Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts, 83378-83407 [2024-23105]

Download as PDF 83378 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 38 RIN 3038–AF40 Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts Commodity Futures Trading Commission. ACTION: Final guidance. AGENCY: The Commodity Futures Trading Commission (the ‘‘Commission’’ or ‘‘CFTC’’) is issuing this guidance to outline factors for consideration by designated contract markets (‘‘DCMs’’), when addressing certain provisions of the Commodity Exchange Act (‘‘CEA’’), and CFTC regulations thereunder, that are relevant to the listing for trading of voluntary carbon credit (‘‘VCC’’) derivative contracts. The Commission recognizes that VCC derivatives are a comparatively new and evolving class of products, and believes that guidance that outlines factors for consideration by a DCM, in connection with the contract design and listing process, may help to advance the standardization of such products in a manner that promotes transparency and liquidity. DATES: Issued on October 15, 2024. FOR FURTHER INFORMATION CONTACT: Lillian A. Cardona, Assistant Chief Counsel, (202) 418–5012, lcardona@ cftc.gov; Steven Benton, Industry Economist, (202) 418–5617, sbenton@ cftc.gov; Samantha Li, Industry Economist, (202) 418–5622, sli@cftc.gov, Nora Flood, Chief Counsel, (202) 418– 6059, nflood@cftc.gov; Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581, or Julia Wood, Assistant Chief Counsel, (202) 853– 4877, jlwood@cftc.gov, Division of Market Oversight, Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800, Chicago, Illinois 60604. SUMMARY: SUPPLEMENTARY INFORMATION: khammond on DSKJM1Z7X2PROD with RULES5 Table of Contents I. Background A. The Regulatory Framework for DCMs B. Voluntary Carbon Markets 1. Overview of Voluntary Carbon Markets 2. Initiatives To Promote Transparency, Integrity and Standardization in the Voluntary Carbon Markets C. The Commission and Voluntary Carbon Markets 1. Derivative Contracts on Environmental Commodities, Including VCCs VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 2. CFTC Initiatives Relating to Voluntary Carbon Markets D. Proposed Guidance Regarding the Listing of VCC Derivative Contracts II. Comments on the Proposed Guidance A. Overview B. Specific Comments 1. Scope and Application of Guidance 2. A DCM Shall Only List Derivative Contracts That Are Not Readily Susceptible to Manipulation—VCC Commodity Characteristics 3. A DCM Shall Monitor a Derivative Contract’s Terms and Conditions as They Relate to the Underlying Commodity Market 4. A DCM Must Satisfy the Product Submission Requirements Under Part 40 of the CFTC’s Regulations and CEA Section 5c(c) 5. Foreign Boards of Trade III. Guidance Regarding the Listing of VCC Derivative Contracts A. A DCM Shall Only List Derivative Contracts That Are Not Readily Susceptible to Manipulation B. A DCM Shall Monitor a Derivative Contract’s Terms and Conditions as They Relate to the Underlying Commodity Market C. A DCM Must Satisfy the Product Submission Requirements Under Part 40 of the CFTC’s Regulations and CEA Section 5c(c) I. Background A. The Regulatory Framework for DCMs The CFTC’s mission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.1 An independent agency of the U.S. Federal Government, the CFTC exercises the authorities granted to it under the CEA to promote market integrity, prevent price manipulation and other market disruptions, protect customer funds, and avoid systemic risk, while fostering responsible innovation and fair competition in the derivatives markets.2 DCMs are CFTC-regulated exchanges that provide participants in the derivatives markets with the ability to execute or trade derivative contracts with one another.3 In order to obtain 1 CFTC Mission Statement, available at: https:// www.cftc.gov/About/AboutTheCommission. 2 See CEA section 3(b), 7 U.S.C. 5(b). 3 See CEA section 1a(6), 7 U.S.C. 1a(6). (The term ‘‘board of trade’’ means any organized exchange or other trading facility); CEA section 1a(51)(A), 7 U.S.C. 1a(51)(A) (The term ‘‘trading facility’’ means a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions— (i) by accepting bids or offers made by other participants that are open to multiple participants in the facility or system; or (ii) through the interaction of multiple bids or multiple offers within a system with a pre-determined nondiscretionary automated trade matching or execution algorithm); and CEA section 5(d)(1)(A), 7 U.S.C. 7(d)(1)(A) (To be designated, and maintain PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 and maintain designation with the CFTC, DCMs must comply with statutory ‘‘Core Principles’’ that are set forth in the CEA,4 as well as applicable CFTC rules and regulations.5 The statutory Core Principles for DCMs reflect the important role that these exchanges play in promoting the integrity of derivatives markets. DCMs are self-regulatory organizations, and each DCM has Core Principle obligations to, among other things, establish and enforce rules for trading on the DCM; 6 provide a competitive, open and efficient market for trading; 7 and monitor trading activity.8 For example, DCM Core Principle 4 requires a DCM to have the capacity and responsibility to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process, through market surveillance, compliance, and enforcement practices and procedures.9 DCM Core Principle 5 requires a DCM to adopt for each contract that it lists for trading, as is necessary and appropriate, position limitations or position accountability for speculators, in order to reduce the potential threat of market manipulation or congestion, especially during trading in the delivery month.10 DCM Core Principle 12 requires a DCM to establish and enforce rules to protect markets and market participants from abusive a designation, as a contract market, a board of trade shall comply with—(i) any core principle described in this subsection; and (ii) any requirement that the Commission may impose by rule or regulation pursuant to CEA section 8a(5)). 4 See, generally, CEA section 5(d), 7 U.S.C. 7(d). There are 23 statutory Core Principles for DCMs. 5 CEA section 5(d)(1)(A), 7 U.S.C. 7(d)(1)(A). 6 DCM Core Principle 2 requires, among other things, that a DCM establish, monitor, and enforce compliance with the rules of the DCM, including access requirements, the terms and conditions of any contracts to be traded on the DCM, and rules prohibiting abusive trade practices on the DCM. DCM Core Principle 2 also requires a DCM to have the capacity to detect, investigate, and apply appropriate sanctions to any person that violates any rule of the DCM. CEA section 5(d)(2), 7 U.S.C. 7(d)(2). See also 17 CFR 38.150 through 38.160. DCM Core Principle 13 requires that a DCM establish and enforce disciplinary procedures that authorize the DCM to discipline, suspend, or expel members or market participants that violate the DCM’s rules. CEA section 5(d)(13), 7 U.S.C. 7(d)(13). See also 17 CFR 38.700 through 38.712. 7 DCM Core Principle 9 requires, among other things, that a DCM provide a competitive, open, and efficient market and mechanism for executing transactions that protects the price discovery process of trading in the centralized market of the DCM. CEA section 5(d)(9), 7 U.S.C. 7(d)(9). See also 17 CFR 38.500. 8 See, e.g., DCM Core Principles 4, 5, and 12, discussed infra. 9 CEA section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR 38.250 through 38.258. 10 CEA section 5(d)(5), 7 U.S.C. 7(d)(5). See also 17 CFR 38.300 through 38.301. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 practices, and to promote fair and equitable trading on the DCM.11 Additionally, each DCM has a specific statutory obligation, under DCM Core Principle 3, to only list for trading derivative contracts that are not readily susceptible to manipulation.12 As discussed in greater detail below, a DCM may elect to list a new derivative contract for trading either by certifying to the Commission that the contract complies with the CEA and CFTC regulations,13 or by seeking Commission approval of the contract.14 In either case, the DCM must submit the contract’s terms and conditions, and other prescribed information relating to the contract, to the Commission prior to listing.15 For a number of the statutory Core Principles for DCMs, the Commission has adopted rules that establish the manner in which a DCM must comply with the Core Principle.16 These implementing rules are set forth in part 38 of the Commission’s regulations.17 The Commission has also adopted, in appendix B to part 38,18 guidance and acceptable practices for DCMs to consider with respect to certain of the Core Principles.19 With respect to the DCM Core Principle 3 requirement that a DCM only list for trading derivative contracts that are not readily susceptible to manipulation, the Commission has adopted guidance that is set forth in appendix C to part 38—Demonstration of Compliance That a Contract is Not 11 CEA section 5(d)(12), 7 U.S.C. 7(d)(12). See also 17 CFR 38.650 through 38.651. 12 CEA section 5(d)(3), 7 U.S.C. 7(d)(3). See also 17 CFR 38.200 through 38.201. 13 CEA section 5c(c)(1), 7 U.S.C. 7a–2(c)(1). See also 17 CFR 40.2. 14 CEA sections 5c(c)(4) through (5), 7 U.S.C. 7a– 2(c)(4) through (5). See also 17 CFR 40.3. 15 See, generally, 17 CFR 40.2 and 40.3. Amendments to contract terms and conditions also must be submitted to the Commission in accordance with procedures set forth at CEA section 5c(c), 7 U.S.C. 7a–2(c), and part 40 of the Commission’s regulations. 16 Unless otherwise determined by the Commission by rule or regulation, a DCM has reasonable discretion in establishing the manner in which it complies with a Core Principle. CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). 17 17 CFR part 38. 18 17 CFR part 38, appendix B. 19 Guidance provides contextual information regarding a Core Principle, including important concerns which the Commission believes should be considered in complying with the Core Principle. The guidance for a DCM Core Principle is illustrative only of the types of matters that a DCM may address, and is not intended to be used as a mandatory checklist. Acceptable practices are more detailed examples of how a DCM may satisfy particular requirements of a DCM Core Principle. Similar to guidance, acceptable practices are for illustrative purposes only, and do not establish a mandatory means of Core Principle compliance. 17 CFR part 38, appendix B. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 Readily Susceptible to Manipulation (the ‘‘Appendix C Guidance’’).20 The Appendix C Guidance outlines certain relevant considerations for a DCM when designing a derivative contract, and providing supporting documentation and data in connection with the submission of the derivative contract to the Commission.21 The Commission takes the considerations outlined in the Appendix C Guidance into account when determining whether, with respect to the contract, the DCM is satisfying its DCM Core Principle 3 obligation only to list derivative contracts that are not readily susceptible to manipulation. Among other things, the Appendix C Guidance outlines, for both physicallysettled and cash-settled derivative contracts, certain considerations in connection with the design of the contract’s rules and terms and conditions.22 With respect to physically-settled derivative contracts, the Appendix C Guidance states, among other things, that the contract’s terms and conditions should conform to the most common commercial practices and conditions in the cash market for the underlying commodity.23 The Appendix C Guidance also states that the contract’s terms and conditions should be designed to avoid impediments to the delivery of the underlying commodity, so as to promote convergence between the price of the contract and the cash market value of the underlying commodity at the expiration of trading in the contract.24 The Appendix C Guidance outlines certain criteria for a 20 See 17 CFR part 38, appendix C. Guidance set forth in appendix B to part 38 states that a DCM may use the Appendix C Guidance as guidance in meeting DCM Core Principle 3 for both new product listings and existing listed contracts. 17 CFR part 38, appendix B, Core Principle 3 Guidance. 21 See Core Principles and Other Requirements for Designated Contract Markets, 77 FR 36612 at 36632 (June 19, 2012). The Appendix C Guidance is also relevant to swap execution facilities (‘‘SEFs’’), another category of CFTC-regulated exchange that provides eligible contract participants with the ability to execute or trade derivative contracts that are swaps with one another. Like DCMs, SEFs are obligated by statute only to permit trading in contracts that are not readily susceptible to manipulation. See CEA section 5h(f)(3), 7 U.S.C. 7b–3(f)(3); 17 CFR 37.301. 22 Physically-settled derivative contracts are contracts that may settle directly into the commodity underlying the contract. If the holder of a position in a physically-settled derivative contract still has an open position at the expiration of trading in the contract, then the position holder must, in accordance with the rules for delivery set forth in the contract, make or take delivery (as applicable) of the underlying commodity. By contrast, cash-settled derivative contracts are, at the expiration of trading in the contract, settled by way of a cash payment instead of physical delivery of the underlying commodity. 23 Appendix C Guidance, paragraph (b)(1). 24 Id. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 83379 DCM to consider addressing in the contract’s terms and conditions,25 including contract size, the period for making and taking delivery under the contract, delivery points, quality standards for the underlying commodity, and inspection/certification procedures for verifying compliance with those quality standards or any other related delivery requirements under the contract.26 The criteria outlined in the Appendix C Guidance that relate to the quality and other attributes of the underlying commodity that would be delivered under a physically-settled derivative contract upon the expiration of trading, inform the pricing of the derivative contract. Addressing these criteria clearly in the derivative contract’s terms and conditions, in a manner that reflects the individual characteristics of the underlying commodity, helps to ensure that trading in the derivative contract is based on accurate information about the underlying commodity. This, in turn, helps to promote accurate pricing and helps to reduce the susceptibility of the derivative contract to manipulation. Further, when a derivative contract’s terms and conditions help to ensure that, upon delivery, the quality and other attributes of the underlying commodity will be as expected by position holders, this helps to prevent price distortions and fosters confidence in the contract that can incentivize trading and enhance liquidity. With respect to cash-settled derivative contracts, the Appendix C Guidance states that an acceptable specification of the cash settlement price would, among other things, include rules that fully describe the essential economic characteristics of the underlying commodity, as well as how the final settlement price is calculated.27 The Appendix C Guidance states that the utility of a cash-settled contract for risk management and price discovery purposes would be significantly impaired if the cash settlement price is not a reliable or robust indicator of the value of the underlying commodity.28 The Appendix C Guidance states that, accordingly, careful consideration should be given to the potential for manipulation or distortion of the cash settlement price, as well as the reliability of that price as an indicator 25 Appendix C Guidance, paragraph (b)(2)(1) (nothing that for physical delivery contracts, an acceptable specification of terms and conditions would include, but may not be limited to, rules that address, as appropriate, the following criteria). 26 Appendix C Guidance, paragraph (b)(2). 27 Appendix C Guidance, paragraph (c)(1). 