market participants
evaluate VCC quality. Accordingly, a DCM may determine that it is
appropriate, when addressing quality standards in connection with
derivative contract design, to consider whether the crediting program
for underlying VCCs has implemented measures to help ensure that
credited mitigation projects or activities (i) meet or exceed best
practices on social and environmental safeguards, and (ii) would avoid
locking in levels of GHG emissions, technologies or carbon intensive
practices that are incompatible with the objective of achieving net
zero GHG emissions by 2050. The Commission has determined to finalize
its guidance accordingly. The Commission emphasizes, however, that it
does not expect that a DCM will necessarily be evaluating the specifics
of the crediting program's measures with respect to social and
environmental safeguards and net zero alignment, and this guidance does
not prescribe any such measures. The Commission is simply noting that,
because such measures may be relevant to how market participants
evaluate VCC quality, a DCM may decide to consider whether a crediting
program has implemented such measures when addressing quality standards
in connection with the design of a VCC derivative contract. The
Commission believes that, as a general matter, industry-recognized
standards for high-integrity VCCs, and whether a particular crediting
program has been approved or certified as adhering to an industry-
recognized standard setting program, can serve as tools for a DCM, in
connection with its consideration of the crediting program's measures
with respect to social and environmental safeguards and net zero
alignment.
iii. Quality
a. Transparency
Commenters broadly agreed that DCMs should provide, in a VCC
derivative contract's terms and conditions, information about the VCCs
that are eligible for delivery under the contract, including
information that readily specifies the crediting program(s) from which
VCCs that are eligible for delivery under the contract may be
issued.\127\ Ceres, ICE, and IETA agreed that the crediting programs
for eligible VCCs should be identified in the contract's terms and
conditions.\128\ Better Markets supported the inclusion of
``comprehensive information about the eligible VCCs for delivery,'' and
stated that such transparency would ensure that ``contract pricing
represents the quality of the underlying VCCs.'' \129\
---------------------------------------------------------------------------
\127\ See, e.g., ANSI National Accreditation Board (``ANAB'') at
5; Better Markets at 8; CarbonPlan at 6-7; CATF at 8; Ceres at 3;
CEWG at 11; Climeworks Corporation (``Climeworks'') at 3; Flow
Carbon Inc. (``Flow Carbon'') at 3; IETA at 2; New York State
Society of Certified Public Accountants (``NYSSCPA'') at 3; Xpansiv
at 9.
\128\ Ceres at 3; ICE at 6; IETA at 2.
\129\ Better Markets at 8.
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Commenters also broadly agreed that DCMs should consider whether a
crediting program for underlying VCCs is making information regarding
the crediting program's policies and procedures, and the projects or
activities that it credits, publicly available.\130\ For example, Anew
Climate stated that ``a crucial component of high-quality VCCs is that
the crediting program that issues those VCCs be transparent and make
sufficient information about its projects and project activities
publicly available.'' \131\
---------------------------------------------------------------------------
\130\ See, e.g., Anew Climate at 4; Flow Carbon at 3; Sylvera at
3-4.
\131\ Anew Climate at 4.
---------------------------------------------------------------------------
Certain commenters addressed the specific questions posed by the
Commission in the Proposed Guidance, regarding whether there are
criteria, factors or information that a DCM should take into account
when considering and/or addressing in a VCC derivative contract's terms
and conditions whether a crediting program is providing sufficient
access to information about the projects or activities that it credits,
and whether there is sufficient transparency about credited projects or
activities.\132\ CarbonPlan stated that DCMs should consider whether
``data about VCCs are shared under terms that support both public
access and reuse.'' \133\ Isometric HQ Limited (``Isometric'') stated
that crediting programs ``should be required to provide the highest
degree of transparency possible (only excluding, where relevant,
confidential information) in relation to all credits that they issue.''
\134\ ICE meanwhile, took the position that ``market participants, and
not DCMs, are best placed to assess whether the information made
available by a crediting program is sufficient and detailed in respect
of the crediting program's policies and procedures and the projects or
activities that it credits.'' \135\
---------------------------------------------------------------------------
\132\ See, e.g., Anew Climate at 4; CarbonPlan at 6-7; CATF at
8; Ceres at 3; Isometric at 3; Xpansiv at 9.
\133\ CarbonPlan at 6-7.
\134\ Isometric at 3.
\135\ ICE at 6.
---------------------------------------------------------------------------
Some commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives,
when considering a crediting program's transparency measures.\136\ For
example, C2ES and ICVCM referenced ICVCM's standards with respect to
transparency, particularly the requirement under the ICVCM Core Carbon
Principle Assessment Framework that a crediting program ``make all
information about the projects and its project rules public.'' \137\
Berkeley and Sylvera, meanwhile, referred to California Assembly Bill
1305, the ``Voluntary Market Disclosures Business Regulation Act,''
which requires a business entity that is marketing or selling VCCs
within the state to publicly disclose, among other things, specific
details regarding the mitigation project in respect of which the VCCs
are generated, as well as ``[t]he pertinent data and calculation
methods needed to independently reproduce and verify the number of
emissions reduction or removal credits issued'' for the project.\138\
Flow Carbon similarly suggested that publicly available project
information should be sufficient to allow a buyer or third party to
verify the accuracy of the claimed emission reductions.\139\
---------------------------------------------------------------------------
\136\ See, e.g., ANAB at 5; Berkeley Carbon Trading Project
(``Berkeley'') at 5; C2ES at 5; EDF at 6; ICVCM at 7; Sylvera at 3-
4.
\137\ C2ES at 5; ICVCM at 7.
\138\ Berkeley at 5; Sylvera at 3-4.
\139\ Flow Carbon at 3.
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[[Page 83389]]
Some commenters recommended that DCMs should provide project- or
activity-level information in the terms and conditions of a VCC
derivative contract.\140\ For example, CATF stated that access to
information at the level of the individual project or activity is
necessary because of the flexibility that is given to project
developers regarding the quantification of credits. CATF thus
recommended that the terms and conditions for a VCC derivative contract
provide buyers with access to specific information about how a
crediting program's protocols are implemented for a given project or
activity, including ``baseline scenario assumptions and quantification
metrics. . . , verification reports, annual reports, risk rating and
justification, and the location of projects.'' \141\ ICE, meanwhile,
stated that while a VCC derivative contract ``will have to identify
clearly what is and is not deliverable under it . . . details as to the
specific types of projects or activities for which [a crediting
program] issues credits are made publicly available by the crediting
programs on their websites and through their registries,'' where they
can be reviewed and assessed by market participants.\142\
---------------------------------------------------------------------------
\140\ See, e.g., CATF at 8; Ceres at 3; Isometric at 3; Terra at
4.
\141\ CATF at 8.
\142\ ICE at 6.
---------------------------------------------------------------------------
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to transparency as
proposed, with certain revisions. The Commission continues to believe
that a DCM should provide, in the terms and conditions of a VCC
derivative contract, information about the VCCs that are eligible for
delivery under the contract.\143\ While the information that is
provided about eligible VCCs need not be ``comprehensive''--for
example, the terms and conditions would not necessarily have to
identify each specific mitigation project or activity in respect of
which VCCs that are eligible for delivery under the contract may be
issued--the Commission agrees that the terms and conditions should make
clear to market participants what is, and what is not, deliverable
under the contract, including by providing information that readily
specifies the crediting program, or programs, from which eligible VCCs
may be issued.\144\ To the extent that eligible VCCs are associated
with a specific category of mitigation project or activity--such as
nature-based projects or activities--this also should be readily
evident from the contract terms and conditions.\145\
---------------------------------------------------------------------------
\143\ See 88 FR 89410 at 89417. See also 17 CFR 40.1(j)(1)(i)
(defining the ``terms and conditions'' of, inter alia, a futures
contract to include quality and other standards that define the
commodity or instrument underlying the contract).
\144\ Id.
\145\ Id.
---------------------------------------------------------------------------
Additionally, and after consideration of the comments received, the
Commission continues to believe that, as part of the contract design
process, a DCM should consider whether the crediting program for VCCs
that are eligible for delivery under a derivative contract is making
detailed information about the crediting program's policies and
procedures, and the projects or activities that it credits, publicly
available in a searchable and comparable manner.\146\ Where such
information is made available by a crediting program, it can assist
market participants in making informed evaluations, and comparisons, of
the quality of the VCCs that underlie derivative contracts, which can
help to support accurate pricing.
---------------------------------------------------------------------------
\146\ 88 FR 89410 at 89417.
---------------------------------------------------------------------------
With respect to comments recommending that the terms and conditions
of a VCC derivative contract should provide project- or activity-
specific information, the Commission reiterates that this guidance
focuses on considerations for a DCM at the crediting program level. As
detailed more fully herein, the Commission believes that the policies
and procedures that a crediting program has in place, along with its
governance framework, inform the quality and other attributes of the
VCCs that the crediting program issues. The Commission does not expect
that a DCM will necessarily be considering the specific mitigation
projects or activities for which eligible VCCs may be issued; the
Commission expects that the DCM's focus will be on its consideration of
the crediting program itself. Nor, as discussed above, does the
Commission expect that information regarding the specific mitigation
projects or activities for which eligible VCCs may be issued would
necessarily be included in the terms and conditions of a VCC derivative
contract. The Commission's view in this regard is predicated, however,
on its view that the contract's terms and conditions should include
information that readily specifies the crediting program or programs
from which eligible VCCs may be issued, so that market participants can
evaluate the substance and sufficiency of project- and activity-level
information that such crediting programs make publicly available.
Likewise, while the Commission continues to believe that a DCM
should consider a crediting program's policies and procedures for
making program information (including mitigation project and activity
information) publicly available, the Commission is persuaded by
comments stating that information regarding such policies and
procedures is not the type of information that typically would be
included in a derivative contract's terms and conditions and has
determined to revise its guidance accordingly.
Finally, after taking into account comments received on the
Proposed Guidance, the Commission clarifies its view that, as a general
matter, industry-recognized standards for high-integrity VCCs, and
whether a particular crediting program has been approved or certified
as adhering to an industry-recognized standards setting program, can
serve as tools for a DCM, in connection with its consideration of the
crediting program's transparency measures.
b. Additionality
In the Proposed Guidance, the Commission noted that additionality
is viewed by many as a necessary element of a high quality VCC, and
stated that it preliminarily believed that, as part of its contract
design market research, a DCM should consider whether a crediting
program can demonstrate that it has procedures in place to assess or
test for additionality.\147\ The Commission preliminarily recognized
VCCs as additional where they are credited for projects or activities
that would not have been developed and implemented in the absence of
the added monetary incentive created by the revenue from carbon
credits. The Commission specifically requested comment on whether this
was the appropriate way to characterize additionality for purposes of
its guidance, and also specifically requested comment on whether there
were particular criteria or factors that a DCM should take into account
when considering whether the procedures that a crediting program has in
place provide a reasonable assurance that GHG emission reductions or
removals will be credited only if they are additional.\148\
---------------------------------------------------------------------------
\147\ Id.
\148\ Id.
---------------------------------------------------------------------------
Commenters on the Proposed Guidance generally supported a DCM's
consideration, as part of the contract design process, of whether a
crediting program for underlying VCCs can demonstrate that it has in
place
[[Page 83390]]
procedures to assess or test for additionality.\149\ Better Markets and
Carbon Direct characterized additionality as a ``cornerstone'' of
quality mitigation projects and their resulting carbon credits.\150\
---------------------------------------------------------------------------
\149\ See, e.g., Scientists affiliated with: Wilkes Center for
Climate Science & Policy, University of Utah; University of
California, Santa Barbara; University of California, Irvine
(``Affiliated Scientists'') at 1-2; American Forest Foundation
(``AFF'') at 3; Anew Climate at 4; BASCS at 3; Berkeley at 5; Better
Markets at 9; C2ES at 5-6; Carbon Direct at 3; Carbonplace UK Ltd.
(``Carbonplace'') at 3; CEPI at 5; Ceres at 3-4; EcoBalance Global
LLC (``Ecobalance'') at 2; Flow Carbon at 3-4; ICVCM at 7; Isometric
at 3; Kita at 3; Nodal at 5; Sky Harvest at 10; Sylvera at 4; Terra
at 5; Xpansiv at 9-10.
\150\ Better Markets at 9; Carbon Direct at 3.
---------------------------------------------------------------------------
However, some commenters raised concerns about recognizing
additionality as a characteristic of a high-integrity VCC, due to
challenges in evaluating and/or verifying this characteristic.\151\ The
Center for International Environmental Law (``CIEL'') stated that
``[t]he evaluation of whether or not a project is additional, or of
whether a marginal ton of removed carbon dioxide is additional, will
rarely be straightforward.'' \152\ Public Citizen similarly took the
position that additionality ``is simply not possible to guarantee,
ensure, or measure.'' \153\
---------------------------------------------------------------------------
\151\ See, e.g., BCarbon at 2; CIEL at 17; Context Labs at 2;
Harvard Business School, University of Oxford Blavatnik School of
Government, Law School, Stanford Doerr School of Sustainability, and
the E-liability Institute (``Harvard et al'') at 14; Iconoclast at
4-6; Nori at 8; Public Citizen at 14; Simon Counsell at 3.
\152\ CIEL at 17.
\153\ Public Citizen at 14.
---------------------------------------------------------------------------
With respect to whether there are particular criteria or factors
that a DCM should take into account when considering a crediting
program's procedures to assess or test for additionality, some
commenters suggested that DCMs look to standards for high-integrity
VCCs developed by private sector or multilateral initiatives.\154\ For
example, Carbonplace suggested that DCMs should consider CORSIA
standards, or third-party assessments of crediting programs by carbon
credit ratings providers or under standards such as the ICVCM's Core
Carbon Principles.\155\
---------------------------------------------------------------------------
\154\ See, e.g., AFF at 3; Anew Climate at 4; BASCS at 3;
Carbonplace at 3; CarbonPlan at 8; CEPI at 5; ICVCM at 7; Terra at
5; Sylvera at 4.
\155\ Carbonplace at 3.
---------------------------------------------------------------------------
Meanwhile, ICE stated that, although it was reasonable for a DCM to
consider whether a crediting program can demonstrate that it has
procedures in place to assesses or test for additionality, ICE
disagreed that DCMs should be required to assess whether those
procedures are of sufficient rigor to provide a reasonable assurance
that GHG emission reductions or removals are credited only if they are
additional: ``This responsibility should be borne by the crediting
program operators.'' \156\ CME likewise asserted that, while as a
factual matter a DCM could confirm that procedures are in place to
assess for additionality, ``it should not be expected to opine on the
accuracy, robustness, or appropriateness of such procedures.'' \157\
Similarly, Nodal recommended that, if the Commission chose to finalize
the Proposed Guidance, then the Commission should omit the reference to
a DCM's consideration of whether a crediting program's procedures are
``sufficiently rigorous and reliable'' to provide a reasonable
assurance that GHG emission reductions or removals are credited only if
they are additional.'' \158\
---------------------------------------------------------------------------
\156\ ICE at 7.
