The US Commodity Futures Trading Commission (CFTC) has withdrawn guidance advising futures exchanges to verify the integrity of voluntary carbon credits tied to derivatives contracts.
The agency withdrew the guidance on 10 September, nearly a year after it was finalized, saying that it added "limited value" to exchanges since it did not provide any new framework to ensure transparency or liquidity in the voluntary carbon market.
In addition, CFTC said standards are already in place to review derivatives contracts, and the guidance "placed a disproportionate focus on" voluntary carbon credits, which could result in "confusion and inconsistencies" in the way futures exchanges adhere to those standards.
Under the 2024 guidance, future exchanges were directed to examine whether voluntary carbon offset credits tied to contracts on their platforms represented tangible, "additional" greenhouse gas (GHG) emissions reductions that would not have occurred without the project from which those offsets were generated from.
The guidance also promoted transparency in how GHG emissions were calculated and directed exchanges to ensure credits were verified and validated by a third party as well as account for risks of potential cancellation or recalling of credits.
The guidance was not a binding rule that exchanges were required to follow. But it gave CFTC "slightly stronger grounds to pursue [through] enforcement action or some sort of regulatory undertaking with respect to an exchange if there was an issue with one of the contracts that they listed," said Alexander Holtan, a partner at Holland & Knight whose focus includes enforcement and compliance with regards to derivatives trading.
But overall, the withdrawal of the guidance is unlikely to have a major impact on how voluntary carbon credits tied to derivatives contracts are evaluated by exchanges.
Such contracts are still going to be evaluated under common "core principles that apply to those CFTC regulated exchanges [and] designated contract markets," said Halley Townsend, an associate at Holland & Knight.
The CFTC's withdrawal of the guidance drew some support.
"The CFTC's withdrawal rests on solid reasoning," said Ken Irvin, a partner at the law firm Sidley Austin focusing on energy transition issues, who noted that "the commission's rulemaking authority does not extend to voluntary carbon spot markets."
The CFTC is typically run by a bipartisan set of five commissioners. But it is currently being helmed solely by acting chairman Caroline Pham after three of its members resigned over the past year. Pham also intends to leave her post once President Donald Trump's nominee for chairman, Brian Quintenz, is confirmed.
