CLS Blue Sky Blog

Cleary Gottlieb Discusses Proposed CFTC Guidance on Voluntary Carbon Credit Derivatives

On December 4, the Commodity Futures Trading Commission (the “CFTC”) proposed guidance for designated contract markets (“DCMs”) listing voluntary carbon credit (“VCC”) derivative contracts.  The proposed guidance, published to coincide with COP 28, and the opportunity to provide comment will be welcomed by the VCC market which has seen several years of significant expansion of VCC markets as well as increased attention from professional and regulatory organizations globally, including the CFTC.  This alert provides a summary and preliminary analysis of the key aspects of the proposed guidance.  We plan to publish additional analysis in the coming days.

In particular, the proposal follows the CFTC Whisleblower Alert encouraging individuals to alert the CFTC of misconduct in the carbon markets, which market participants have been very focused on as they expand their activity in the primary and secondary VCC markets.  Principally, the proposal would provide guidance on the factors that DCMs should consider when addressing certain provisions of the Commodity Exchange Act (“CEA”), and CFTC regulations thereunder, that are relevant to the listing for trading of VCC derivative contracts, with a particular focus on physically-settled contracts.  However, the CFTC anticipates that the guidance would also be relevant to cash-settled transactions and SEFs offering such products.  We also expect participants in the bilateral, over-the counter markets to consider how the proposal affects their regulatory obligations and liabilities under spot, forward and swap transactions in VCCs.

DCMs are self-regulatory organizations required by the CFTC to comply with statutory “Core Principles” set forth in CEA, including requirements regarding the listing of futures contracts.  Futures contract where the underlying commodity is a VCC are currently listed on DCMs for participants to purchase carbon credits whose retirement represents the reduction or removal of greenhouse gas emissions.

The preamble to the proposal notes that market participants have encountered challenges related to a lack of standardization, transparency, and integrity as VCC markets have grown, and the CFTC’s proposed guidance is an attempt to address those concerns with respect to VCC futures listed on DCMs.

Over the past two years, the CFTC has held two Voluntary Carbon Markets Convenings to discuss issues related to the supply of and demand for VCC derivatives contracts and last year the CFTC issued a Request for Information on climate-related financial risk, which included questions regarding the VCC market.  The proposed guidance leverages the work the CFTC has done through these public initiatives to establish standards for VCC derivatives contract listings on DCMs, and also references work done by the International Swaps and Derivatives Association (“ISDA”), the Board of the International Organization of Securities Commissions (“IOSCO”), and the Futures Industry Association (“FIA”). The proposed guidance states:

Comments on the proposal are due by February 16, 2024.

For background see:

For additional information, please see:

This post comes to us from Cleary, Gottlieb, Steen & Hamilton LLP. It is based on the firm’s memorandum, “CFTC Proposes Voluntary Carbon Credit Derivatives Guidance,” dated December 6, 2023, and available here. Brian Morris contributed to the memorandum. 

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