\157\ CME at 6.
\158\ Nodal at 5.
---------------------------------------------------------------------------
Several commenters supported how the Commission characterized
additionality in the Proposed Guidance.\159\ CATF stated that ``there
is broad consensus for defining additionality as demonstrating that the
project or activity would not have taken place without the monetary
incentive of a carbon credit, especially for voluntary carbon
credits.'' \160\ Similarly, Xpansiv stated that the characterization of
additionality in the Proposed Guidance was ``in line with the market
consensus.'' \161\
---------------------------------------------------------------------------
\159\ See, e.g., AFF at 3; Affiliated Scientists at 1-2;
Berkeley at 5; Carbon Direct at 3-4; CATF at 9; C2ES at 6; ICVCM at
7; Xpansiv at 10.
\160\ CATF at 9.
\161\ Xpansiv at 10.
---------------------------------------------------------------------------
As noted above, the Commission specifically requested comment in
the Proposed Guidance on whether another characterization of
additionality would be more appropriate, such as characterizing
additionality as the reduction or removal of GHG emissions resulting
from projects or activities that are not already required by law,
regulation, or any other legally binding mandate applicable in the
project's or activity's jurisdiction.\162\ Some commenters supported
characterizing additionality with reference to this ``regulatory test''
for ``legal'' additionality, as well as with reference to ``financial''
additionality.\163\ For example, AFREF stated that ``the Commission
should add this regulatory test to its characterization of
additionality.'' \164\ Meanwhile, Charm stated its view that legal
additionality was implicit in the Commission's proposed
characterization of additionality, but should be explicitly stated ``to
ensure all projects meet both thresholds.'' \165\
---------------------------------------------------------------------------
\162\ 88 FR 89410 at 89421.
\163\ See, e.g., AFF at 3; AFREF at 10; Berkeley at 5; Carbon
Direct at 4; CarbonPlan at 8; Charm at 3; CRA at 3-4; Natural
Resources Defense Council at 8; NYSSCPA at 4; NYU Policy Integrity
at 1, 5-6; Public Citizen at 14; Sky Harvest at 10; WWF at 1.
\164\ AFREF at 10.
\165\ Charm at 3.
---------------------------------------------------------------------------
Several commenters did not support recognizing additionality based
on the ``regulatory test.'' \166\ Affiliated Scientists stated that the
regulatory test ``is a necessary, but wholly insufficient element of a
robust definition of additionality.'' \167\ CATF stated that ``even
where regulatory requirements focus on the legal minimum to determine
additionality . . . demonstration of additionality requires a
comparison to a conservative business-as usual scenario'' to provide a
``comparison to a counterfactual without the revenue provided from the
credit.'' \168\
---------------------------------------------------------------------------
\166\ See, e.g., Affiliated Scientists at 1-2; CATF at 10;
Institute for Agriculture and Trade Policy (``IATP'') at 21.
\167\ Affiliated Scientists at 1-2.
\168\ CATF at 10.
---------------------------------------------------------------------------
Meanwhile, Ecosystem Services Market Consortium (``ESMC'') stated
that projects with additionality features ``should be characterized as
implemented in response to market incentives, and the definition should
not extend beyond this market-incentives framework to incorporate
emission reductions resulting from projects or activities that go
above-and-beyond the letter of the law.'' \169\
---------------------------------------------------------------------------
\169\ ESMC at 8.
---------------------------------------------------------------------------
Some commenters suggested other alternatives to the Commission's
proposed characterization of additionality.\170\ Ceres suggested that
DCMs should consider a range of approaches for testing additionality
and did not believe that the ``financial'' additionality described in
the Proposed Guidance should be the only measure of additionality.\171\
Among other approaches, Ceres cited performance standards and barrier
analysis.\172\ BeZero similarly believed that ``the additionality of a
carbon project cannot and should not be assessed through a single
lens--e.g., carbon accounting, financial or legal. Rather, a holistic
analysis considering a range of factors is necessary.'' \173\ BCarbon
expressed concern that ``[w]e see the continued conservation of
thriving ecosystems as
[[Page 83391]]
essential to mitigation of climate change, yet the current form of
additionality provides no mechanism for these activities to be
financially valued.'' \174\ CATF, meanwhile, emphasized the need to
take into account that the accepted meaning of the term additionality
is likely to evolve.\175\ Similarly, Xpansiv stated that the
characterization of additionality in the Commission's guidance should
not be ``overly prescriptive to ensure DCMs are able to follow evolving
VCC market developments, including revised or broadened definitions of
key criteria.'' \176\ In that regard, CME noted that while there may be
broad consensus that additionality is an important element of a high
quality VCC, ``the question of how additionality is defined and
calculated is a complex and nuanced issue and does not appear to have
reached industry consensus.'' \177\ According to CME, neither the
Commission nor DCMs should dictate the definition.\178\
---------------------------------------------------------------------------
\170\ See, e.g., BCarbon at 2; BeZero at 6; CATF at 10; Ceres at
3-4; Climeworks at 4; IATP at 21; Kita at 3; Sylvera at 4; TNC at 2.
\171\ Ceres at 3-4.
\172\ Ceres at 4.
\173\ BeZero at 6.
\174\ BCarbon at 2.
\175\ CATF at 10.
\176\ Xpansiv at 10.
\177\ CME at 6.
\178\ Id.
---------------------------------------------------------------------------
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to additionality as
proposed, with certain revisions. While the Commission appreciates that
there may be some complexity involved in characterizing, and measuring,
additionality, the comments on the Proposed Guidance support the
Commission's observation that additionality is broadly understood to be
a ``cornerstone'' characteristic of a high quality VCC. If holders of
positions in a VCC derivative contract understand and intend for VCCs
that are eligible for delivery under the contract to be additional, but
in fact they may not be, then the pricing of the derivative contract
may not accurately reflect the quality of the VCCs that may be
delivered under the contract. Thus, the Commission continues to believe
that, as part of the contract design process, a DCM should consider
whether a crediting program has procedures to assess or test for
additionality--and whether those procedures provide a reasonable
assurance that GHG emission reductions or removals are credited only if
they are additional.
The comments on the Proposed Guidance indicate, however, that there
is variation across the voluntary carbon markets in how, precisely,
additionality is characterized. For example, while some commenters on
the Proposed Guidance supported the Commission's preliminary discussion
of financial additionality, a number of commenters recommended other
approaches, including performance standards, and approaches that
addressed both financial additionality and legal additionality. The
Commission further recognizes that as the voluntary carbon markets
continue to develop, industry consensus on how to characterize
additionality may evolve.
Accordingly, the Commission has determined not to provide in its
guidance a definition of additionality. Taking into account comments
received on the Proposed Guidance, the Commission is clarifying its
view that, as a general matter, industry-recognized standards for high-
integrity VCCs can serve as tools for a DCM, both in connection with
its consideration of a particular crediting program's characterization
of additionality, and in connection with the DCM's consideration of
whether the crediting program's procedures to assess or test for
additionality provide reasonable assurance that GHG emission reductions
or removals will be credited only if they are additional, as so
characterized.
Further, the Commission is persuaded by comments stating that
specific information regarding a crediting program's procedures for
assessing or testing for additionality is not the type of information
that typically would be included in a derivative contract's terms and
conditions, and has determined to revise its guidance accordingly.
c. Permanence and Accounting for the Risk of Reversal
A number of commenters on the Proposed Guidance supported a DCM's
consideration, as part of the contract design process, of whether a
crediting program for VCCs that are eligible for delivery under the
contract has measures in place to address and account for the risk of
reversal.\179\ However, certain commenters expressed concern about a
DCM's capacity and responsibility to assess the sufficiency of the
crediting program's measures in this regard. For example, Nodal
recommended that, if the Commission finalized its guidance, the
Commission should omit reference to a DCM's consideration of whether
the crediting program's measures provide reasonable assurance that, in
the event of a reversal, an underlying VCC will be replaced by a VCC of
comparably high quality that meets the contemplated specifications of
the contract,\180\ arguing that the Commission would otherwise be
asking DCMs ``to evaluate the sufficiency of VCC quality standards,
which are normally addressed by the underlying markets.'' \181\
BCarbon, meanwhile, stated that it would be helpful for the Commission
to elaborate on what constitutes a ``similar'' VCC for purposes of
replacement.\182\
---------------------------------------------------------------------------
\179\ See, e.g., aDryada at 1; Anew Climate at 6; Better Markets
at 9; BCarbon at 2-3; Carbonplace at 4; Carbon Market Watch at 5;
Ceres at 4-5; CEPI at 5; Emergent at 2; ESMC at 5; Isometric at 5;
Kita at 3; NYSSCPA at 5; NYU Policy Integrity at 1; Sylvera at 5;
Terra at 6; TNC at 2; WWF at 1; Xpansiv at 11.
\180\ Nodal at 5.
\181\ Id.
\182\ BCarbon at 2.
---------------------------------------------------------------------------
The Commission specifically requested comment on whether there were
criteria or factors that a DCM should take into account when
considering a crediting program's measures to address reversal risk,
particularly where the underlying VCCs are sourced from nature-based
products or activities such as agriculture, forestry or other land use
initiatives.\183\ Some commenters suggested that a DCM consider a
crediting program's definition of ``permanence,'' as applied to
mitigation projects or activities for which the crediting program
issues VCCs, and the crediting program's transparency regarding that
definition.\184\
---------------------------------------------------------------------------
\183\ 88 FR 89410 at 89421.
\184\ See, e.g., aDryada at 1; Anew Climate at 5; Carbon Market
Watch at 5; CRA at 4; C2ES at 6; NYSSCPA at 5; Sylvera at 5; TNC at
2.
---------------------------------------------------------------------------
A number of commenters explicitly supported consideration of
whether a crediting program has a buffer ``pool'' or ``reserve'' in
place to address the risk of reversal.\185\ Some commenters recommended
that DCMs should consider the quality of the VCCs in a crediting
program's buffer reserve.\186\ For example, Isometric suggested, one
possibility would be to ensure that credits in the buffer reserve are
derived from high-durability projects which themselves have a low risk
of reversal, ``in order to partially mitigate cascading risk events
that could overwhelm the buffer [reserves'] ability to compensate for
reversals.'' \187\ Other commenters similarly suggested that DCMs
consider whether a crediting program has mechanisms in place to account
for the continuing sufficiency of the buffer
[[Page 83392]]
reserve.\188\ For example, Affiliated Scientists stated that ``DCMs
should only accept carbon credits from crediting programs that have
updated (and will continue to update as the science evolves) their
buffer pools to reflect the latest science on disturbance risk to make
such buffer pools sufficiently capitalized.'' \189\ Meanwhile, BCarbon
stated that it was worth noting that buffer pools are not the only
measure that exists for mitigation of reversal risk.\190\
---------------------------------------------------------------------------
\185\ See, e.g., Ceres at 4; WWF at 1; Xpansiv at 10.
\186\ See, e.g., Affiliated Scientists at 2; BCarbon at 2; CEPI
at 5; Emergent at 2; Isometric at 4; Kita at 3.
\187\ Isometric at 4.
\188\ See, e.g., Affiliated Scientists at 2; Carbonplace at 4;
CarbonPlan at 9; Charm at 4; Terra at 5; Sky Harvest at 11.
\189\ Affiliated Scientists at 2.
\190\ BCarbon at 2.
---------------------------------------------------------------------------
Some commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives,
and adherence by a crediting program to such standards, when
considering the crediting program's measures to address and account for
the risk of reversal.\191\ For example, Sylvera noted that ``industry
initiatives such as IC-VCM have already developed quality frameworks
that consider factors such as reversal risk,'' and encouraged
Commission alignment with these frameworks.\192\
---------------------------------------------------------------------------
\191\ See, e.g., Anew Climate at 5; CATF at 11; Carbonplace at
4; CEPI at 6; Charm at 4; C2ES at 6; Ducks Unlimited, Inc.
(``Ducks'') at 3; Emergent at 2; Flow Carbon at 4; Sylvera at 5;
Terra at 6.
\192\ Sylvera at 5.
---------------------------------------------------------------------------
Some commenters noted specific issues or factors for consideration
when VCCs underlying a derivative contract are sourced from nature-
based mitigation projects or activities, with many highlighting the
heightened risk of reversal associated with such projects or
activities.\193\ To provide more transparency regarding this risk, CATF
recommended providing location-specific data that adjusts with risk
assessments over time.\194\ Public Citizen stated that ``[d]ue to
significant risk of reversal in the case of nature-based projects or
activities, the DCM should either prohibit the listing of derivative
contracts based on the same, or only list those whose underlying
projects maintain a buffer pool equal to 100% of the carbon credit
value.'' \195\
---------------------------------------------------------------------------
\193\ See, e.g., CATF at 11; ESMC at 5; Public Citizen at 15;
Simon Counsell at 4.
\194\ CATF at 11. The CATF recommends adaptive risk ratings
because climate change has the potential to impact carbon credits in
certain localities.
\195\ Public Citizen at 15.
---------------------------------------------------------------------------
The Commission also specifically requested comment on how a DCM
should account for a reversal, should one occur with respect to a VCC
that is eligible for delivery under a derivative contract, and whether
there are specific terms and conditions, or other rules that a DCM
should consider including in a VCC derivative contract to account for
reversal risk.\196\ Generally, commenters supported DCMs looking to the
crediting program's measures for addressing a reversal.\197\ For
example, Anew Climate stated that DCMs should rely on the requirements
and procedures of the respective crediting program: ``The DCM should
consider how the crediting program addresses avoidable and unavoidable
reversals when they do occur and requirements related to buffer pool
contributions.'' \198\
---------------------------------------------------------------------------
\196\ 88 FR 89410 at 89421.
\197\ See, e.g., aDryada at 1; Anew Climate at 6; BCarbon at 2-
3; Better Markets at 9; Carbonplace at 4; Carbon Market Watch at 5;
CEPI at 5; Ceres at 4-5; ESMC at 5; Emergent at 2; Isometric at 5;
Kita at 3; NYSSCPA at 5; NYU Policy Integrity at 1; Sylvera at 5;
Terra at 6; TNC at 2; WWF at 1; Xpansiv at 11.
\198\ Anew Climate at 5.
---------------------------------------------------------------------------
Some commenters suggested that DCMs should design contracts in a
manner that differentiates VCCs based on assessments of reversal
risk.\199\ For example, Isometric stated that VCCs based on projects
with higher risk of reversal should be identifiable and distinct from
those VCCs based on projects with low or negligible risks of reversals:
``This will enable more effective price discovery and better
functioning markets.'' \200\ Meanwhile, IATP stated that ``[i]f we
assume that reversals will become more frequent and severe'' due to an
increase in extreme weather events, then ``DCMs should begin to account
for the impact of reversals on VCC estimated deliverable supply and on
the possibility of market disruption if uncompensated reversals become
widespread.'' \201\
---------------------------------------------------------------------------
\199\ See, e.g., BCarbon at 2; IATP at 22; Isometric at 4; Terra
at 6.