28 Appendix C Guidance, paragraph (c)(2). E:\FR\FM\15OCR5.SGM 15OCR5 83380 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations of cash market values.29 Appropriate consideration also should be given to the commercial acceptability, public availability, and timeliness of the price series that is used to calculate the cash settlement price.30 B. Voluntary Carbon Markets 1. Overview of Voluntary Carbon Markets As discussed further below, this final Commission guidance addresses an emerging class of climate-related derivative contracts listed for trading by DCMs, where the underlying commodity is a VCC.31 In addition to direct greenhouse gas (‘‘GHG’’) emissions reduction initiatives, market-based mechanisms, such as carbon markets,32 have developed to support emissions reduction efforts. A carbon market generally refers to an economic mechanism to support the buying and selling of environmental commodities 33 that represent GHG emission reductions or removals from the atmosphere. Carbon markets are intended to harness market forces to incentivize carbon mitigation activities. Carbon markets generally fall into two categories: (i) mandatory (or compliance) markets, and (ii) voluntary carbon markets. Mandatory markets, such as cap-andtrade programs, emissions trading systems and allowance trading systems, 29 Id. 30 Id. khammond on DSKJM1Z7X2PROD with RULES5 31 This guidance uses the term ‘‘voluntary carbon credits’’ rather than ‘‘verified carbon credits,’’ since the guidance is focused on the quality and other attributes of the intangible commodity underlying a derivative contract. The Commission recognizes that market participants in the cash or secondary market for voluntary carbon credits may choose to use a set of standardized terms for the trading and retirement of ‘‘verified carbon credits,’’ as defined by the International Swaps and Derivatives Association (‘‘ISDA’’), in the market participants’ physically-settled spot, forward or option transactions. See 2022 ISDA Verified Carbon Credit Transactions Definitions (‘‘VCC Definitions’’) Frequently Asked Questions, available at: 2022– ISDA-Verified-Carbon-Credit-TransactionsDefinitions-FAQs-061323.pdf. 32 While the term ‘‘carbon’’ is generally intended to also include other GHGs, such as methane, nitrous oxide, sulfur hexafluoride, hydro fluorocarbons and perfluorocarbons, most emissions trading involves emissions trading of carbon dioxide. 33 An agreement, contract or transaction in an environmental commodity may qualify for the forward exclusion from the ‘‘swap’’ definition set forth in section 1a(47) of the CEA, 7 U.S.C. 1a(47), if the agreement, contract or transaction is intended to be physically-settled. For further discussion of the Commission’s interpretation of whether agreements, contracts, or transactions in environmental commodities fall within the forward exclusion from the swap definition, see Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208 (August 13, 2012). VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 are established and regulated by national, regional, or international governmental bodies.34 Entities subject to the requirements of a mandatory market generally must demonstrate compliance by directly reducing their emissions from their own operations or activities, or by purchasing eligible compliance credits representing emission reductions or removals achieved by others. Voluntary carbon markets are not established by any government body. They enable market participants to purchase, on a voluntary basis, carbon credits that upon retirement represent reductions or removals of GHG emissions. A voluntary carbon credit, or ‘‘VCC,’’ is a tradeable intangible instrument that is issued by a carbon crediting program (‘‘crediting program’’).35 The general industry standard is for a VCC to represent a GHG emissions reduction to, or removal from, the atmosphere equivalent to one metric ton of carbon dioxide.36 A participant in the voluntary carbon markets may purchase a VCC, representing an emissions reduction or removal by another party, to supplement emissions reductions or removals achieved from the participant’s own operations or activities. Liquid and transparent markets in high-integrity VCCs may serve as a tool to facilitate emissions reduction efforts.37 34 See, for example, the United Nation’s Clean Development Mechanism (‘‘CDM’’), the California Compliance Offset Program, the Regional Greenhouse Gas Initiative (‘‘RGGI’’), the Alberta Emission Offset System (‘‘AEOS’’), and the EU Emissions Trading System (‘‘ETS’’). 35 See, e.g., The Integrity Council for the Voluntary Carbon Market Carbon Core Principles, Section 5 Definitions, available at: https:// icvcm.org/wp-content/uploads/2023/07/CCPSection-5-R2-FINAL-26Jul23.pdf. 36 This is calculated as the difference in GHG emission reductions or removals from a baseline scenario, to the emission reductions or removals occurring under the carbon mitigation project or activity, with any adjustments for leakage. See The Integrity Council for the Voluntary Carbon Market Carbon Core Principles, Section 5 Definitions, available at: https://icvcm.org/wp-content/uploads/ 2023/07/CCP-Section-5-R2-FINAL-26Jul23.pdf. 37 The Board of the International Organization of Securities Commissions (‘‘IOSCO’’) published, in November 2022, a Voluntary Carbon Markets consultation for public comment. The IOSCO consultation paper sought feedback on a potential approach that regulatory authorities and market participants could take to foster sound and wellfunctioning voluntary carbon market structure and, as a consequence, scale up these markets to allow them to achieve their environmental objectives. See, Voluntary Carbon Markets, Discussion Paper, CR/ 06/22, November 2022, available at: https:// www.iosco.org/library/pubdocs/pdf/IOSCOPD718. pdf. In December 2023, IOSCO published its Voluntary Carbon Markets Consultation Report, CR/ 06/23, December 2023 (outlining a proposed set of good practices to promote the integrity and orderly functioning of voluntary carbon markets) available PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 The process by which VCCs are issued deserves careful consideration, as that process informs VCC quality and, by extension, the overall integrity and effective functioning of voluntary carbon markets. Generally, parties