CFTC Releases First Carbon Credit Market Guidance

Sept 20 (Reuters) – The U.S. Commodity Futures Trading Commission on Friday approved the country’s first voluntary trading guidelines for carbon credit derivatives contracts.

A carbon credit derivative contract is a financial instrument whose value is a carbon credit, which represents the right to emit one metric ton of carbon dioxide or an equivalent amount of greenhouse gases.

These contracts allow traders and market participants to hedge or speculate on the future price of carbon credits, similar to how traditional derivative contracts work in commodity or financial markets.

Regulators have called for greater scrutiny of voluntary carbon markets, which have developed outside government oversight, amid concerns about quality and double counting.

The U.S. derivatives regulator has set out guidelines for derivatives exchanges to combat price manipulation.

“The CFTC’s unique mission focused on risk mitigation and price discovery places us at the forefront of the nexus between today’s global financial markets and decarbonization efforts,” said CFTC Chairman Rostin Behnam.

Regulators in the Americas and Europe are increasingly concerned about greenwashing.

Earlier this year, the U.S. Commodity Futures Trading Commission said it was investigating “greenwashing” — the practice of companies exaggerating their environmental credentials — as part of its crackdown on fraud and misconduct in the voluntary carbon market.

In May, the U.S. government unveiled rules governing the use of voluntary carbon credits, aimed at boosting confidence in the emerging market after some high-profile carbon offset projects failed to deliver the promised emissions reductions.

“Voluntary carbon markets can help unleash the power of private markets to reduce emissions, but this can only happen if we address the significant challenges that exist,” Treasury Secretary Janet Yellen said at the time.

Many companies “offset” their greenhouse gas emissions by purchasing voluntary carbon credits, which avoid or eliminate emissions through projects located primarily in developing countries.

(Reporting by Manya Saini in Bengaluru; Editing by Krishna Chandra Eluri)