\200\ Isometric at 4.
\201\ IATP at 22.
---------------------------------------------------------------------------
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to permanence and
accounting for reversal risk as proposed, with certain revisions. After
considering the comments, the Commission continues to believe that, in
connection with the design of a VCC derivative contract, a DCM should
consider whether the crediting program for underlying VCCs has measures
in place to address and account for the risk of reversal.\202\ Market
participants that are utilizing physically-settled VCC derivative
contracts to help meet their carbon mitigation goals have an interest
in ensuring that, upon physical settlement, the underlying VCCs will
actually reduce or remove the amount of emissions that they were
intended to reduce or remove. Accordingly, the Commission believes that
the risk of reversal--and the manner in which it is accounted for by a
crediting program--is tied to the quality of the underlying VCCs and,
by extension, to the pricing of the derivative contract.
---------------------------------------------------------------------------
\202\ See 88 FR 89410 at 89417.
---------------------------------------------------------------------------
The Commission believes that comments on the Proposed Guidance
support the Commission's view that a DCM should consider whether a
crediting program for underlying VCCs has a buffer reserve or other
measures in place to address reversal risk \203\--as well as the
Commission's view that relevant considerations with respect to a
crediting program's buffer reserve could include whether the crediting
program regularly reviews the methodology by which the size of its
buffer reserve is calculated, and whether there is a mechanism in place
to audit the continuing sufficiency of the buffer reserve. In response
to comments received, the Commission clarifies that a crediting program
may, now or in the future, have measures other than, or in addition to,
a buffer reserve to address the risk of credited emissions reductions
or removals being reversed; this guidance contemplates that a DCM
should consider whether a crediting program has a buffer reserve and/or
other measures in place to address such risk.\204\
---------------------------------------------------------------------------
\203\ See id. at 89418.
\204\ The Commission understands that each crediting program,
and the registry that it operates or uses, may handle reversals in
its own way. Measures to address reversals that do not involve the
cancellation of credits in a buffer reserve may include limiting
future sales of credits, cancelling unsold credits, or having
affected projects procure credits from other projects to offset the
reversal, among other measures.
---------------------------------------------------------------------------
The Commission is also clarifying the statement, in the Proposed
Guidance, that a DCM should consider whether a crediting program's
buffer reserve or other measures provide reasonable assurance that, in
the event of a reversal, the VCCs intended to underlie a derivative
contract will be replaced by VCCs of comparably high quality that meet
the contemplated specifications of the contract. The Commission
understands that VCCs in a buffer reserve are generally drawn down and
cancelled to compensate for reversals associated with a project or
activity, rather than being drawn upon to replace VCCs issued for such
project or activity, and has determined to clarify its guidance
accordingly.
Furthermore, in response to comments received, the Commission is
[[Page 83393]]
clarifying its view that, as a general matter, industry-recognized
standards for high-integrity VCCs, and whether a particular crediting
program has been approved or certified as adhering to an industry-
recognized standards setting program, can serve as tools for a DCM, in
connection with its consideration of a crediting program's measures to
address and account for the risk of reversal.
While the Commission acknowledges comments stating that there is a
heightened risk of reversal associated with nature-based mitigation
projects and activities--including comments suggesting that VCCs issued
for such projects or activities should not be permitted to underlie a
derivative contract, or that derivative contracts should be designed in
a manner that differentiates VCCs based on assessments of reversal
risk--the Commission emphasizes that the purpose of this guidance is
not for the Commission to make recommendations, or proscriptions,
regarding the specific types of VCC derivative contracts that a DCM
should list for trading. Rather, the guidance is intended to outline
factors for the DCM, itself, to consider in connection with its
contract design and listing activities, in order to help ensure that
the DCM is complying with its statutory and regulatory obligations. The
comments with respect to nature-based mitigation projects and
activities do, however, underscore the Commission's view that a VCC
derivative contract's terms and conditions should clearly identify what
is deliverable under the contract--including by making it clear if
eligible VCCs are associated with a specific category of mitigation
projects or activities, such as nature-based products or activities.
Transparency in this regard will help to make sure that market
participants understand what VCCs can be expected to deliver under the
contract, and to make an assessment of the VCCs' quality, which will
help to support accurate pricing.
The Commission is persuaded by comments stating that specific
information regarding a crediting program's measures for estimating,
monitoring, and addressing the risk of reversal is not the type of
information that typically would be included in a derivative contract's
terms and conditions, and has determined to revise its guidance
accordingly.
d. Robust Quantification
Commenters on the Proposed Guidance broadly agreed that the
quantification methodologies or protocols used by a crediting program
for calculating GHG reduction or removal levels help to inform the
quality of VCCs issued by the crediting program.\205\ In the Proposed
Guidance, the Commission stated that it preliminarily believed that, as
part of its contract design market research, a DCM should consider the
methodology or protocol used by a crediting program to calculate
emission reduction or removals for VCCs underlying a derivative
contract, and whether the crediting program can demonstrate that such
methodology or protocol is robust, conservative, and transparent.\206\
The Commission specifically requested comment on whether there were
particular criteria or factors that a DCM should take into account when
considering, and/or addressing in a VCC derivative contract's terms or
conditions, whether a crediting program applies a robust, conservative
and transparent methodology or protocol.\207\ A number of commenters
suggested criteria or factors.\208\
---------------------------------------------------------------------------
\205\ See, e.g., Anew Climate at 6; BCarbon at 2-3; Carbon
Market Watch at 1; Carbonplace at 4; CEPI at 6; Ceres at 4-5; CIEL
at 11; Context Labs at 2; Iconoclast at 5; Isometric at 5; NYSSCPA
at 5; NYU Policy Integrity at 1; Puro at 7-8; Terra at 6; Sylvera at
5; Xpansiv at 11.
\206\ 88 FR 89410 at 89418.
\207\ Id. at 89421.
\208\ See, e.g., Centre for Competition Policy at 4; CEPI at 6;
Ceres at 3; Charm at 4; CIEL at 11; Context Labs at 2; Ducks at 4;
Flow Carbon at 4; NYU Policy Integrity at 6; Sylvera at 3-4; TNC at
3.
---------------------------------------------------------------------------
CEPI and Ducks recommended that DCMs consider whether there are
independent review procedures for a crediting program's quantification
methodologies, such as a public consultation or peer review
process.\209\ CEPI additionally recommended that DCMs consider whether
a crediting program relies on scientific evidence to develop its
quantification methodologies, and whether there are ``mechanisms for
the periodic review and/or revision of the methodologies.'' \210\
Similarly, TNC stated that any quantification methodology should use
baselines that are periodically reviewed.\211\ CIEL stated that, in
order to enable transparency, a crediting program ``must make its
methodology, and how it has been applied to individual projects,
available to public scrutiny.'' \212\ Sylvera noted that robust
quantification is only verifiable by third parties if there are
sufficient disclosures by the project developers to allow third parties
to check the accounting.\213\ NYU Policy Integrity and TNC believed
that DCMs should consider ``leakage risk'' in quantification
methodologies.\214\ Ceres cautioned against overly focusing on
conservative accounting, which might lead to an underestimation of
emission reductions or removals, and recommended balancing
conservativeness with the ultimate goal of accuracy.\215\
---------------------------------------------------------------------------
\209\ See CEPI at 6; Ducks at 4.
\210\ CEPI at 6.
\211\ TNC at 3.
\212\ CIEL at 11.
\213\ Sylvera at 3-4.
\214\ See NYU Policy Integrity at 6; TNC at 3.
\215\ Ceres at 3.
---------------------------------------------------------------------------
Other commenters, meanwhile, raised concerns similar to those noted
in Section I.B.2, regarding the lack of standardization across the
voluntary carbon markets with respect to quantification methodologies
and protocols, and how this may create issues with over-crediting and
reliability.\216\ CEPI recommended that a crediting program have
procedures in place to suspend or withdraw the use of a quantification
methodology where there is sufficient evidence that the emission
removals or reductions have been overstated.\217\
---------------------------------------------------------------------------
\216\ See, e.g., CATF at 13; Center for American Progress at 4;
Public Citizen at 13.
\217\ CEPI at 6.
---------------------------------------------------------------------------
Some commenters did recommend quantification standards,\218\ such
as the International Organization for Standardization (``ISO'') 14060
standards for quantifying, monitoring, reporting and validating GHG
emissions,\219\ or the GHG Protocol.\220\ Certain commenters
recommended that DCMs look to standards for high-integrity VCCs
developed by private sector or multilateral initiatives, such as the
robust quantification standards under the ICVCM's Core Carbon
Principles (``CCP'') and CCP Assessment Framework, and adherence by a
crediting program to such standards.\221\
---------------------------------------------------------------------------
\218\ See, e.g., Carbonplace at 4; NYSSCPA at 5; Sylvera at 5;
Terra at 6.
\219\ See, e.g., Carbonplace at 4. Carbonplace suggested that at
a minimum, DCMs focus on standards which are supported by ISO
certification.
\220\ See NYSSCPA at 5.
\221\ See, e.g., BASCS at 4; Ceres at 4-5; C2ES at 6; Ducks at
4; ICVCM at 8; Sylvera at 5.
---------------------------------------------------------------------------
Other commenters expressed concern with the view that a DCM should
consider whether a crediting program's quantification methodology or
protocol is robust, conservative and transparent.\222\ ICE stated that
expecting a DCM to engage in such an assessment would lead to
unnecessary duplication of extensive, public consultation processes to
which crediting program methodologies already are subject.\223\
[[Page 83394]]
Verra expressed concern that carrying out such an assessment would
require a DCM to obtain specialized technical expertise about topics
that are beyond its core competency in overseeing derivatives
markets.\224\ Likewise, CME stated that it would be impractical for
DCMs to develop the expertise to make such an assessment of a crediting
program's quantification methodology or protocol, and stated that it
was also possible, ``if not likely,'' that various DCMs and market
participants could have different views as to what level of robustness,
conservatism and transparency is sufficient.\225\ CME believed that
``it is preferable for the crediting program to publish its methodology
. . . and for market participants to render their own judgment.'' \226\
Ceres similarly stated that DCMs should not conduct additional due
diligence and should rely on crediting programs to demonstrate they
have processes/procedures to achieve high quality credits.\227\ Nodal
recommended that, if the Commission finalized its guidance, the
Commission omit reference to a DCM's consideration of whether the
crediting program's quantification methodology or protocol is ``robust,
conservative and transparent'', arguing that the Commission would
otherwise be asking DCMs ``to evaluate the sufficiency of VCC quality
standards, which are normally addressed by the underlying markets.''
\228\
---------------------------------------------------------------------------
\222\ See, e.g., Center for American Progress at 4; Ceres at 2-
3; CME at 7; ICE at 7; Nodal at 5; Public Citizen at 13; Verra at 6.
\223\ ICE at 7.
\224\ Verra at 6.
\225\ CME at 7.
\226\ Id.
\227\ Ceres at 2-3.
\228\ Nodal at 5.
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The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to robust
quantification as proposed, with certain revisions. As recognized in
the Proposed Guidance, and highlighted by some commenters, there are
not currently standardized methodologies or protocols that are used
across the voluntary carbon markets to quantify emission reduction or
removal levels. Given the current absence of such standardized
methodologies or protocols, the Commission continues to believe that
robustness, conservativeness and transparency are factors that inform
the extent to which a quantification methodology or protocol applied by
a crediting program helps to ensure that the number of VCCs that are
issued for a mitigation project or activity accurately reflects the
emission reduction or removal levels associated with that project or
activity.\229\ Market participants that are utilizing physically-
settled VCC derivative contracts to help meet their carbon mitigation
goals have an interest in ensuring that, upon physical settlement, the
underlying VCCs will actually reduce or remove the amount of emissions
that they were intended to reduce or remove. Accordingly, the
Commission believes that the robustness, conservativeness and
transparency of the quantification methodology or protocol that is
applied with respect to the underlying VCCs can inform their quality--
and, by extension, the pricing of the derivative contract.
---------------------------------------------------------------------------
\229\ See 88 FR 89410 at 89418. The Commission agrees that,
ultimately, the accuracy of estimations is a key objective--one that
informs confidence that the voluntary carbon markets can serve as a
tool to assist in emissions reduction efforts, as well as accurate
pricing by market participants.
---------------------------------------------------------------------------
Furthermore, the Commission continues to believe that where the
quantification methodology or protocol used to calculate the amount of
VCCs for a particular project is robust, conservative, and transparent,
the DCM should have a more reliable basis from which to form a
deliverable supply estimate for exchange-set position limits
purposes.\230\
---------------------------------------------------------------------------
\230\ Id.
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Given the relevance with respect to VCC quality, as well as
deliverable supply estimates, although the Commission acknowledges that
a DCM may not have the specialized, technical expertise to determine
whether a crediting program has demonstrated that the quantification
methodology or protocol that it uses to calculate GHG emission
reduction or removal levels for VCCs underlying a derivative contract
is robust, conservative, and transparent, the Commission does believe
that the DCM should consider whether there is reasonable assurance that
the methodology or protocol used by the crediting program is robust,
conservative and transparent.\231\ In this regard, the Commission
acknowledges and supports commenters' suggestions that factors that may
inform the robustness, conservativeness, and transparency of a
quantification methodology or protocol could include whether the
methodology or protocol has been developed with reference to scientific
evidence, whether the methodology or protocol has been subject to
independent review procedures, and whether there are mechanisms for the
periodic review and/or revision of the methodology or protocol. In
response to ICE's comment suggesting that all crediting program
methodologies are subject to extensive, public consultation procedures,
the Commission notes that review and consultation procedures may be
crediting-program specific and the implementation by any particular
crediting program of extensive public consultation procedures should
not be taken as a given.
---------------------------------------------------------------------------
\231\ In the Proposed Guidance, the Commission generally
referred to a crediting program's methodology or protocol used for
calculating the level of GHG reductions or removals associated with
a mitigation project or activity. The Commission recognizes that
crediting programs typically have multiple quantification
methodologies or protocols, and has made certain revisions to its
guidance to account for this.
---------------------------------------------------------------------------
Furthermore, and particularly in light of the comments received
that highlighted the technical and specialized nature of a crediting
program's quantification methodologies or protocols, the Commission is
clarifying its view that, as a general matter, industry-recognized
standards for high-integrity VCCs, and whether a particular crediting
program has been approved or certified as adhering to an industry-
recognized standard setting program, can serve as tools for a DCM, in
connection with its consideration of a crediting program's
quantification methodologies or protocols, including consideration of
whether there is reasonable assurance that the methodology or protocol
used to calculate emission reductions or removals for VCCs underlying a
derivative contract is robust, conservative and transparent.
