The Commodity Futures Trading Commission published its final guidance for listing carbon credits on voluntary markets in the Federal Register Tuesday, aiming to shore up the integrity of such credits.

The CFTC approved the guidance last month, which provides standards for project developers, crediting programs and third-party verifiers to ensure voluntary carbon credits — as opposed to those in regulated cap-and-trade programs — are not subject to manipulation and have their contract terms monitored.

“The process by which [voluntary carbon credits] are issued deserves careful consideration, as that process informs VCC quality and, by extension, the overall integrity and effective functioning of voluntary carbon markets,” the CFTC’s guidance said. 

The final guidance is the culmination of yearslong work by CFTC on the topic and is an outgrowth of work the commission has done regulating environmental commodities for “decades,” including mandatory emissions program products since 2005. 

The agency began working towards this update by gathering voluntary carbon market stakeholders for a June 2022 summit to discuss issues, before releasing a request for information to the public the same month. The agency reconvened stakeholders again in July 2023 to discuss public and private sector carbon credit initiatives and developing trends, before issuing proposed guidance in December 2023, which received public support from Congressional Democrats this August.

The guidance is the product of “strong public-private partnership” and is designed “to support transparency, liquidity and market integrity in the VCC derivatives markets as well as ultimately drive standardization and efficient capital allocation to scale the underlying cash market for high integrity [credits].” CFTC Chair Rostin Behnam said in a September statement.

“The CFTC’s unique mission focused on risk mitigation and price discovery puts us on the front lines of the now global nexus between financial markets and decarbonization efforts,” Behnam said.

A need for transparency

The guidance is part of a broader concerted effort to increase the scrutiny on and reliability of carbon credits, with the commission undertaking the guidance in part due to the fact that standardization and accountability mechanisms are still in development. 

“Challenges with respect to accurately ascertaining [voluntary carbon credit] quality, and associated pricing challenges, can erode confidence in voluntary carbon markets,” the guidance said. “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.”

The Commission said markets listing carbon credits should design their contracts with provisions focused on ensuring quality standards, the credits’ delivery points and facilities and inspection provisions.

To ensure that carbon credits follow quality standards, CFTC said the markets should: 

• Provide publicly available data for transparency; 
• Have procedures to assess or test for additionality;
• Account for the risk of credit cancellation; and
• Conservatively quantify greenhouse gas emissions reductions or removals for robust quantification.

When managing delivery of contracted carbon credits, CFTC said the markets should consider whether the crediting program has a governance framework in place that supports its independence, transparency and accountability. To assess that governance framework, the commission recommends looking at the crediting organization’s decision-making process, public and stakeholder engagement policies and risk management procedures.

Additionally, the agency said markets should consider the trackability of such credits — to ensure credits are monitored through issuance, transfer and retirement — and make sure there are procedures in place to prevent double-counting.

The guidance — which includes the agency’s response to public comments — also laid out a framework to ensure carbon credits satisfy CFTC product submission standards and monitoring the terms of contracted credits related to the “underlying commodity market.”

CFTC’s guidance comes as corporations are looking for reassurance that carbon credits used in concert with operational emissions reductions or to offset emissions correspond with measurable emissions removed from the atmosphere. Experts have harped on the necessity for the increased transparency of carbon credits to make sure contracted credits are up to snuff.

In July, a coalition of 80 environmental and social organizations said that corporations that utilize carbon credits to offset emissions could undermine emissions reductions progress. That concern was supported by a Science Based Targets initiative study released later that month that found “clear risks” to using carbon credits to offset emissions.

In May, the Biden-Harris Administration released a list of principles for how corporations should responsibly participate in the voluntary carbon market, which said there is still an open question of how to ensure credits “genuinely drive additional decarbonization” rather than shift emissions in the balance sheet.

“Put simply, stakeholders must be certain that one credit truly represents one tonne of carbon dioxide (or its equivalent) reduced or removed from the atmosphere, beyond what would have otherwise occurred,” the administration’s May statement said.