The U.S. Commodity Futures Trading Commission approved on Friday the first guidelines for trading voluntary carbon credit derivative contracts in the country, a move expected to help bolster the nascent market.
Carbon credit derivative contracts are financial instruments that derive their value from carbon credits, which represent the right to emit one metric ton of carbon dioxide or an equivalent amount of greenhouse gases.
The contracts allow traders and market participants to hedge against or speculate on the future price of carbon credits, similar to how traditional derivative contracts function in commodities or financial markets.
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Regulators have pushed for heightened scrutiny of voluntary carbon markets, which have developed outside government oversight, due to concerns over quality and double counting.
The U.S. derivatives watchdog has outlined guidance for derivatives exchanges to crack down on price manipulation.
“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,” said CFTC Chairman Rostin Behnam.
Regulators in the Americas and Europe have increasingly been worried about greenwashing.
Earlier this year, the CFTC said it was investigating greenwashing – when companies exaggerate their environmental credentials – as part of its crackdown on fraud and misconduct in the voluntary carbon markets.
In May, the U.S. government unveiled rules to govern the use of voluntary carbon credits, seeking to boost confidence in a nascent market after some high-profile offset projects failed to deliver the promised emissions reductions.
“The CFTC’s guidance will promote the integrity of carbon credits and enable greater liquidity and price transparency,” Treasury Secretary Janet Yellen said in a statement, noting the move was part of a broader effort by the administration to tackle climate change and accelerate a clean energy transition.
Many companies “offset” their own greenhouse gas emissions by buying voluntary carbon credits, which represent the avoidance or removal of emissions via projects largely located in developing countries.
(Reporting by Manya Saini in Bengaluru; Editing by Krishna Chandra Eluri and Deepa Babington)