The Commission is persuaded by comments stating that specific
information about the quantification methodology or protocol used by a
crediting program to calculate GHG emissions reductions or removals is
not the type of information that typically would be included in a
derivative contract's terms and conditions, and has determined to
revise its guidance accordingly.
iv. Delivery Points and Facilities
a. Governance
Generally, commenters agreed that, as part of the contract design
process for a VCC derivative contract, a DCM should consider whether
the crediting program for underlying VCCs has a governance framework
that supports the program's independence, transparency and
accountability.\232\ Better Markets, for example, stated that ``DCMs
should rigorously evaluate the governance
[[Page 83395]]
frameworks . . . employed by the crediting programs of the underlying
VCCs.'' \233\
---------------------------------------------------------------------------
\232\ See, e.g., AFREF at 6; ANAB at 5; Anew Climate at 6; BASCS
at 4; Better Markets at 11; CATF at 13-14; C2ES at 7; Forest Peoples
at 5; ICVCM at 8; Isometric at 5; NYSSCPA at 5; Simon Counsell at 4-
5; Sylvera at 6; Terra at 6; WWF at 1; Xpansiv at 11.
\233\ Better Markets at 11.
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In the Proposed Guidance, the Commission stated that, with respect
to a crediting program's governance framework, it preliminarily
believed that a DCM should consider, among other things, a crediting
program's decision-making procedures, reporting and disclosure
procedures, public and stakeholder engagement processes, and risk
management policies, as well as whether information regarding those
procedures and policies is made publicly available.\234\ The Commission
specifically requested comment on whether there were other criteria or
factors that a DCM should take into account when considering, and/or
addressing in a VCC derivative contract's terms or conditions, whether
a crediting program's governance framework effectively supports
transparency and accountability.\235\
---------------------------------------------------------------------------
\234\ 88 FR 89410 at 89419.
\235\ Id. at 89421.
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Several commenters responded to highlight conflicts of interest
considerations.\236\ For example, Anew Climate recommended that DCMs
consider whether a crediting program has policies in place to identify
and mitigate potential conflicts of interest between various
stakeholders.\237\ ICVCM and C2ES similarly recommended that
consideration of a crediting program's governance framework include
consideration of the program's conflict of interest policy.\238\
Likewise, Simon Counsell believed that a crediting program's governance
framework should address conflicts of interest, and also should include
independent review processes and an appeal process.\239\ Anew Climate
similarly stated that DCMs should consider ``whether a grievance
process and procedures by which to address those grievances are in
place.'' \240\ With respect to transparency, Xpansiv recommended that
DCMs specifically consider a crediting program's transparency and
responsiveness in connection with significant changes to project or
credit status.\241\
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\236\ See, e.g., Anew Climate at 6; C2ES at 7; ICVCM at 8;
Isometric at 5; Simon Counsell at 4-5; Sky Harvest at 13.
\237\ Anew Climate at 6.
\238\ See C2ES at 7; ICVCM at 8.
\239\ Simon Counsell at 4-5.
\240\ Anew Climate at 6.
\241\ Xpansiv at 11.
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Some commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives,
such as the governance standards under CORSIA, the International Carbon
Reduction and Offset Alliance (``ICROA'') and the ICVCM's Core Carbon
Principles, and adherence by a crediting program to such
standards.\242\
---------------------------------------------------------------------------
\242\ See e.g., Sylvera at 6; Terra at 6.
---------------------------------------------------------------------------
ICE believed that a DCM should not be responsible for determining
the adequacy of a crediting program's governance, and that a DCM should
instead be permitted to rely on recognized standard setting bodies,
``to establish threshold standards for high-quality carbon credits
which the crediting programs should adhere to and be audited against.''
\243\ CME was similarly of the view that a DCM should not determine the
effectiveness of a crediting program's independence, transparency, and
accountability, because ``DCMs are not experts in registry governance
structures, and it is impractical to expect DCMs to develop such
expertise.'' \244\
---------------------------------------------------------------------------
\243\ ICE at 7.
\244\ CME at 7.
---------------------------------------------------------------------------
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to governance as
proposed, with certain revisions. Given the importance of a crediting
program's governance framework in ensuring the overall quality of the
VCCs issued by the program, as well as the potential importance of a
crediting program's registry in facilitating delivery under a
physically-settled VCC derivative contract, the Commission continues to
believe that, as part of the contract design process, a DCM should
consider the governance framework of the crediting program for
underlying VCCs.\245\ More specifically, and after considering the
comments received, the Commission believes that a DCM should consider
whether the crediting program's governance framework supports the
crediting program's independence, transparency, and accountability.
With respect to particular criteria or factors that may inform such
independence, transparency, and accountability, and in acknowledgment
that a number of commenters highlighted these points, the Commission is
revising its guidance to expressly recognize conflict of interest
measures as a factor which may inform a crediting program's
independence, and appeals mechanisms as a factor which may inform a
crediting program's accountability.
---------------------------------------------------------------------------
\245\ 88 FR 89410 at 89419.
---------------------------------------------------------------------------
Furthermore, in response to comments received, the Commission is
clarifying its view that, as a general matter, industry-recognized
standards for high-integrity VCCs, and whether a particular crediting
program has been approved or certified as adhering to an industry-
recognized standards setting program, can serve as tools for a DCM, in
connection with its consideration of a crediting program's governance
framework, including whether the governance framework supports the
crediting program's independence, transparency, and accountability.
Finally, the Commission is persuaded by comments stating that
specific information regarding a crediting program's governance
framework is not the type of information that typically would be
included in a derivative contract's terms and conditions,\246\ and has
determined to revise its guidance accordingly.
---------------------------------------------------------------------------
\246\ See e.g., CME at 7; ICE at 7.
---------------------------------------------------------------------------
b. Tracking
In the Proposed Guidance, the Commission stated that it
preliminarily believed that a DCM should consider whether a crediting
program for underlying VCCs can demonstrate that it has processes and
procedures in place to help ensure clarity and certainty with respect
to the issuance, transfer, and retirement of VCCs.\247\ The Commission
stated that the DCM should consider whether the crediting program
operates or makes use of a registry that has measures in place to
effectively track issuance, transfer, and retirement; to identify who
owns or retires a VCC; and to make sure that each VCC is uniquely and
securely identified and associated with a single emission reduction or
removal of one metric ton of carbon dioxide equivalent.\248\ The
Commission stated that, where the registry will serve as the delivery
point for a physically-settled VCC derivative contract, it may be
appropriate for the DCM to include as a condition of the contract that
the registry have such measures to address tracking in place.\249\
---------------------------------------------------------------------------
\247\ 88 FR 89410 at 89419.
\248\ Id.
\249\ Id.
---------------------------------------------------------------------------
In its comments on the Proposed Guidance, ISDA highlighted that,
because registries currently serve as delivery points for futures
contracts, ``[i]t is important to ensure registries have consistent and
transparent rules on how VCCs are verified, counted and transferred.
Failure to correctly track and safeguard carbon credits, or a gap in
standards in the creation of a carbon credit itself, could lead to
fraudulent
[[Page 83396]]
practices, such as greenwashing and double counting.'' \250\ ISDA went
on to say that it believes the ``CFTC has a regulatory interest in
ensuring that VCC registries (that act as delivery points for carbon
futures contracts) adopt appropriate procedures for tracking the buying
and selling of credits in the context of VCC futures and other
bilateral markets.'' \251\
---------------------------------------------------------------------------
\250\ ISDA at 3.
\251\ Id.
---------------------------------------------------------------------------
ICE stated that ``[i]t is important to distinguish between the role
of carbon crediting programs and registries,'' noting that the two
roles are often ``conflated.'' \252\ ICE stated that ``the physical
delivery of VCCs is effectuated by transferring the VCC from the seller
to the buyer in the registry operated by the crediting program.'' \253\
ICE stated that, because ``market participants value the delivery
mechanism as an important risk management function offered by DCMs and
DCOs,'' it believed that a ``DCM should seek confirmation from a
crediting program utilizing a registry that it has appropriate measures
in place to effectively track the issuance, transfer and retirement of
VCCs.'' \254\
---------------------------------------------------------------------------
\252\ ICE at 8.
\253\ Id.
\254\ Id.
---------------------------------------------------------------------------
The Commission received several responses to its request for
comment regarding whether there were other factors, in addition to
those identified in the Proposed Guidance, that a DCM should take into
account when considering, and/or addressing in a VCC derivative
contract's terms and conditions, whether a crediting program's registry
has processes and procedures in place to help ensure clarity and
certainty with respect to the issuance, transfer and retirement of
VCCs.\255\
---------------------------------------------------------------------------
\255\ See, e.g., Anew Climate at 7; BASCS at 4; C2ES at 7;
Carbon Direct at 7; Carbonplace at 5; CEPI at 6; Differentiated Gas
Coordinating Council (``DGCC'') at 6; Ecobalance at 2; Flow Carbon
at 5; Harvard et al at 18; Iconoclast at 5; ICVCM at 10; ISDA at 3;
Nodal at 6; Nori at 5; NYSSCPA at 10; Public Citizen at 16; Sky
Harvest at 14; Sylvera at 6; Terra at 6; Xpansiv at 12.
---------------------------------------------------------------------------
Like ISDA, some commenters highlighted the importance of
transparent registry rules regarding VCC tracking and retirement.\256\
For example, Anew Climate responded that ``DCMs should assess whether
the crediting program has published transparent operating procedures
for its registry activities, explaining how these processes work, as
well as terms of use that govern participation in the program.'' \257\
Other commenters supported specific accounting frameworks for tracking
to help ensure accuracy.\258\
---------------------------------------------------------------------------
\256\ See, e.g., Anew Climate at 7; Carbon Direct at 7; DGCC at
6; Flow Carbon at 5; Harvard et al at 18; ISDA at 3; Nori at 5; Sky
Harvest at 14.
\257\ Anew Climate at 7.
\258\ See, e.g., Carbon Direct at 7; Harvard et al at 18;
Stanford Doerr School of Sustainability Stanford Law School
(``Stanford Doerr'') at 1.
---------------------------------------------------------------------------
NYSSCPA supported tracking VCCs by assigning them a ``unique serial
number'' and having the crediting program, or registry, track the VCC
throughout its life cycle, including changes in ownership following
delivery and the VCC's retirement.\259\ ICVCM similarly stated that
unique identifiers ``can dramatically improve transparency and reduce
risk of double counting.'' \260\
---------------------------------------------------------------------------
\259\ NYSSCPA at 10.
\260\ ICVCM at 10.
---------------------------------------------------------------------------
Sylvera, BASCS, ICVCM, and C2ES responded in support of ICVCM's
standards with respect to tracking and double counting.\261\ The ICVCM
CCP Assessment Framework requires crediting programs to have registry
provisions that prevent double registration of mitigation activities,
double use of a carbon credit after it has been cancelled or retired
for a specific use, and measures to prevent double claiming with
mandatory domestic mitigation programs or incentivization schemes
(e.g., Renewable Energy Certificates).\262\
---------------------------------------------------------------------------
\261\ See, e.g., BASCS at 4; C2ES at 7; ICVCM at 10; Sylvera at
6.
\262\ ICVCM at 10.
---------------------------------------------------------------------------
A few commenters expressed concern with the view that a DCM should
consider the effectiveness of a crediting program's tracking
measures.\263\ Terra stated that this should be handled by the
crediting program.\264\ Nodal recommended that, if the Commission
finalized the Proposed Guidance, the Commission should omit reference
to a DCM's consideration of whether a crediting program operates or
makes use of a registry that has measures in place to ``effectively''
track VCCs, arguing that the Commission would otherwise be asking DCMs
``to evaluate the sufficiency of VCC quality standards, which are
normally addressed by the underlying markets.'' \265\
---------------------------------------------------------------------------
\263\ See e.g., ICE at 8; Nodal at 5-6; Terra at 6.
\264\ Terra at 6.
\265\ Nodal at 5-6.
---------------------------------------------------------------------------
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to tracking as
proposed, with certain revisions. As discussed in the Proposed
Guidance, market participants that are utilizing physically-settled VCC
derivative contracts to help meet carbon mitigation goals have an
interest in ensuring that, upon physical settlement, the underlying
VCCs will actually reduce or remove the emissions that they were
intended to reduce or remove. It is therefore important for each
credited VCC to be uniquely associated with a single emission reduction
or removal of one metric ton of carbon dioxide. Processes and
procedures to help ensure clarity and certainty with respect to the
issuance, transfer and retirement of VCCs can help support this.
Conversely, if there is not a reasonable assurance that the VCCs
underlying a derivative contract are each unique, then, among other
things, this could distort or obscure the accuracy of the derivative
contract's pricing. The fact that the current voluntary carbon market
structure typically relies on the registries used or operated by
crediting programs to effectuate the physical delivery of VCCs
underlying a derivative contract further supports the Commission's view
that a DCM should consider whether there is reasonable assurance of the
effectiveness of the tracking measures that a crediting program has in
place.
In response to comments received, the Commission is clarifying its
view that, as a general matter, industry-recognized standards for high-
integrity VCCs, and whether a particular crediting program has been
approved or certified as adhering to an industry-recognized standard
setting program, can serve as tools for a DCM, in connection with its
consideration of the crediting program's tracking measures.
Finally, the Commission notes that the Proposed Guidance indicated
that it may be appropriate, in certain circumstances, to include in a
physically-settled VCC derivative contract certain conditions relating
to the tracking measures that the registry used or operated by the
crediting program for underlying VCCs has in place. While, based on the
specific facts and circumstances in issue, a DCM may determine that
inclusion of such conditions in a particular contract is appropriate,
the Commission is persuaded by the broader comments that it received
regarding the type of information that typically would, and would not,
be included in a derivative contract's terms and conditions,\266\ and
has determined to revise its guidance accordingly.
---------------------------------------------------------------------------
\266\ See, e.g., CME at 7; ICE at 7.
---------------------------------------------------------------------------
c. No Double-Counting
In the Proposed Guidance, the Commission stated that it
preliminarily
[[Page 83397]]
believed that a DCM should consider whether the crediting program for
underlying VCCs can demonstrate that it has effective measures in place
that provide reasonable assurance that credited emission reductions or
removals are not double-counted: ``That is, that the VCCs representing
the credited emission reductions or removals are issued to only one
registry and cannot be used after retirement or cancellation.'' \267\
Carbon Market Watch highlighted that the risk of double counting can
manifest itself in many ways. For example, a given emission reduction
may be claimed by multiple actors, such as various financers of the
mitigation project or activity (e.g., a bank that issues a loan to the
project or activity, as well as a company that purchases VCCs from the
project or activity). \268\
---------------------------------------------------------------------------
\267\ 88 FR 89410 at 89419.
\268\ Carbon Market Watch at 4.
---------------------------------------------------------------------------
aDryada stated that it believes there is confusion in the voluntary
carbon markets regarding the understanding of the term ``double
counting'' (i.e., whether the term refers to double issuance, double
use, or double claim).\269\ The AFF suggested a clarification to the
Commission's ``no double-counting'' characterization, to recognize that
there is no double counting where emission reductions or removals from
a mitigation project or activity are counted only once toward achieving
mitigation targets or goals.\270\
---------------------------------------------------------------------------
\269\ aDryada at 1.
