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The US government is ramping up activity on climate matters. First was EPA’s methane rule. Then on Monday, the US Commodity Futures Trading Commission (CFTC) approved proposed guidance on voluntary carbon credit (VCC) derivative contract trading. The proposed guidance outlines certain factors a CFTC-regulated exchange, or designated contract market (DCM) should consider that are relevant to the contract design and listing process. According to the press release, the action

“may help to advance the standardization of voluntary carbon credit derivative contracts in a manner that fosters transparency and liquidity, accurate pricing, and market integrity.”

While the guidance is aimed at DCMs rather than buyers and sellers of carbon credits, it offers good information about the US government’s view on characteristics of carbon credit integrity and quality. The four characteristics are

1. Transparency: “whether the crediting program for the underlying VCCs is making detailed information about the crediting program’s policies and procedures and the projects or activities that it credits, such as relevant project documentation, publicly available in a searchable and comparable manner.”

2. Additionality: “whether the VCCs are credited only for projects or activities that result in GHG emission reductions or removals that would not have been developed and implemented in the absence of the added monetary incentive created by the revenue from the sale of carbon credits.” This includes whether “procedures are in place to assess or test for additionality… [and] whether those procedures are sufficiently rigorous and reliable to provide a reasonable assurance that GHG emission reductions or removals are credited only if they are additional.”

3. Permanence and risk of reversal: whether there are “measures in place to address and account for the risk of reversal (i.e., the risk that VCCs issued for a project or activity may have to be recalled or cancelled due to carbon removed by the project or activity being released back into the atmosphere, or due to a reevaluation of the amount of carbon reduced or removed from the atmosphere by the project or activity).”

With regard to reversal: “Information regarding a crediting program’s measures for estimating, monitoring, and addressing the risk of reversal may constitute an economically significant attribute of the underlying VCCs that should be described or defined in the terms and conditions of a VCC derivative contract.” Therefore, “the crediting program for a VCC [should have] measures in place that provide reasonable assurance that, in the event of a reversal, the VCC will be replaced by a VCC of comparably high quality that meets the contemplated specifications of the contract.”

4. Robust quantification: “whether the crediting program for the underlying VCCs can demonstrate that the quantification methodology or protocol that it uses to calculate emission reductions or removals for the underlying VCCs is robust, conservative, and transparent. A robust, conservative, and transparent quantification methodology or protocol helps to ensure that the number of VCCs that are issued for a project or activity accurately reflects the level of GHG emission reductions or removals associated with the project or activity.”

Supporting principles are called out as well, such as whether there

  • is a demonstrable governance framework that effectively supports the crediting program’s independence, transparency and accountability.
  • are processes and procedures in place to help ensure clarity and certainty with respect to the issuance, transfer, and retirement of VCCs.
  • are effective measures to prevent double counting (i.e., ensuring that “VCCs representing the credited emission reductions or removals are issued to only one registry and cannot be used after retirement or cancelation.”)
  • are up-to-date, robust and transparent validation and verification procedures, including whether those procedures contemplate validation and verification by a reputable, disinterested party or body.

The guidance also discusses “three submission requirements in connection with the listing of VCC derivative contracts. These requirements apply regardless of whether a DCM elects to list the contract by way of self-certification, or with prior Commission approval.”

I’m not sure any of this is really new – although I like the specific mention about program governance. But the document is a relatively succinct and surprisingly clear explanation (at least in my opinion) of what goes into a credible and quality VCC.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile