Today’s non-binding guidance[1] to designated contract markets (“DCMs”) regarding listing of voluntary carbon credits (“VCCs”) derivative contracts is a solution in search of a problem. The Commodity Futures Trading Commission[2] has no shortage of topics that warrant our immediate attention. But instead of addressing those, we are issuing guidance on an emerging class of products that have very little open interest and comprise a miniscule percentage of trading activity on CFTC-regulated DCMs.[3]
In addition to issuing the VCC Guidance, the Commission has held multiple “convenings,” and the Division of Enforcement established a task force and issued a Whistleblower Office alert.[4] I question whether any other class of derivative products has received the outsized attention that VCC derivative contracts have received from the CFTC.
Guidance can play an important role in providing clarity and fostering transparency regarding rules that are complex and open to interpretation. That is why the Commission published existing guidance to DCMs through Appendices B and C to Part 38 of the Commission’s regulations. But this new VCC Guidance on a singular class of derivatives contracts does very little to provide clarity, and it most certainly does nothing to foster transparency. Because the VCC Guidance is just guidance, it “does not establish new obligations for DCMs.”[5] So why are we engaged in a non-binding exercise that does little to provide clarity, does not foster transparency, and does not establish new obligations? It seems the only explanation is to set the stage for the Commission to promote a political agenda.
The VCC Guidance includes veiled attempts to propagate controversial political ideologies best left to debate by voters and elected officials. Specifically, the VCC Guidance states that, “a DCM may determine that it is appropriate, when addressing quality standards in connection with derivative contract design, to consider whether the crediting program for underlying VCCs has implemented measures to help ensure that credited mitigation projects or activities (i) meet or exceed best practices on social and environmental safeguards, and (ii) would avoid locking in levels of [greenhouse gas] emissions, technologies or carbon intensive practices that are incompatible with the objective of achieving net zero [greenhouse gas] emissions by 2050.”[6]
Environmental and Social Governance (ESG) compliance and Net Zero goals are completely immaterial to the ability of the listed derivatives products to meet their regulatory obligations. Focusing on ESG and Net Zero in evaluating derivatives contracts is a backdoor attempt to inject and memorialize certain political ideologies into CFTC regulatory decisions.
The Commission should evaluate VCC derivative products as we would any other derivative product listed by a DCM, and we should regulate a DCM listing VCC derivative products the same way we regulate DCMs listing other derivatives products. Our outsized focus on the VCC derivative products and the underlying VCC markets looks a lot more like promotion of ideology than simply offering guidance. For these reasons, I respectfully dissent.
[1] This statement will refer to Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts as “VCC Guidance.”
[2] This statement will refer to the Commodity Futures Trading Commission as the “Commission”, “CFTC”, or “Agency.” All web pages cited herein were last visited on September 16, 2024.
[3] CME Group response to Request for Comment on Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts, at 5.
[4] CFTC Announces Second Voluntary Carbon Markets Convening (July 19, 2023) available at: https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923; CFTC Release Number 8736-23 (“CFTC Division of Enforcement Creates Two New Task Forces”) (June 29, 2023) available at: https://www.cftc.gov/PressRoom/PressReleases/8736-23; CFTC Whistleblower Alert, (June 20, 2023) available at: https://www.whistleblower.gov/sites/whistleblower/files/2023-06/06.20.23%20Carbon%20Markets%20WBO%20Alert.pdf.
[5] VCC Guidance at page 25.
[6] VCC Guidance at page 35-36.