\270\ AFF at 4.
---------------------------------------------------------------------------
The Commission specifically requested comment on whether there are
particular criteria or factors that a DCM should take into account when
considering, and/or addressing in a VCC derivative contract's terms and
conditions, whether it can be demonstrated that the registry operated
or utilized by a crediting program has in place measures that provide
reasonable assurance that credited emission reductions or removals are
not double counted.\271\ CarbonPlan suggested that a DCM should
consider whether a crediting program discloses ``the precise location
and boundaries of projects that generate VCCs.'' \272\ Bloomberg
Philanthropies, ICVCM, and C2ES highlighted that the use of unique
identifiers can reduce the risk of double counting.\273\ Other
commenters supported specific accounting frameworks for tracking to
help ensure accuracy.\274\ Some commenters provided information
regarding blockchain technology or digital assets. In general, these
commenters supported the use of blockchain or similar technology for
VCC-related recordkeeping to help avoid double counting.\275\
---------------------------------------------------------------------------
\271\ 88 FR 89410 at 89421.
\272\ CarbonPlan at 9-10.
\273\ See Bloomberg Philanthropies at 3; C2ES at 7; ICVCM at 9.
\274\ See, e.g., Carbon Direct at 7; Harvard et al at 18.
\275\ See, e.g., BCarbon at 3; Context Labs at 1; DGCC at 6;
Ecobalance at 2; Flow Carbon at 5; Harvard et al at 7; Iconoclast at
5; Nori at 6; NYSSCPA at 6; Stanford Doerr at 1.
---------------------------------------------------------------------------
A few commenters expressed concern with the view that a DCM should
consider the effectiveness of a crediting program's measures with
respect to double counting.\276\ Terra stated that this should be
handled by the crediting program.\277\ Nodal recommended that, if the
Commission finalized the Proposed Guidance, the Commission should omit
reference to a DCM's consideration of whether the crediting program can
demonstrate that it has ``effective measures'' in place with respect to
double counting,\278\ arguing that the Commission would otherwise be
asking DCMs ``to evaluate the sufficiency of VCC quality standards,
which are normally addressed by the underlying markets.'' \279\
---------------------------------------------------------------------------
\276\ See, e.g., Nodal at 6; Terra at 6.
\277\ Terra at 6.
\278\ Nodal at 6.
\279\ Id. at 5.
---------------------------------------------------------------------------
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to double counting as
proposed, with certain revisions. The Commission understands that the
term ``double counting'' may be interpreted differently within the
voluntary carbon markets, depending, for example, on the context. The
Commission clarifies that, since this guidance is focused on
considerations for DCMs in connection with the listing for trading of
physically-settled VCC derivative contracts, the Commission is
primarily concerned with double issuance--i.e., the issuance of the
same VCC more than once.
After considering the comments received, the Commission believes
that a DCM should consider whether a crediting program for underlying
VCCs has measures in place that provide reasonable assurance that
credited emission reductions or removals are not double counted. As
discussed above in connection with tracking, it is important for each
credited VCC to be uniquely associated with a single emission reduction
or removal of one metric ton of carbon dioxide equivalent to help
ensure that VCCs effectively further carbon mitigation goals, and,
relatedly, to help avoid the distortion or opaqueness of a VCC
derivative contract's pricing. The Commission therefore believes that
it is important for a DCM to consider whether a crediting program has
measures in place, including measures with respect to double counting,
that provide reasonable assurance that the VCCs issued by the crediting
program are unique.
In response to comments received, the Commission is clarifying
that, as a general matter, industry-recognized standards for high-
integrity VCCs, and whether a particular crediting program has been
approved or certified as adhering to an industry-recognized standard
setting program, can serve as tools for a DCM, in connection with its
consideration of the crediting program's measures to prevent double
counting.
v. Inspection Provisions--Third-Party Validation and Verification
Certain commenters on the Proposed Guidance highlighted the role
that effective crediting program validation and verification procedures
play in supporting VCC quality, and supported the Commission's
recognition of the benefits of validation and verification by a
reputable, disinterested party or body. Better Markets stated that the
validation and verification processes ``are vital for confirming that
credited mitigation projects or activities adhere to the [crediting]
program's rules and standards, ensuring that the emission reductions or
removals claimed are genuine and verifiable.'' \280\ Better Markets
further stated that ``the involvement of reputable, independent third-
parties in the validation and verification of projects or activities is
crucial. Such independent oversight provides assurance that the GHG
emissions reductions or removals are accurately achieved, thereby
enhancing the quality of the underlying VCCs.'' \281\ WWF, meanwhile,
stated that a third-party verification process ``should be a
requirement to improve the integrity of the credit and ultimately the
integrity of the voluntary carbon market.'' \282\ Better Markets stated
that ``best practices in third-party validation and verification should
ensure diverse and impartial review by preventing exclusive reliance on
a single validator for all projects or activities, and should include
mechanisms for addressing performance issues, conducting periodic
reviews of
[[Page 83398]]
validators, and ensuring that ongoing validation and verification are
carried out by different parties from those who performed the initial
assessments.'' \283\
---------------------------------------------------------------------------
\280\ Better Markets at 12.
\281\ Id.
\282\ WWF at 1.
\283\ Better Markets at 12.
---------------------------------------------------------------------------
Most commenters responding to a specific request for comment on
this point agreed that the delivery procedures for a physically-settled
VCC derivative contract should describe the responsibilities of
registries, crediting programs, or other third parties required to
carry out the delivery process.\284\ Xpansiv stated that such a
description enables buyers and sellers to trade VCC-linked contracts
``with a clear understanding of the delivery mechanism, the
responsibilities of all parties involved in the delivery process and
the chain of custody of VCCs being transferred in the delivery
process.'' \285\ Flow Carbon stated that, ``[f]or market participants,
transparency around the settlement process, coupled with credible
third-party review and independent verification, is critical to
ensuring that firms have the confidence to deploy capital into these
markets and products.'' \286\ Terra stated that delivery procedures
should clearly outline the ``responsibilities of all parties involved
to ensure the integrity and authenticity of the VCCs upon delivery.''
\287\
---------------------------------------------------------------------------
\284\ See, e.g., AFF at 4; Carbonplace at 5; CEPI at 7; EDF at
8; IATP at 23; Kita at 5; Public Citizen at 17; Terra at 5; Xpansiv
at 12.
\285\ Xpansiv at 12.
\286\ Flow Carbon at 5.
\287\ Terra at 7.
---------------------------------------------------------------------------
ICVCM stated that contracts ``should not have to describe the
responsibilities of third parties if the roles of the third party are
known to both parties, and the performance of those responsibilities by
third parties can be managed through usual risk management in contracts
by allocating that risk between the contract parties or providing for
default/force majeure etc. type risks.'' \288\
---------------------------------------------------------------------------
\288\ ICVCM at 9.
---------------------------------------------------------------------------
ICE highlighted the role of the DCO in the delivery process.\289\
EDF noted that the ``responsibilities of registries, crediting programs
and other third-parties required to carry out the delivery process are
generally articulated in Terms of Use contracts available on registry
websites and mandatory for registry account activation.'' \290\ EDF
stated that ``DCMs should specify which registry or registries will be
used, and also how the respective Terms of Use satisfy governance,
tracking mechanisms and double-counting prevention measures.'' \291\
---------------------------------------------------------------------------
\289\ ICE at 9-10, stating that the ``delivery procedures used
by the relevant DCO for the [VCC derivative contract] should take
account of the functions provided by the relevant registries,
specify the responsibilities of parties in the delivery process, and
address the risks to the DCO and market participants for delivery
failures, consistent with the DCO core principles.'' The Commission
reiterates that this guidance focuses considerations for DCMs in
connection with the design, and listing, of VCC derivative
contracts.
\290\ EDF at 8.
\291\ Id.
---------------------------------------------------------------------------
A few commenters expressed concern that, under the Proposed
Guidance, DCMs would be expected to assess the sufficiency of a
crediting program's procedures for validating and verifying that
credited mitigation projects or activities meet the program's rules and
standards. CME stated that serving as arbiter of such procedures is not
the appropriate role of a DCM.\292\ Nodal similarly recommended that,
if the Commission finalized the Proposed Guidance, the Commission omit
reference to a DCM's consideration of whether a crediting program's
procedures contemplated validation and verification by a ``reputable,
disinterested'' party or body, as well as reference to a DCM's
consideration of whether the crediting program is employing ``best
practices'' with respect to third-party validation and
verification.\293\
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\292\ CME at 8.
\293\ Nodal at 6.
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The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance with respect to inspection
provisions as proposed, with certain revisions. Consistent with the
Appendix C Guidance, the Commission continues to believe that
inspection or certification procedures for verifying compliance with
quality requirements or any other related delivery requirements for a
physically-settled VCC derivative contract should be specified in the
contract's terms and conditions. With respect to comments on whether
the delivery procedures for a physically-settled VCC derivative
contract should describe the responsibilities of registries, crediting
programs or any other third parties required to carry out the delivery
process, the Commission reminds exchanges and market participants that
the Appendix C Guidance states that physically-settled derivative
contracts should, among other things, specify appropriately detailed
delivery procedures ``that describe the responsibilities of deliverers,
receivers, and any required third parties in carrying out the delivery
process.'' \294\ The Commission clarifies that, in the specific context
of physically-settled VCC derivative contracts, a registry or crediting
program may be considered a deliverer, receiver or required third party
as contemplated in the Appendix C Guidance.
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\294\ Appendix C Guidance, paragraph (b)(2)(i)(B).
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The Commission acknowledges comments asserting that a DCM may not
have the specialized, technical expertise to make an independent
determination regarding the conservativeness, robustness, and
transparency of a crediting program's validation and verification
procedures. However, given the role played by a crediting program's
validation and verification procedures in informing the quality of VCCs
issued by the crediting program, the Commission does believe that there
should be reasonable assurance that the program's validation and
verification procedures are up-to-date, robust and transparent. The
Commission believes that comments also support a DCM's consideration of
whether there is reasonable assurance that those procedures reflect
best practices with respect to third-party validation and verification.
The Commission clarifies that, while such best practices with respect
to third-party validation and verification may include conducting
reviews of the performance of validators, procedures for remediating
performance issues, not using the same third-party validator to verify
every project type or project category, and using a separate third
party to conduct ongoing validation and verification from the third
party that completed the initial validation and verification process,
the Commission does not expect the DCM itself to conduct such reviews
or implement such procedures. The Commission further clarifies that it
does not expect a DCM to specify, in a VCC derivative contract's terms
and conditions, or rules, how a registry's Terms of Use address the
discussion in this guidance of governance, tracking and double
counting.
Taking into account comments received, the Commission is clarifying
its view that, as a general matter, industry-recognized standards for
high-integrity VCCs, and whether a particular crediting program has
been approved or certified as adhering to an industry-recognized
standard setting program, can serve as tools for a DCM, in connection
with its consideration of the crediting program's validation and
verification procedures, including whether there is reasonable
assurance that those procedures reflect best practices with respect to
third-party validation and verification.
[[Page 83399]]
3. A DCM Shall Monitor a Derivative Contract's Terms and Conditions as
They Relate to the Underlying Commodity Market
The Commission received a few comments regarding the Commission's
discussion in the Proposed Guidance of considerations for a DCM under
DCM Core Principle 4. Better Markets supported the Commission's
proposal.\295\ Iconoclast stated that continual monitoring by the DCM
of the appropriateness of a VCC derivative contract's terms and
conditions should include price.\296\
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\295\ See Better Markets at 13.
\296\ Iconoclast at 4.
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BPC noted that, given that DCMs ``are at their root financial
services companies,'' they may not currently have ``the in-house
scientific or technical expertise needed to comprehensively evaluate
and continuously monitor for changes in carbon crediting programs that
may affect the terms and conditions of VCC derivative contracts.''
\297\ BPC suggested that the ``Commission could consider facilitating a
community of practice among DCMs to encourage sharing of best practices
and developing common evaluation frameworks.'' \298\
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\297\ BPC at 3.
\298\ Id.
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The Commission appreciates the comments that it received on this
subject and, after considering the comments, has determined to finalize
its guidance with respect to DCM Core Principle 4 as proposed, with one
revision. The Commission notes that implementing Commission regulations
under DCM Core Principle 4 already require a DCM, among other things,
to monitor a physically-settled derivative contract's terms and
conditions as they relate to the underlying commodity market and to the
convergence of the contract price and the price of the underlying
commodity.\299\ Given that VCC derivatives are a comparatively new and
evolving class of products, and given that standardization and
accountability mechanisms for VCCs are still being developed, the
Commission does believe that it is appropriate for a DCM's monitoring
of a VCC derivative contract to include monitoring of the continued
appropriateness of the contract's terms and conditions that includes,
among other things, monitoring to ensure that the underlying VCC
conforms, or, where appropriate, updates to reflect the latest
certification standard(s) applicable for that VCC. However, for
enhanced clarity, the Commission is replacing its reference in the
guidance to ``continual'' monitoring of a contract's appropriateness,
with a reference to ``ongoing'' monitoring of such appropriateness. For
example, where there are changes to either the crediting program or the
types of projects or activities associated with the underlying VCC, due
for example to new standards or certifications, then the DCM should
amend the contract's terms and conditions to reflect this update.
---------------------------------------------------------------------------
\299\ See 17 CFR 38.252(a).
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The Commission further notes that it is supportive of exchanges
sharing best practices for statutory and regulatory compliance.
4. A DCM Must Satisfy the Product Submission Requirements Under Part 40
of the CFTC's Regulations and CEA Section 5c(c)
Some commenters on the Proposed Guidance responded to the
Commission's discussion of requirements in connection with the
submission of a VCC derivative contract to the Commission under CEA
section 5c(c)(5)(C) and part 40 of the Commission's regulations. WWF
believed the Commission should disallow self-certification of VCC
derivative contracts ``[d]ue to the limited number of voluntary carbon
credit derivative contracts and the newness of this function for the
CFTC.'' \300\ Similarly, AFREF and EDF supported the development by the
Commission of a ``heightened review framework for any self-certified
climate-related products.'' \301\ The Commission notes that, with
specific limited exceptions, the CEA contemplates that a DCM may list a
new derivative contract for trading, or amend an existing derivative
contract, by way of self-certification, provided that the DCM complies
with the substantive and procedural requirements set forth in the
statute and the Commission's implementing regulations, including the
requirement that the DCM submit certain prescribed information to the
Commission, including but not limited to the contract's terms and
conditions.\302\ The Commission notes that the CEA also sets forth the
standard that must be met by the DCM in order to list or amend a
derivative contract--which would include a VCC derivative contract--
namely, that the contract comply with the CEA and the regulations
thereunder.\303\
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\300\ WWF at 1.
\301\ AFREF at 7; EDF at 2.
\302\ CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1); 17 CFR 40.2.
\303\ CEA sections 5c(c)(1) and (5), 7 U.S.C. 7a-2(c)(1) and
(5).
