The Commodity Futures Trading Commission (CFTC) has approved final guidance for listing voluntary carbon credit (VCC) derivative contracts, a crucial step in promoting climate-smart agriculture efforts. This guidance aims to foster the development of carbon credit markets while ensuring transparency and market integrity. Link to pre-publication version of the rule.
Contract market requirements. The guidance sets clear expectations and requirements for designated contract markets (DCMs) trading or listing or trading derivatives tied to carbon credits. DCMs must comply with the Commodity Exchange Act (CEA) and relevant regulations, focusing on several core principles:
• Establishing and enforcing rules
• Listing contracts resistant to manipulation
• Preventing market manipulation and price distortion
• Adopting adequate position limits
• Enforcing disciplinary measures
Transparency and integrity. CFTC emphasizes the importance of promoting transparency, market integrity, and additionality in VCC markets. DCMs are required to implement strong governance frameworks for tracking credits and preventing issues like double counting.
Contract submission requirements. When submitting VCC derivative contracts for approval, DCMs must provide detailed explanations and analyses, demonstrating compliance with statutory and regulatory requirements.
Impact on climate-smart agriculture. The guidance supports efforts like USDA’s $3.1 billion Partnerships for Climate Smart Commodities (PCSC) program. This initiative aims to help farmers and ranchers implement emissions-reducing practices and generate additional revenue from carbon credits.
Climate-smart farming and carbon credit generation offer opportunities for: • Food companies and agribusinesses to meet consumer demand for climate-friendly products
• Businesses to meet their greenhouse gas emission reduction goals
• Farmers and ranchers to adopt sustainable practices and access new income streams
Reaction. The guidance has been well-received by both agricultural interests and environmental advocates:
• The Food and Agriculture Climate Alliance (FACA) praised CFTC for driving integrity and confidence in the voluntary carbon marketplace.
• The Environmental Defense Fund (EDF) welcomed the guidance, stating it lays important groundwork for protecting market participants and building a transparent, reliable marketplace.
Bottom line: This guidance marks a significant step in establishing rules for carbon credit markets, which are set to play a key role in agricultural climate efforts and the broader fight against climate change.