Public Statements & Remarks

Statement of Commissioner Christy Goldsmith Romero on Exchange Listing Standards for Voluntary Carbon Credit Derivative Contracts

December 04, 2023

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[1] The Commission has held two convenings to gather information from a range of carbon market stakeholders and last year conducted a request for information on climate-related risks, which asked several questions about carbon markets.  The Commission received significant comments on voluntary carbon credit products and markets.

[2] National Oceanic and Atmospheric Administration, Topping the charts: September 2023 was Earth’s warmest September in 174-year record (Oct. 13, 2023).

[3] See Letter from Senators Booker, Warren, Markey, Blumenthal, Sanders, Merkley and Gillibrand (Oct. 13, 2022); see also ISDA Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“We believe that the Commission should take a leading role in supporting and enhancing the integrity of voluntary carbon markets.”); see also Intercontinental Exchange Inc. Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“ICE supports the Commission taking a leadership role in supporting and enhancing the integrity of project-based carbon markets.”); see also Environmental Defense Fund Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“EDF respectfully welcomes CFTC’s interest in identifying the potential for fraud and market manipulation in voluntary carbon markets.  Enhanced quality and integrity in voluntary carbon markets can help mobilize carbon finance, help cut emissions and facilitate the achievement of corporate and national greenhouse gas reduction goals.”); see also bp Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“bp believes the CFTC should focus on simultaneously enhancing its oversight role in derivatives and futures markets while allowing these markets to become deeper and more liquid.”).

[5] In one relevant example, several press sources reported serious allegations about a project developed by the market’s largest firm, a project that has been among the leading sources of carbon credits globally.  Heidi Blake, The Great Cash-for-Carbon Hustle, The New Yorker (Oct. 16, 2023); Ben Elgin, Alastair Marsh, and Max de Haldevang, Faulty Credits Tarnish Billion-Dollar Carbon Offset Seller, Bloomberg (Mar. 24, 2023).  The allegations were sufficiently credible that the project’s registry put on hold issuance of credits from the project, pending an investigation. Verra Statement on the New Yorker Article of October 16, 2023, Verra (Oct. 17, 2023).

[6] See Ceres Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022).

[8] See ISDA Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“In order for these markets to flourish, there can be no room for greenwashing, double-counting of credits or any other types of fraud and manipulation…”); See also EDF Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“One particular concern in carbon markets is that traded reductions might be “double counted,” a situation in which a single GHG emission reduction or removal (i.e. credit) is counted more than once towards achieving mitigation targets or goals.”).

[9] See Ceres Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022) (“The best way to guard against the risk of market disruption because of the lack of the integrity of the underlying credits would be to require all credits underlying derivative instruments be subject to a meaningful evaluation and certification process by an outside, neutral, and expert third party.”).

[10] See Blue Diamond Farming Company Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022); see also Bryan Agricultural Enterprises Comment Letter on CFTC Request for Information on Climate-Related Financial Risk (Oct. 7, 2022).