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The Commission also received a comment regarding the requirement
that a contract submission to the Commission--including a submission
with respect to a VCC derivative contract--include an ``explanation and
analysis of the contract and its compliance with applicable provisions
of the [CEA], including core principles and the Commission's
regulations thereunder.'' \304\ BPC urged the Commission to ``encourage
consistency across DCMs in their development of the required
`explanation and analysis' of how their VCC derivative contract meets .
. . this proposed guidance.'' \305\
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\304\ 17 CFR 40.2(a)(3)(v) (for self-certification) and
40.3(a)(4) (for Commission approval).
\305\ BPC at 3.
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The Commission notes that each DCM has an obligation to ensure,
through its own review and analysis, that the derivative contracts that
it seeks to list for trading--including any VCC derivative contracts--
comply with the CEA and the regulations thereunder, and the DCM's
contract submissions to the Commission should reflect this review and
analysis. That said, by outlining certain relevant considerations for a
DCM in connection with the design and listing of a VCC derivative
contract, the Commission is hopeful that this guidance will help to
support the standardization of such contracts in a manner that not only
facilitates informed evaluations and comparisons by market
participants, but also fosters greater consistency in VCC derivative
product submissions to the Commission.
The Commission appreciates all of the comments that it received on
this subject. After considering the comments, the Commission has
determined to finalize its guidance regarding the product submission
requirements under part 40 of the CFTC's regulations and CEA section
5c(c)(5)(C) as proposed.
5. Foreign Boards of Trade
The Commission requested comment on whether the VCC commodity
characteristics identified in the Proposed Guidance should be
recognized as being relevant to submissions with respect to VCC
derivative contracts made by a registered foreign board of trade
(``FBOT'') under CFTC regulation Sec. 48.10.\306\ Most commenters who
[[Page 83400]]
responded were supportive of the VCC commodity characteristics being
recognized as relevant to such FBOT submissions.\307\ For example,
after noting that both DCMs and registered FBOTs are held to a ``not
readily susceptible to manipulation'' standard,\308\ CME stated that if
the Commission's guidance was intended to guard against the listing of
contracts readily susceptible to manipulation, then the scope of the
guidance should extend to FBOTs.\309\ Conversely, one commenter stated
that it did not support the application of the Commission's guidance to
contract submissions by registered FBOTs. ICE stated that under the
Commission's framework for registered FBOTs, the exchange's home
country regulator is generally tasked with the primary oversight of the
FBOT's contract terms.\310\
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\306\ 88 FR 89410 at 89421. CEA section 4(b)(1)(A), 7 U.S.C.
6(b)(1)(A), provides that the Commission may adopt rules and
regulations requiring registration with the Commission for an FBOT
that provides the members or other participants located in the
United States with direct access to the electronic trading and order
matching system of the FBOT, including rules and regulations
prescribing the procedures and requirements applicable to the
registration of such FBOTs. CEA section 4(b)(1)(A)(i) provides that,
in adopting such rules and regulations, the Commission shall
consider, inter alia, whether any such FBOT is subject to
comparable, comprehensive supervision and regulation by the
appropriate governmental authorities in the FBOT's home country. The
Commission has adopted rules requiring the registration of FBOTs
that seek to provide such direct access to members or other
participants located in the United States, which among other things
prescribe the procedures and requirements applicable to
registration. These rules are set forth at part 48 of the
Commission's regulations. Commission regulation Sec. 48.10(a), 17
CFR 48.10(a), provides that a registered FBOT that wishes to make an
additional derivative contract available for trading via direct
access to members or other participants located in the United States
must submit a written request ``prior to offering the contracts
within the United States,'' which must include specified
information, including the contract's terms and conditions. In
general, the registered FBOT can make the contract available for
trading by direct access 10 business days after the date of the
Commission's receipt of the written request, unless the Commission
notifies the FBOT that additional time is needed to complete its
review of policy or other issues pertinent to the contract.
\307\ See, e.g., AFREF at 9; Carbonplace at 3; CEPI at 4; Charm
at 3; CME at 8; C2ES at 5; IATP at 20; ICVCM at 7; NYSSCPA at 3;
Public Citizen at 13; Xpansiv at 9.
\308\ Commission regulation Sec. 48.7(c)(1), 17 CFR 48.7(c)(1),
provides, among other things, that that derivative contracts to be
made available by a registered FBOT via direct access to members or
other participants located in the United States must not be readily
susceptible to manipulation. As discussed herein, DCM Core Principle
3, CEA section 5(d)(3), 7 U.S.C. 7(d)(3), provides that a DCM must
only list derivative contracts that are not readily susceptible to
manipulation. See also 17 CFR 38.200 and 38.201.
\309\ CME at 2.
\310\ ICE at 2. The Commission has adopted specific requirements
for two types of derivative contracts offered by registered FBOTs
for trading via direct access to members and other participants
located in the United States: linked contracts and certain
securities-related contracts. Commission regulation Sec. 48.8(c),
17 CFR 48.8(c), imposes notification and reporting requirements on
registered FBOTs related to their offering for trading via direct
access of contracts that settle to the price of a futures contract
listed on a DCM (``linked contracts''). Commission regulation Sec.
48.7(c)(2), 17 CFR 48.7(c)(2), provides that registered FBOTs may
only offer via direct access non-narrow-based security index futures
and option contracts that have been certified by the Commission
pursuant to Commission regulation Sec. 30.13, 17 CFR 30.13, in
accordance with criteria set forth in Commission regulation Sec.
40.11, 17 CFR 40.11.
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The Commission appreciates all of the comments that it received on
this subject. The Commission acknowledges efforts that have been made
across jurisdictions--by governmental bodies, private sector and
multilateral initiatives, and derivative exchanges themselves--to
support transparent markets for high-integrity VCCs. The Commission
recognizes that its counterparts in other jurisdictions have similar
regulatory interests in the manner in which VCC derivatives, as a
product class, evolve--as well as in ensuring, more generally, that the
financial markets that they oversee are liquid, fair, and stable, and
free from manipulation and other abusive trading practices. The
Commission further recognizes that, given the global nature of
financial markets--including voluntary carbon markets--international
coordination is critical to support market integrity. The Commission
looks forward to continuing to coordinate with its regulatory
counterparts on efforts to promote the integrity and orderly
functioning of voluntary carbon markets, including markets for VCC
derivative contracts.
III. Guidance Regarding the Listing of VCC Derivative Contracts
The Commission is issuing guidance that outlines factors for
consideration by DCMs when addressing certain requirements under the
CEA, and CFTC regulations, that are relevant to the listing for trading
of VCC derivative contracts. The Commission recognizes that VCC
derivatives are a comparatively new and evolving class of products, and
believes that guidance that outlines factors for a DCM to consider in
connection with the contract design and listing process may help to
advance the standardization of such products in a manner that promotes
transparency and liquidity.
This guidance does not establish new obligations for DCMs. Unlike a
binding rule adopted by the Commission, which would state with
precision when particular requirements do and do not apply to
particular situations, this guidance is a statement of the Commission's
views regarding factors that may be relevant in its evaluation of DCM
compliance, and allows for flexibility in application to various
situations, including consideration of all relevant facts and
circumstances, whether or not explicitly discussed in the guidance. The
Commission intends for this guidance to be an efficient and flexible
vehicle to communicate the agency's current views, in order to give
DCMs the benefit of the Commission's thinking as they address their
Core Principle and regulatory compliance obligations.\311\
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\311\ For a number of the statutory Core Principles for DCMs,
the Commission has adopted rules that establish the manner in which
a DCM must comply with the Core Principle. Unless otherwise
determined by the Commission by rule or regulation, a DCM has
reasonable discretion in establishing the manner in which it
complies with a Core Principle. CEA section 5(d)(1)(B), 7 U.S.C.
7(d)(1)(B).
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This guidance is not intended to modify or supersede existing
Commission guidance that addresses the listing of derivative contracts
by CFTC-regulated exchanges, including the Appendix C Guidance. Rather,
taking into account certain unique attributes of VCC derivatives and
voluntary carbon markets, this guidance outlines particular matters for
consideration by a DCM when designing and listing a VCC derivative
contract. Among other things, this guidance addresses how certain
aspects of the Appendix C Guidance may be considered in the specific
context of VCC derivative contracts.
This guidance focuses primarily on the listing by DCMs of
physically-settled VCC derivative contracts. In part, this focus
reflects the fact that all VCC derivative contracts that are currently
listed for trading on DCMs are physically-settled contracts. To date,
no DCM has listed for trading a cash-settled VCC derivative contract.
In addition, the Commission believes that at this juncture in the
evolution of VCC derivatives as a product class, it may be of
particular benefit to outline considerations for a DCM that can help to
ensure that, upon delivery, the quality and other attributes of VCCs
underlying a derivative contract will be as expected by position
holders. This will support accurate pricing, help reduce the
susceptibility of the contract to manipulation, and foster confidence
in the contract that can enhance liquidity.
While this guidance focuses primarily on physically-settled VCC
derivative contracts, the Commission continues to believe that, with
respect to cash-settled derivative contracts, an acceptable
specification of the cash settlement price would include rules that
fully describe the essential economic
[[Page 83401]]
characteristics of the underlying commodity.\312\ Accordingly, the
Commission believes that discussions in this guidance of VCC commodity
characteristics for consideration by a DCM in connection with the
design and listing of a physically-settled VCC derivative contract,
would also be relevant for cash-settled derivative contracts that
settle to the price of a VCC, unless otherwise noted.\313\
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\312\ Appendix C Guidance, paragraph (c)(1).
\313\ As noted herein, and for the avoidance of doubt, this
guidance is not intended to modify or supersede the Appendix C
Guidance, which outlines considerations for both cash-settled and
physically-settled derivative contracts--including considerations
that are not touched on in this guidance. DCMs are reminded to
consult and consider the Appendix C Guidance when developing rules,
terms and conditions, and contract submissions to the Commission,
for all derivative product types--including VCC derivative products.
---------------------------------------------------------------------------
Further, while this guidance focuses on the listing of VCC
derivative contracts by DCMs, the Commission believes that the factors
outlined for consideration also would be relevant for consideration by
any SEF that may seek to permit trading in swap contracts that settle
to the price of a VCC, or in physically-settled VCC swap
contracts.\314\
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\314\ As noted above, the Appendix C Guidance is also relevant
for SEFs, which, like DCMs, are obligated by statute only to permit
trading in contracts that are not readily susceptible to
manipulation. CEA section 5h(f)(3), 7 U.S.C 7b-3(f)(3). Like DCMs,
SEFs also are subject to a statutory obligation to monitor trading
in swaps to prevent manipulation, price distortion, and disruptions
of the delivery or cash settlement process through surveillance,
compliance, and disciplinary practices and procedures. CEA section
5h(f)(4) 7, U.S.C 7b-3(f)(4). See also 17 CFR 37.400 through 37.408.
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In developing this guidance, the Commission has considered those
public comments on the RFI on Climate-Related Financial Risk that
addressed product innovation and voluntary carbon markets, as well as
comments received in response to the Proposed Guidance. Taking into
account these comments, the Commission believes that this guidance
furthers the agency's mission and may help to advance the
standardization of VCC derivative contracts in a manner that fosters
transparency and liquidity.\315\
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\315\ See also, e.g., International Emissions Trading
Association comment in response to the Second Voluntary Carbon
Markets Convening at 5-6 (stating that the CFTC is in a fortunate
position to leverage the evolving work of existing initiatives to
support the drive for quality and integrity in the voluntary carbon
markets), and BP America, Inc. comment in response to the Second
Voluntary Carbon Markets Convening at 3 (supporting guidance for
CFTC-regulated exchanges).
---------------------------------------------------------------------------
The Commission recognizes that VCC derivative products and
voluntary carbon markets are evolving and that it may therefore be
appropriate for the Commission to revisit this guidance or to issue
additional guidance in the future,\316\ as VCC derivative products and
voluntary carbon markets continue to develop and mature.\317\
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\316\ For example, the Commission may in the future revisit this
guidance, or issue additional guidance, to further address the
listing of cash-settled VCC derivative contracts, including index-
based contracts, or to further address the listing of VCC derivative
contracts by SEFs.
\317\ For the avoidance of doubt, this guidance does not address
the regulatory treatment of any underlying VCC or associated offset
project or activity, including whether any such product, project or
activity may qualify as a swap or be eligible for the forward
contract exclusion under Commission's ``swaps'' definition. See
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping; Final Rule, 77 FR 48208 (August 13, 2012).
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A. A DCM Shall Only List Derivative Contracts That Are Not Readily
Susceptible to Manipulation
DCM Core Principle 3 provides that a DCM shall only list for
trading derivative contracts that are not readily susceptible to
manipulation.\318\ With respect to DCM Core Principle 3, the Appendix C
Guidance (``Demonstration of Compliance That a Contract is Not Readily
Susceptible to Manipulation'') \319\ outlines certain relevant
considerations for a DCM when developing contract terms and conditions,
and providing supporting documentation and data in connection with the
submission of a contract to the Commission.\320\
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\318\ CEA section 5(d)(3), 7 U.S.C. 7(d)(3).
\319\ 17 CFR part 38, appendix C.
\320\ See also section I.A., supra. As noted above, the Appendix
C Guidance is also relevant to SEFs, which are similarly obligated
by statute only to permit trading in derivative contracts that are
not readily susceptible to manipulation. CEA section 5h(f)(3); 7
U.S.C 7b-3(f)(3).
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With respect to a physically-settled derivative contract, the
Appendix C Guidance states that the terms and conditions of the
contract should describe or define all of the economically significant
characteristics or attributes of the commodity underlying the
contract.\321\ Among other things, failure to specify the economically
significant attributes of the underlying commodity may cause confusion
among market participants, who may expect a commodity of different
quality, or with other features, to underlie the contract. This may
render the precise nature of the commodity that the contract is pricing
ambiguous, and make the contract susceptible to manipulation or price
distortion.
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\321\ Appendix C Guidance, paragraph (b)(2)(i)(A).
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The Appendix C Guidance states that, for any particular contract,
the specific attributes of the underlying commodity that should be
described or defined in the contract's terms and conditions ``depend
upon the individual characteristics of the commodity.'' \322\ Where the
underlying commodity is a VCC, the Commission recognizes that
standardization and accountability mechanisms for VCCs are currently
still developing. The Commission believes that the fact that
standardization and accountability mechanisms for VCCs are currently
still developing is, itself, an ``individual characteristic of the
commodity'' that should be taken into account by a DCM when designing a
VCC derivative contract and addressing the underlying commodity in the
contract's terms and conditions.
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\322\ Id.
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To that end, the Commission recognizes that, while standardization
and accountability mechanisms for VCCs are currently still being
developed, there are certain characteristics that have been identified
broadly--across both mandatory and voluntary carbon markets--as helping
to inform the integrity of carbon credits. The Commission believes that
a DCM should take these characteristics--referred to in this guidance
as ``VCC commodity characteristics'' and discussed more fully below--
into consideration when designing a VCC derivative contract, and
addressing in the contract's terms and conditions the underlying VCC.
As a general matter, the Commission believes that a DCM should
consider the VCC commodity characteristics when selecting one or more
crediting programs from which eligible VCCs, meeting the derivative
contract's specifications, may be delivered at the contract's
settlement. The Commission believes that consideration of these
characteristics will assist the DCM in understanding key attributes of
the commodity--the VCC--that underlies the derivative contract.
More specifically, the Commission believes that, at a minimum, a
DCM should consider the VCC commodity characteristics when addressing
the following criteria in the design of a VCC derivative contract:
Quality standards,
Delivery points and facilities, and
Inspection provisions.
These are among the criteria identified in the Appendix C Guidance
as criteria for a DCM to consider addressing in the terms and
conditions of a physically-settled derivative contract. As discussed
above, addressing these three criteria clearly in
[[Page 83402]]
the contract's terms and conditions helps to ensure that trading in the
contract is based on accurate information about the underlying
commodity. This, in turn, helps to promote accurate pricing and helps
to reduce the susceptibility of the contract to manipulation.
The Commission believes that, as a general matter, industry-
recognized standards for high-integrity VCCs can serve as tools for
DCMs, in connection with their consideration, with respect to a
particular crediting program, of the VCC commodity characteristics
outlined in this guidance. Where a crediting program for VCCs that are
eligible for delivery under a derivative contract has been approved or
certified by an industry-recognized standards program for high-
integrity VCCs, the DCM should consider clearly identifying the
standards program in the contract terms and conditions, along with the
crediting program itself.
1. Quality Standards
The Commission believes that a DCM should consider the following
VCC commodity characteristics when addressing quality standards in
connection with the design of a VCC derivative contract: (i)
transparency, (ii) additionality, (iii) permanence and risk of
reversal, and (iv) robust quantification.\323\
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\323\ As is the case for physically-settled VCC derivative
contracts, the Commission believes that for cash-settled derivative
contracts that settle to the price of a VCC, it is important to
clearly specify the VCC quality standards in the contract's terms
and conditions to help ensure that the pricing of the contract
reflects the quality of the VCC underlying the contract.
---------------------------------------------------------------------------
The Commission also understands that the measures that a crediting
program has in place with respect to social and environmental
safeguards, and net zero alignment, may have a bearing on how market
participants evaluate the quality of the VCCs that are issued by the
crediting program. In light of this, a DCM may determine that it is
appropriate to consider, when addressing quality standards in
connection with derivative contract design, whether the crediting
program for underlying VCCs has implemented measures to help ensure
that credited mitigation projects or activities: (i) meet or exceed
best practices on social and environmental safeguards, and (ii) would
avoid locking in levels of GHG emissions, technologies or carbon
intensive practices that are incompatible with the objective of
achieving net zero GHG emissions by 2050.
i. Transparency--Publicly Available Data To Promote Transparency
As a threshold matter, the Commission believes that a DCM should
provide, in the terms and conditions of a physically-settled VCC
derivative contract, information about the VCCs that are eligible for
delivery under the contract. The contract terms and conditions should
clearly identify what is deliverable under the contract, including by
providing information that readily specifies the crediting program or
programs from which underlying VCCs may be issued. To the extent that
underlying VCCs are associated with a specific category of mitigation
project or activity--such as nature-based projects or activities--this
also should be readily evident from the contract's terms and
conditions.
Specifying which crediting programs and, as applicable, which types
of projects or activities are eligible for purposes of delivery will
help to provide clarity to market participants regarding the VCCs that
can be expected to deliver under the contract, and will thereby help to
ensure that the pricing of the contract accurately reflects the
intended quality of the underlying VCCs. Where there is ambiguity or
confusion about the quality of the VCCs that may be delivered under the
contract, this may render the contract susceptible to manipulation or
price distortion.
The Commission believes that, when designing a VCC derivative
contract, DCMs should also consider whether the crediting program for
underlying VCCs is making detailed information about its policies and
procedures, and the projects or activities that it credits--such as
relevant project documentation--publicly available in a searchable and
comparable manner. Making such information publicly available would
assist market participants in understanding how GHG emission reductions
or removals are calculated by the crediting program--including how
additionality, which is discussed further below, is assessed--and how
GHG emission reductions or removals are quantified. This would assist
market participants in making informed evaluations and comparisons of
the quality of the VCCs that underlie derivative contracts, which would
help to support accurate pricing.
ii. Additionality
The Commission believes that, in connection with the design of a
VCC derivative contract, a DCM should consider whether the crediting
program for underlying VCCs has procedures in place to assess or test
for additionality. Additionality is recognized by many as an important
element of a high-quality VCC. If holders of positions in a VCC
derivative contract understand and intend for VCCs that are eligible
for delivery under the contract to be additional, but in fact they may
not be, then the pricing of the derivative contract may not accurately
reflect the quality of the VCCs that may be delivered under the
contract. The cheapest-to-deliver VCC,\324\ that otherwise meets the
contract's specifications, may not have additionality. Accordingly, the
Commission believes the DCM should consider whether the procedures that
a crediting program has in place to assess or test for additionality
provide reasonable assurance that GHG emission reductions or removals
will be credited only if they are additional.
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\324\ The term ``cheapest-to-deliver'' refers to the least
expensive commodity that can be delivered under the derivative
contract that otherwise meets the contract's specifications.
---------------------------------------------------------------------------
While additionality is recognized by many as an important element
of a high-quality VCC, the Commission understands that there currently
is variation across the voluntary carbon markets in how, precisely,
additionality is characterized. For example, an assessment of
additionality may focus on whether 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. Alternatively or additionally, an assessment of additionality
may focus on whether the project or activity is already required by
law, regulation, or any other legally binding mandate applicable in the
project's or activity's jurisdiction, or on other approaches such as
performance standard approaches.\325\ The Commission understands that
the factors that inform an assessment of additionality also may vary
depending on the type of mitigation project or activity in issue, and
that, as the voluntary carbon markets continue to develop, industry
consensus on how to characterize and assess additionality may evolve.
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\325\ See Joint Policy Statement on Voluntary Carbon Markets,
U.S. Department of the Treasury, May 2024, available at: https://home.treasury.gov/system/files/136/VCM-Joint-Policy-Statement-and-Principles.pdf.
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In recognition of the foregoing, the Commission is not providing in
this guidance a definition of additionality. The Commission believes
that, as a general matter, industry-recognized
[[Page 83403]]
standards for high-integrity VCCs can serve as tools for a DCM, in
connection with its consideration of a particular crediting program's
characterization of additionality, as well as the DCM's consideration
of whether the crediting program's procedures to assess or test for
additionality provide reasonable assurance that GHG emission reductions
or removals will be credited only if they are additional, as so
characterized.
iii. Permanence and Accounting for the Risk of Reversal
The Commission believes that, in connection with the design of a
VCC derivative contract, a DCM should consider whether the crediting
program for underlying VCCs has measures in place to address and
account for the risk of reversal (i.e., the risk that VCCs issued for a
project or activity may have to be recalled or cancelled due to carbon
removed by the project or activity being released back into the
atmosphere, or due to a reevaluation of the amount of carbon reduced or
removed from the atmosphere by the project or activity).
The risk of reversal may impact the risk management needs of VCC
derivative market participants. Market participants that are utilizing
physically-settled VCC derivative contracts to help meet their carbon
mitigation goals have an interest in ensuring that, upon physical
settlement, the underlying VCCs will actually reduce or remove the
amount of emissions that they were intended to reduce or remove.
Accordingly, the risk of reversal--and the manner in which it is
accounted for by a crediting program--is tied to the quality of the
underlying VCCs and, by extension, to the pricing of the derivative
contract. The crediting program's measures to address and account for
the risk of reversal may be particularly important where underlying
VCCs are issued for project or activity types with a higher reversal
risk.
Most crediting programs have established VCC ``buffer reserves'' to
help address the risk of credited GHG emission reductions or removals
being reversed. Under this approach, VCCs are set aside into a common
buffer reserve (or ``pool''). Reserved VCCs can be drawn upon and
cancelled, proportional to the magnitude of the reversal. A DCM should
consider whether a crediting program has a buffer reserve in place to
help address the risk of reversal. Relevant considerations with respect
to a crediting program's buffer reserve could include whether the
crediting program regularly reviews the methodology by which the size
of its buffer pool is calculated in order to address evolving
developments that may heighten reversal risk, and whether there is a
mechanism in place to audit the continuing sufficiency of the buffer
reserve. The Commission recognizes, however, that a crediting program
may, now or in the future, have measures other than, or in addition to,
a buffer reserve to address the risk of reversal. This guidance
contemplates that a DCM should consider whether a crediting program has
a buffer reserve and/or other measures in place to address such risk.
iv. Robust Quantification--GHG Emission Reductions or Removals Should
Be Conservatively Quantified
Given the current absence of a standardized methodology or protocol
to quantify GHG emission reduction or removal levels \326\--not only
across crediting programs, but even by a particular crediting program,
with respect to different types of projects or activities--the
Commission believes that, in connection with the design of a VCC
derivative contract, a DCM should consider whether there is reasonable
assurance that the quantification methodology(ies) or protocol(s) used
by the crediting program for calculating emission reductions or
removals for underlying VCCs is robust, conservative, and transparent.
A robust, conservative, and transparent quantification methodology or
protocol helps to ensure that the number of VCCs that are issued for a
project or activity accurately reflects the level of GHG emission
reductions or removals associated with the project or activity.
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\326\ Related specifically to the agriculture and forest sector,
the Office of Management and Budget, the White House Office of
Science and Technology Policy, and White House Office of Domestic
Climate Policy announced the release of the National Strategy to
Advance an Integrated U.S. Greenhouse Gas Measurement, Monitoring,
and Information System, a Strategy developed by the Greenhouse Gas
Monitoring and Measurement Interagency Working Group (``GHG IWG'')
to enhance coordination and integration of greenhouse gas
measurement, monitoring, and information efforts across the Federal
government. The GHG IWG issued this Federal Strategy on November 29,
2023, available at: https://www.whitehouse.gov/ostp/news-updates/2023/11/29/national-strategy-to-advance-an-integrated-u-s-greenhouse-gas-measurement-monitoring-and-information-system/.
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Moreover, the Commission notes that for the derivative contracts
that they list, DCMs are required to adopt, as is necessary and
appropriate, exchange-set position limits for speculators.\327\ To
establish exchange-set position limits, a DCM should derive a
quantitative estimate of the deliverable supplies of the underlying
commodity for the delivery period specified in the contract.\328\ A
DCM's estimate of a VCC's deliverable supplies is likely to be informed
by understanding how the relevant crediting program determines the
amount of VCCs that are issued for credited projects or activities.
Where the quantification methodology or protocol used to calculate the
amount of VCCs is robust, conservative, and transparent, the DCM should
have a more reliable basis from which to form its deliverable supply
estimate. That deliverable supply estimate, in turn, can be used as the
basis for effectively setting the DCM's exchange-set speculative
position limits to help reduce the possibility of corners or squeezes
that may distort or manipulate the price of the derivative
contract.\329\
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\327\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5). See also 17 CFR
38.300 and 38.301.
\328\ Guidance on estimating deliverable supply can be found in
the Appendix C Guidance.
\329\ For a cash-settled VCC derivative contract, a DCM may
similarly consider the deliverable supply of the underlying VCCs
when setting exchange-set speculative position limits or historical
open interest when establishing non-spot month position
accountability levels. See 17 CFR 150.5 and appendix F to part 150,
title 17.
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2. Delivery Points and Facilities
The Appendix C Guidance states that the delivery procedures for a
physically-settled derivative contract should, among other things, seek
to minimize or eliminate any impediments to making or taking delivery
by both deliverers and takers of delivery, to help ensure convergence
of cash and derivative contract prices at the expiration of the
derivative contract.\330\ When addressing delivery procedures in
connection with the design of a physically-settled VCC derivative
contract, the Commission believes that a DCM should consider the
governance framework and tracking mechanisms of the crediting program
for underlying VCCs, as well as the crediting program's measures to
prevent double counting.\331\
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\330\ Appendix C Guidance, paragraph (b)(2)(i)(B).
\331\ While cash-settled VCC derivative contracts do not result
in the delivery of a VCC, the Commission believes that considering
the VCC commodity characteristics of governance, tracking and no
double counting when developing the terms and conditions of a cash-
settled VCC derivative contract will help to ensure that the
contract terms and conditions address essential economic
characteristics of the underlying VCC in a manner that promotes
accurate pricing and helps to reduce the susceptibility of the
contract to manipulation.
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i. Governance
The Commission believes that a DCM should consider whether the
crediting program for underlying VCCs has in place a governance
framework that supports the crediting program's independence,
transparency and accountability. As a threshold matter, a governance
framework that supports independence, transparency and
[[Page 83404]]
accountability helps to ensure the overall quality of the VCCs issued
by a crediting program. Furthermore, it is the Commission's
understanding that a crediting program's registry may be used as a
delivery point to facilitate physical settlement for a VCC derivative
contract. A registry is a repository for tracking mitigation projects
or activities and associated VCCs. An effective crediting program
governance framework can help to ensure that the crediting program
operates or makes use of a registry that has appropriate measures in
place to facilitate the physical settlement of a VCC derivative
contract.
Relevant factors when considering a crediting program's governance
framework could include, among other things, the program's decision-
making procedures, including who is responsible for administration of
the program and conflict of interest measures such as how the
independence of key functions is ensured; reporting and disclosure
procedures; public and stakeholder engagement processes, including
whether there are appeals mechanisms; and risk management policies,
such as financial resources/reserves, cyber-security, and anti-money
laundering policies. A DCM should consider whether detailed information
regarding a crediting program's governance framework, such as
information regarding the above-described procedures and policies, is
made publicly available.
ii. Tracking
The Commission believes that a DCM should consider whether the
crediting program for the underlying VCCs has processes and procedures
in place to help ensure clarity and certainty with respect to the
issuance, transfer, and retirement of VCCs. The DCM should consider
whether the crediting program operates or makes use of a registry, and
whether there is reasonable assurance that the registry has effective
measures in place to track the issuance, transfer, and retirement of
VCCs; to identify who owns or retires a VCC; and to make sure that each
VCC is uniquely and securely identified and associated with a single
emission reduction or removal of one metric ton of carbon dioxide
equivalent.
iii. No Double-Counting
The Commission believes that a DCM should consider whether the
crediting program for the underlying VCCs has measures in place that
provide reasonable assurance that credited emission reductions or
removals are not double counted. That is, that the VCCs representing
the credited emission reductions or removals are issued to only one
registry and cannot be used after retirement or cancelation. As
discussed above in connection with the VCC commodity characteristics of
additionality and permanence, market participants that are utilizing
physically-settled VCC derivative contracts to help meet carbon
mitigation goals have an interest in ensuring that, upon physical
settlement, the underlying VCCs will actually reduce or remove the
emissions that they were intended to reduce or remove. In order for
VCCs to effectively further carbon mitigation goals, it is important
for each credited VCC to be uniquely associated with a single emission
reduction or removal of one metric ton of carbon dioxide equivalent; a
crediting program should have measures in place that provide reasonable
assurance of this. If there is not a reasonable assurance that the VCCs
underlying a derivative contract are each unique, then, among other
things, this could distort or obscure the accuracy of the derivative
contract's pricing.
In the context of evolving national and international carbon
markets and emissions trading frameworks, effective measures to ensure
that emission reductions or removals are not double counted may
include, among other things, procedures for conducting cross-checks
across multiple carbon credit registries.
3. Inspection Provisions--Third-Party Validation and Verification
Consistent with the Appendix C Guidance, the Commission believes
that any inspection or certification procedures for verifying
compliance with quality requirements or any other related delivery
requirements for physically-settled VCC derivative contracts should be
specified in the contract's terms and conditions.\332\ The Commission
believes that these inspection or certification procedures should be
consistent with the latest procedures in the voluntary carbon markets.
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\332\ Appendix C Guidance, paragraph (b)(2)(i)(G) (noting that
to the extent that formal inspection procedures are not used in the
cash market, an acceptable specification would contain provisions
that assure accuracy in assessing the commodity, that are available
at a low cost, that do not pose an obstacle to delivery on the
contract and that are performed by reputable, disinterested third
party or by qualified designated contract market employees).
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Additionally, the Commission believes that, when designing a VCC
derivative contract, a DCM should consider whether there is reasonable
assurance that the crediting program for underlying VCCs has up-to-
date, robust and transparent procedures for validating and verifying
that credited mitigation projects or activities meet the crediting
program's rules and standards.
By providing independent confirmation that mitigation projects or
activities are achieving the claimed GHG emission reductions or
removals, third-party validation and verification can help to ensure
that the underlying VCC accurately reflects the quality intended by the
DCM and supports voluntary carbon market integrity.\333\ Accordingly, a
DCM should consider whether there is reasonable assurance that the
crediting program's procedures reflect best practices with respect to
third party validation and verification. Such best practices may
include: crediting program reviews of the performance of its
validators; procedures for remediating performance issues; not using
the same third-party validator to verify every project type or project
category; and using a separate third-party to conduct ongoing
validation and verification from the third-party that completed the
initial validation and verification process.
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\333\ Id.
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B. A DCM Shall Monitor a Derivative Contract's Terms and Conditions as
They Relate to the Underlying Commodity Market
DCM Core Principle 4 requires a DCM to prevent manipulation, price
distortion, and disruptions of the physical delivery or cash-settlement
process through market surveillance, compliance, and enforcement
practices and procedures.\334\ For physically-settled derivative
contracts, implementing Commission regulations under DCM Core Principle
4 require a DCM, among other things, to monitor the contract's terms
and conditions as they relate to the underlying commodity market, and
to the convergence between the contract price and the price of the
underlying commodity, and to monitor the supply of the underlying
commodity in light of the contract's delivery requirements.\335\ Such
monitoring will help a DCM identify circumstances that may cause the
contract to become susceptible to price manipulation or distortions,
and to assess whether the terms and conditions of the contract continue
to be appropriate--or whether a change in circumstances should be
addressed, for example, through changes to the contract's terms and
conditions.\336\
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\334\ CEA section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR
38.250 through 38.258.
\335\ 17 CFR 38.252.
\336\ The Commission has, similarly, recognized that a DCM has a
responsibility to monitor the continued appropriateness of the terms
and conditions of a cash-settled derivative contract. See, e.g., 17
CFR 38.253(a)(2).
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[[Page 83405]]
Given that VCC derivatives are a comparatively new and evolving
class of products, and given that standardization and accountability
mechanisms for VCCs are still being developed, the Commission believes
that the monitoring by a DCM of the terms and conditions of a
physically-settled VCC derivative contract should include ongoing
monitoring of the appropriateness of the contract's terms and
conditions that includes, among other things, monitoring to ensure that
the delivery instrument--that is, the underlying VCC--conforms or,
where appropriate, updates to reflect the latest certification
standard(s) applicable for that VCC. For example, where there are
changes to either the crediting program or the types of projects or
activities associated with the underlying VCC, due for example to new
standards or certifications, then the DCM should amend the contract's
terms and conditions to reflect this update. In such circumstances, the
DCM should also ensure that it is monitoring the adequacy of the
estimated deliverable supply of the underlying VCC to satisfy the
contract's delivery requirements.
Finally, the Commission reminds market participants that Commission
regulations implementing DCM Core Principle 4 require DCMs to have
rules requiring their market participants to keep records of their
trading that include records of their activity in the underlying
commodity and related derivatives markets.\337\ A DCM's rules also must
require market participants to make such records available upon request
to the DCM.\338\ As such, DCM market participants are required, upon
request, to make records of their trading in underlying VCC cash
markets available to the DCM, in order to assist the DCM in fulfilling
its market monitoring obligations. These records also are subject to
Commission inspection under applicable Commission recordkeeping rules.
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\337\ 17 CFR 38.254(a).
\338\ Id.
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C. A DCM Must Satisfy the Product Submission Requirements Under Part 40
of the CFTC's Regulations and CEA Section 5c(c)
There are generally two processes by which a DCM may list a new
derivative contract for trading.\339\ The DCM may elect to list the
contract for trading by providing the Commission with a written
certification--a ``self-certification''--that the contract complies
with the CEA, including the CFTC's regulations thereunder.\340\
Alternatively, the DCM may elect voluntarily to seek prior Commission
approval of the contract.\341\ In each case, the DCM must submit
prescribed information to the Commission, including but not limited to
the contract's terms and conditions.\342\ Amendments to an existing
derivative contract also must be submitted to the Commission, along
with prescribed information, either by way of self-certification or for
prior Commission approval.\343\
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\339\ SEFs also may generally list new contracts by way of
either of these two processes. See, generally, CEA section 5c(c), 7
U.S.C. 7a-2(c).
\340\ CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1). See also 17 CFR
40.2. The Commission must receive the DCM's self-certified
submission at least one business day before the contract's listing.
17 CFR 40.2(a)(2).
\341\ CEA sections 5c(c)(4) and (5), 7 U.S.C. 7a-2(c)(4) and
(5). See also 17 CFR 40.3.
\342\ 17 CFR 40.2 and 40.3.
\343\ 17 CFR 40.5 and 40.6.
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This guidance highlights three submission requirements in
connection with the listing of VCC derivative contracts. These
requirements apply regardless of whether a DCM elects to list the
contract by way of self-certification or with prior Commission
approval. These requirements generally apply with respect to the
listing by a DCM of a derivative contract, regardless of the underlying
asset class. However, the Commission wishes to remind DCMs of the
importance of fully complying with these requirements in a submission
for a VCC derivative contract.
The relevant requirements provide, first, that a contract
submission to the Commission must include an ``explanation and
analysis'' of the contract and the contract's compliance with
applicable provisions of the CEA, including core principles and the
Commission's regulations thereunder.\344\ Second, the relevant
requirements provide that the explanation and analysis of the contract
either be accompanied by the documentation relied upon to establish the
basis for compliance with applicable law, or incorporate information
contained in such documentation, with appropriate citations to data
sources.\345\ Third, the relevant requirements provide that, if
requested by Commission staff, a DCM must provide any additional
evidence, information or data that demonstrates that the contract
meets, initially or on a continuing basis, the requirements of the CEA
or the Commission's regulations or policies thereunder.\346\
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\344\ 17 CFR 40.2(a)(3)(v) (for self-certification) and
40.3(a)(4) (for Commission approval). The ``explanation and
analysis'' requirement for self-certified contracts provides for
such explanation and analysis to be ``concise.'' The ``explanation
and analysis'' requirement for contracts submitted for prior
Commission approval does not include the ``concise'' qualifier. The
Commission requires DCMs to provide a more detailed explanation and
analysis of contracts that are submitted for affirmative Commission
approval.
\345\ 17 CFR 40.2(a)(3)(v) (for self-certification) and
40.3(a)(4) (for Commission approval).
\346\ 17 CFR 40.2(b) (for self-certification) and 40.3(a)(10)
(for Commission approval).
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Since VCC derivatives are a comparatively new and evolving class of
products, and since standardization and accountability mechanisms for
VCCs are still being developed, the Commission anticipates that in
connection with the submission for a VCC derivative contract, a DCM may
provide qualitative explanations and analysis to assist in addressing
the three above-described requirements. The Commission expects that the
information--including supporting documentation, evidence and data--
provided by the DCM to describe how the contract complies with the CEA
and applicable Commission regulations, will be complete and thorough.
This is especially important given unique and developing aspects of
VCCs and VCC derivative markets. Including complete and thorough
information will assist the Commission and its staff in their
understanding of the contract and their analysis of the contact's
compliance with applicable statutory and regulatory requirements,
including whether or not the contract is readily susceptible to
manipulation.
Issued in Washington, DC, on October 2, 2024, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Commission Guidance Regarding the Listing of Voluntary
Carbon Credit Derivative Contracts--Voting Summary and Chairman's and
Commissioner's Statements
Appendix 1--Voting Summary
On this matter, Chairman Behnam and Commissioner Goldsmith
Romero voted in the affirmative. Commissioners Johnson and Pham
voted to concur. Commissioner Mersinger voted in the negative.
Appendix 2--Statement of Support of Chairman Rostin Behnam
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
[[Page 83406]]
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.
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\1\ See, e.g., CFTC, Event: Advisory Committee Meetings, CFTC's
Market Risk Advisory Committee to Meet June 12 to Discuss Climate-
related Financial Risk (Jun. 12, 2019), https://www.cftc.gov/PressRoom/Events/opaeventmrac051219.
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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\
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\2\ Managing Climate Risk in the U.S. Financial System, Report
to the CFTC's Market Risk Advisory Committee by the Climate-Related
Market Risk Subcommittee (Sept. 2020), https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf.
\3\ See Press Release Number 8368-21, CFTC Acting Chairman
Behnam Creates New Climate Risk Unit (Mar. 17, 2021), https://www.cftc.gov/PressRoom/PressReleases/8368-21.
\4\ 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.
\5\ Request for Information on Climate-Related Financial Risk,
87 FR 34856 (Jun. 8, 2022), available at https://www.cftc.gov/sites/default/files/2022/06/2022-12302a.pdf.
\6\ Proposed Commission Guidance Regarding the Listing of
Voluntary Carbon Credit Derivative Contracts and Request for
Comment, 88 FR 89410 (Dec. 27, 2023), https://www.cftc.gov/sites/default/files/2023/12/2023-28532a.pdf; See comment file available at
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7463&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50.
\7\ 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.
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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 Market 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\
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\8\ International Organization of Securities Commissions
(IOSCO), CR06/2023 Voluntary Carbon Markets, Consultation Report
(Dec. 2023), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD749.pdf.
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The CFTC's unique mission focused on risk mitigation and price
discovery puts us on the front lines of the now global nexus
[[Page 83407]]
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.
Appendix 3--Dissenting Statement of Commissioner Summer K. Mersinger
Today's non-binding VCC Guidance \1\ to designated contract
markets (``DCMs'') regarding listing of voluntary carbon credits
(``VCCs'') derivative contracts is a solution in search of a
problem. The Commodity Futures Trading Commission \2\ has no
shortage of topics that warrant our immediate attention. But instead
of addressing those, we are issuing guidance on an emerging class of
products that have very little open interest and comprise a
miniscule percentage of trading activity on CFTC-regulated DCMs.\3\
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\1\ This statement will refer to Commission Guidance Regarding
the Listing of Voluntary Carbon Credit Derivative Contracts as ``VCC
Guidance.''
\2\ This statement will refer to the Commodity Futures Trading
Commission as the ``Commission'', ``CFTC'', or ``Agency.'' All web
pages cited herein were last visited on September 16, 2024.
\3\ CME Group response to Request for Comment on Commission
Guidance Regarding the Listing of Voluntary Carbon Credit Derivative
Contracts, at 5.
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In addition to issuing the VCC Guidance, the Commission has held
multiple ``convenings,'' and the Division of Enforcement established
a task force and issued a Whistleblower Office alert.\4\ I question
whether any other class of derivative products has received the
outsized attention that VCC derivative contracts have received from
the CFTC.
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\4\ CFTC Announces Second Voluntary Carbon Markets Convening
(July 19, 2023) available at: https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923; CFTC Release Number 8736-23
(``CFTC Division of Enforcement Creates Two New Task Forces'') (June
29, 2023) available at: https://www.cftc.gov/PressRoom/PressReleases/8736-23; CFTC Whistleblower Alert, (June 20, 2023)
available at: https://www.whistleblower.gov/sites/whistleblower/files/2023-06/06.20.23%20Carbon%20Markets%20WBO%20Alert.pdf.
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Guidance can play an important role in providing clarity and
fostering transparency regarding rules that are complex and open to
interpretation. That is why the Commission published existing
guidance to DCMs through appendices B and C to part 38 of the
Commission's regulations. But this new VCC Guidance on a singular
class of derivatives contracts does very little to provide clarity,
and it most certainly does nothing to foster transparency. Because
the VCC Guidance is just guidance, it ``does not establish new
obligations for DCMs.'' \5\ So why are we engaged in a non-binding
exercise that does little to provide clarity, does not foster
transparency, and does not establish new obligations? It seems the
only explanation is to set the stage for the Commission to promote a
political agenda.
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\5\ VCC Guidance at page 27.
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The VCC Guidance includes veiled attempts to propagate
controversial political ideologies best left to debate by voters and
elected officials. Specifically, the VCC Guidance states that, ``a
DCM may determine that it is appropriate, when addressing quality
standards in connection with derivative contract design, to consider
whether the crediting program for underlying VCCs has implemented
measures to help ensure that credited mitigation projects or
activities (i) meet or exceed best practices on social and
environmental safeguards, and (ii) would avoid locking in levels of
[greenhouse gas] emissions, technologies or carbon intensive
practices that are incompatible with the objective of achieving net
zero [greenhouse gas] emissions by 2050.'' \6\
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\6\ VCC Guidance at page 39.
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Environmental and Social Governance (ESG) compliance and Net--
Zero goals are completely immaterial to the ability of the listed
derivatives products to meet their regulatory obligations. Focusing
on ESG and Net Zero in evaluating derivatives contracts is a
backdoor attempt to inject and memorialize certain political
ideologies into CFTC regulatory decisions.
The Commission should evaluate VCC derivative products as we
would any other derivative product listed by a DCM, and we should
regulate a DCM listing VCC derivative products the same way we
regulate DCMs listing other derivatives products. Our outsized focus
on the VCC derivative products and the underlying VCC markets looks
a lot more like promotion of ideology than simply offering guidance.
For these reasons, I respectfully dissent.
[FR Doc. 2024-23105 Filed 10-11-24; 8:45 am]
BILLING CODE 6351-01-P