that play a role in the issuance of a VCC include: (1) the developer of a mitigation project or activity that is intended to reduce or remove GHG emissions from the atmosphere (‘‘project developer’’); (2) a crediting program that, among other things, issues VCCs for mitigation projects or activities that satisfy the crediting program’s standards; 38 and (3) an independent third party that verifies and validates the mitigation project or activity. A project developer must first select the crediting program with which it seeks to certify its mitigation project or activity. The crediting program will certify the project or activity if it satisfies the crediting program’s standards for issuing VCCs. A crediting program generally engages an independent third party to review project or activity documentation, including, among other things, to verify the accuracy of the estimated amount of emission reductions or removals that are expected to be associated with the project or activity, based on the project’s or activity’s baseline scenario 39 and the crediting program’s methodology or protocol for quantifying reduction or removal levels. The estimated emission reductions or removals serve as the basis for the determination of the number of VCCs to be issued for the project or activity. Once the crediting program determines that the mitigation project or activity satisfies the crediting program’s standards for issuing VCCs, the project or activity will be certified. The crediting program typically operates or makes use of a registry, which serves as a central repository for tracking certified mitigation projects or activities and their associated VCCs. Once registered, VCCs associated with a certified mitigation project or activity may be at: https://www.iosco.org/library/pubdocs/pdf/ IOSCOPD749pdf. See also, Voluntary Carbon Markets Joint Policy Statement and Principles (‘‘Joint Policy Statement on Voluntary Carbon Markets’’), U.S. Department of the Treasury, May 2024, available at: https://home.treasury.gov/ system/files/136/VCM-Joint-Policy-Statement-andPrinciples.pdf. 38 Currently, the four main crediting programs in the voluntary carbon markets are the American Carbon Registry, the Climate Action Reserve, the Gold Standard and the Verified Carbon Standard. 39 A baseline scenario is the predicted or assumed outcome in the absence of the incentives created by carbon credits, holding all other factors constant. See, e.g., The Integrity Council for the Voluntary Carbon Market, Core Carbon Principles Section 5: Definitions; January 2024, Version 2, at 104. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations bought and sold to end users (businesses or individuals) or to intermediaries such as brokers or aggregators that provide liquidity to voluntary carbon market participants.40 khammond on DSKJM1Z7X2PROD with RULES5 2. Initiatives To Promote Transparency, Integrity and Standardization in the Voluntary Carbon Markets As the voluntary carbon markets have continued to develop and mature, private sector and multilateral initiatives have sought to address certain issues—relevant to both the supply side (generation of VCCs from carbon mitigation projects or activities), and the demand side (businesses or individuals purchasing VCCs)— impacting the speed at which transparent, robustly traded markets for high-integrity VCCs are scaled. On the supply side, a key focus has been on the quality of VCCs, and particularly, whether they accurately represent the nature and level of GHG emission reductions or removals that they are intended to represent. Given the current absence of a standardized methodology or protocol to quantify emissions reduction or removal levels, there is a possibility that methodologies or protocols of differing degrees of robustness may calculate different reduction or removal impacts for two projects that are identical in type and size (or even for the same project). This could result in different amounts of carbon credits being issued for each project, despite their actual reduction or removal impact being the same. It may also create incentives for project developers to seek to apply the quantification protocol or methodology, or to seek to certify with the crediting program, that would result in the issuance of the most credits. Among other things, these possibilities create challenges for accurately pricing VCCs. Further, it can be difficult to discern the extent to which the price of any particular VCC reflects the price of one metric ton of carbon dioxide equivalent reduced or removed from the atmosphere, and the extent to which the price of the VCC reflects understandings or concerns relating to the mitigation project or activity for which the VCC was issued, or other aspects of the process for issuing the VCC.41 40 Funding by investors for a mitigation project or activity could begin as early as the planning stage. Early investors may enter into agreements with a project developer for funding in exchange for discounted VCCs, if and when issued. 41 Factors that may affect the price of VCCs issued for any particular mitigation project or activity may include the type of the project or activity, the geographic location of the project or activity, and the methodology or protocol used to measure the levels of emission reductions or removals VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 Challenges with respect to accurately ascertaining VCC quality, and associated pricing challenges,42 can erode confidence in voluntary carbon markets. Furthermore, opaque or inadequate calculation methodologies or protocols, which can obscure or mischaracterize the carbon impact of a mitigation project or activity, can undermine both the integrity and purpose of voluntary carbon markets. On the demand side, concerns have been raised that, in connection with meeting their carbon mitigation goals, businesses or individuals may be utilizing low integrity VCCs which do not accurately reflect the nature or level of GHG emission reductions or removals that are associated with the projects or activities for which the VCCs have been issued.43 This can raise questions not only about the business’s or individual’s progress towards their carbon mitigation goals, but also about whether any claims related to those goals are misleading.44 Market participants that are purchasing VCCs to help meet their carbon mitigation goals may be focused largely or primarily on price, and also may not have ready access to all of the information that they need to make informed evaluations, and comparisons, of VCC quality. All of this may incentivize, intentionally or not, the purchase of lower quality VCCs. This associated with the project or activity. Types of carbon mitigation projects or activities for which VCCs are issued include renewable energy, industrial gas capture, energy efficiency, forestry initiatives (avoiding deforestation), regenerative agriculture, wind power, and biogas. The location of a mitigation project or activity may, for example, impact the cost of implementing and/or operating the project or activity. Mitigation projects and activities for which VCCs are issued are located in countries worldwide. See Berkeley Voluntary Registry Offsets Database, available at: https:// gspp.berkeley.edu/research-and-impact/centers/ cepp/projects/berkeley-carbon-trading-project/ offsets-database. 42 Observed trading of VCCs is not as readily transparent as for other financial instruments. Spot markets for VCCs are still largely bespoke, with buyers purchasing directly from project developers or via intermediaries. Some exchanges for trading VCCs have been established and are evolving. For example, the AirCarbon Exchange (https://acx.net/ acx-singapore/), located in Singapore; Carbon Trade Exchange (https://ctxglobal.com/), located in the United Kingdom; and Xpansiv CBL (https:// xpansiv.com/cbl/), located in the United States. 43 See, e.g., Forbes, Carbon Neutral Claims Under Investigation In Greenwashing Probe (June 16, 2023), available at: https://www.forbes.com/sites/ amynguyen/2023/06/16/carbon-neutral-claimsunder-investigation-in-greenwashing-probe/ ?sh=2a6170466431. 44 See, e.g., Federal Trade Commission, Guides for the Use of Environmental Marketing Claims, Regulatory Review Notice and Request for Public Comment, 87 FR 77766 (December 20, 2022) (Federal Trade Commission request for public comment on updating its Green Guides to include claims made regarding carbon offsets). PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 83381 may be facilitated by the opaque pricing of VCCs. Private sector and multilateral efforts have spearheaded the development of various initiatives to address the above challenges, and to promote transparency, integrity and standardization in the voluntary carbon markets. To support and promote VCC quality, these private sector and multilateral initiatives have focused on developing standards for high-integrity VCCs.45 Among other things, these standards are intended to help provide assurance that the VCCs that have been issued for a carbon mitigation project or activity accurately reflect the actual GHG emissions reduction or removal levels associated with that project or activity. These standards also generally highlight the importance of effective crediting program processes, procedures, and governance arrangements, in ensuring that a crediting program is issuing highintegrity VCCs. Standards that assist market participants in making informed evaluations, and comparisons, of VCC quality may promote accurate pricing and enhance confidence that the voluntary carbon markets can serve as a tool to assist in emissions reduction efforts. Such standards can thereby play a valuable role in supporting market transparency and liquidity, and the scaling of high-integrity voluntary carbon markets. Such standards may also support initiatives being developed to address concerns about the accuracy of claims made by purchasers of VCCs regarding the role that VCCs play in the purchasers’ progress toward carbon mitigation goals.46 Such standards could serve as a foundation for criteria that purchasers of VCCs could 45 See, e.g., The Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles (July 2023), available at: https://icvcm.org/wpcontent/uploads/2023/07/CCP-Book-R2-FINAL26Jul23.pdf; the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation (‘‘CORSIA’’) (2023), available at: https://www.icao.int/ environmental-protection/CORSIA/Pages/ default.aspx; the G7 Principles of High Integrity Carbon Markets (2023), available at: https:// www.meti.go.jp/information/g7hirosima/energy/ pdf/Annex004.pdf. See also, Joint Policy Statement on Voluntary Carbon Markets, available at: https:// home.treasury.gov/system/files/136/VCM-JointPolicy-Statement-and-Principles.pdf. 46 See, e.g., the World Wildlife Fund (‘‘WWF’’), Environmental Defense Fund (‘‘EDF’’) and OekoInstitut’s Carbon Credit Quality Initiative (https:// carboncreditquality.org/); the Tropical Forest Credit Integrity Guide for Companies: Differentiating Tropical Forest Carbon Credit by Impact, Quality, and Scale (https://tfciguide.org/); and the Voluntary Carbon Markets Integrity Initiative’s Claims Code of Practice (https://vcmintegrity.org/vcmi-claims-codeof-practice/). E:\FR\FM\15OCR5.SGM 15OCR5 83382 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations voluntarily adhere to, in order to demonstrate their commitment to using high-integrity VCCs to support their carbon mitigation goals, and to being transparent in their progress towards those goals. C. The Commission and Voluntary Carbon Markets 1. Derivative Contracts on Environmental Commodities, Including VCCs khammond on DSKJM1Z7X2PROD with RULES5 Derivative contracts on environmental commodities have been trading on CFTC-regulated exchanges for decades. Derivative contracts on mandatory emissions program instruments have been trading since 2005, with GHG emissions-related instruments first listed for trading in 2007.47 There are currently over 150 derivative contracts on mandatory emissions program instruments listed for trading on DCMs.48 As of August 2024, twentynine derivative contracts on voluntary carbon market products have been listed 47 The Chicago Climate Futures Exchange (‘‘CCFE’’) listed a Sulfur Financial Instruments Current Vintage Delivery futures contract in 2005. In 2006, the New York Mercantile Exchange (‘‘NYMEX’’) listed a nitrogen oxide (‘‘NOX’’) Emissions Allowance futures contract. In 2007, CCFE listed the first Carbon Financial Instrument futures contract and other emission contracts. In 2008, NYMEX listed the first RGGI futures contract. In 2011, Green Exchange listed its European Union Allowance futures contract. In 2012, NYMEX listed its California Carbon Allowance futures contract. To date, there have been over 1,500 futures and options contracts on mandatory emissions program instruments listed for trading on various DCMs. The vast majority of these contracts are no longer listed for trading. 48 Examples of derivatives contracts on mandatory emissions program instruments, such as renewable energy credits (‘‘RECs’’) and renewable fuel standards (‘‘RFS’’), that currently have open interest include: the ICE Futures US (‘‘ICE US’’) PJM Tri Qualified Renewable Energy Certificate Class I futures contract; the ICE US Texas Compliance Renewable Energy Certificate from CRS Listed Facilities Front Half Specific futures contract; the ICE US New Jersey Compliance Renewable Energy Certificate Class II futures contract; the Chicago Mercantile Exchange (‘‘CME’’) Ethanol T2 FOB Rotterdam Including Duty (Platts) futures contract; the ICE US Biofuel Outright—D4 RINS (OPIS) futures contract; the ICE US RGGI Vintage 2024 futures contract; and the ICE US California Carbon Allowance Current Auction futures contract. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 for trading by DCMs.49 Three of those contracts currently have open interest.50 Physically-settled derivative contracts on VCCs base their price on the spot price of VCCs. If the holder of a position in a physically-settled VCC derivative contract still has an open position at the expiration of trading in the contract, then the position holder must, in accordance with the rules for delivery set forth in the contract, make or take delivery (as applicable) of VCCs that meet the contract’s rules for delivery eligibility.51 2. CFTC Initiatives Relating to Voluntary Carbon Markets i. First Voluntary Carbon Markets Convening In June 2022, Chairman Behnam held the first-ever Voluntary Carbon Markets 49 NYMEX lists the following physically-settled futures contracts on voluntary carbon market products: (1) the CBL Global Emissions Offset (GEO) futures contract; (2) the CBL Nature-Based Global Emissions Offset (N–GEO) futures contract; (3) the CBL Core Global Emissions Offset (C–GEO) futures contract; (4) the CBL Nature-Based Global Emissions Offset Trailing futures contract; and (5) the CBL Core Global Emissions Offset Trailing futures contract. Nodal Exchange (‘‘Nodal’’) lists the following physically-settled futures and options contracts on voluntary carbon market products: (1) Verified Emission Reduction—Nature-Based Vintage 2017 futures and options contracts; (2) Verified Emission Reduction—Nature-Based Vintage 2018 futures and options contracts; (3) Verified Emission Reduction—Nature-Based Vintage 2019 futures and options contracts; (4) Verified Emission Reduction—Nature-Based Vintage 2020 futures and options contracts; (5) Verified Emission Reduction—Nature-Based Vintage 2021 futures and options contracts; (6) Verified Emission Reduction—Nature-Based Vintage 2022 futures and options contracts; (7) Verified Emission Reduction—Nature-Based Vintage 2023 futures and options contracts; (8) Verified Emission Reduction—Nature-Based Vintage 2024 futures and options contracts; (9) Verified Emission Reduction—Nature-Based Vintage 2025 futures and options contracts; (10) Verified Emission Reduction—Nature-Based futures and options contracts; (11) Verified Emission Reduction—CORSIA-Eligible futures and options contracts; (12) Carbon Removal futures contract; and (13) Global Emission Reduction futures contract. 50 The NYMEX CBL GEO futures contract; the NYMEX CBL N–GEO futures contract; and the NYMEX CBL C–GEO futures contract are currently the only futures contacts listed for trading on DCMs with open interest and trading volume. Information is available at: https://www.cmegroup.com/ markets/energy/emissions/cbl-global-emissionsoffset.volume.html. 51 For example, NYMEX’s CBL Global Environmental Offset futures contracts, and Nodal’s Verified Emission Reduction futures and options contracts, are physically-settled contracts. The NYMEX futures contracts permit VCCs to be delivered from the Verified Carbon Standard (‘‘VCS’’) Verra Registry, and the registries of the American Carbon Registry (‘‘ACR’’), and the Climate Action Reserve (‘‘CAR’’). The Nodal futures and options contracts permit VCCs to be delivered from VCS’s Verra Registry and from the Gold Standard Impact Registry, as well as from the ACR registry for certain contracts. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 Convening to discuss issues related to the supply of and demand for highquality carbon credits, including product standardization and the data necessary to support the integrity of carbon credits’ GHG emissions removal and reduction claims.52 A further goal of the convening was to gather information from a wide variety of participants in the voluntary carbon markets to better understand the potential role of the official sector in these markets, particularly in connection with the emergence of CFTC-regulated derivatives referencing VCCs. The convening included participants from carbon credit standard setting bodies, a crediting program, private sector integrity initiatives, spot platforms, DCMs, intermediaries, end-users, public interest groups, and others. ii. Commission Request for Information In June 2022, the Commission issued for public comment a Request for Information (‘‘RFI on Climate-Related Financial Risk’’) 53 in order to better inform the Commission on how, consistent with its statutory authority, to address climate-related financial risk as pertinent to the derivatives markets and underlying commodities markets.54 The responsive comments that the Commission received included feedback on specific questions relating to product innovation and voluntary carbon markets.55 Several commenters expressed support for the Commission to take steps that could support transparency and confidence in the 52 For the official announcement of the convening and related materials, see CFTC Announces Voluntary Carbon Markets Convening, available at: https://www.cftc.gov/PressRoom/Events/ opaeventcftccarbonmarketconvene060222. 53 Request for Information on Climate-Related Financial Risk, 87 FR 34856 (June 8, 2022) (‘‘RFI on Climate-Related Financial Risk’’). 54 In addition to soliciting public feedback on all aspects of climate-related financial risk as it may pertain to the derivatives markets, underlying commodities markets, registered entities, registrants, and other related market participants, the RFI on Climate-Related Financial Risk requested feedback on specific questions relating to: (1) Data, (2) Scenario Analysis and Stress Testing, (3) Risk Management, (4) Disclosure, (5) Product Innovation, (6) Voluntary Carbon Markets, (7) Digital Assets, (8) Financially Vulnerable Communities, (9) PublicPrivate Partnerships/Engagement, and (10) Capacity Coordination. The RFI on Climate-Related Financial Risk stated that the Commission may use information provided in response to the RFI on Climate-Related Financial Risk to inform potential future actions including, but not limited to, the issuance of new or amended guidance, interpretations, policy statements, or regulations, or other potential Commission action. Id. 55 Twenty-five commenters on the RFI on Climate-Related Financial Risk responded to questions regarding product innovation and 44 commenters on the RFI on Climate-Related Financial Risk responded to questions regarding the voluntary carbon markets. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 voluntary carbon markets, particularly through recognition or support of private sector and multilateral initiatives to promote standardization and integrity.56 In connection with product innovation, certain commenters expressed the view that the Commission’s current statutory framework and regulations are sufficient to regulate voluntary carbon market derivatives products.57 While there were comments expressing different views on the reach of the Commission’s jurisdiction to regulate voluntary carbon markets,58 many commenters supported the Commission utilizing its spot market anti-fraud and anti-manipulation authority in the voluntary carbon market space.59 56 See, e.g., International Swaps and Derivatives Association (‘‘ISDA’’) response to the RFI on Climate-Related Financial Risk, at 6; American Petroleum Institute (‘‘API’’) response to the RFI on Climate-Related Financial Risk, at 4; Center for American Progress response to the RFI on ClimateRelated Financial Risk, at 10; Environmental Defense Fund (‘‘EDF’’) response to the RFI on Climate-Related Financial Risk, at 12; Futures Industry Association (‘‘FIA’’) response to the RFI on Climate-Related Financial Risk, at 9; Intercontinental Exchange, Inc. (‘‘ICE’’) response to the RFI on Climate-Related Financial Risk, at 4. 57 See, e.g., CME Group (‘‘CME’’) response to the RFI on Climate-Related Financial Risk, at 10, FIA response to the RFI on Climate-Related Financial Risk, at 3; ISDA response to the RFI on ClimateRelated Financial Risk, at 7. 58 See, e.g., Heritage Foundation response to the RFI on Climate-Related Financial Risk, at 7; API response to the RFI on Climate-Related Financial Risk, at 2–4; Commercial Energy Working Group (‘‘CEWG’’) response to the RFI on Climate-Related Financial Risk, at 2–3. 59 See, e.g., API response to the RFI on ClimateRelated Financial Risk, at 3; ISDA response to the RFI on Climate-Related Financial Risk, at 6; Verra response to the RFI on Climate-Related Financial Risk, at 2. With respect to the Commission’s spot market anti-fraud and anti-manipulation authority, as well as its spot market authority with respect to false reporting, see, e.g., CEA section 6(c)(1), 7 U.S.C. 9(1), which among other things prohibits any person from using or employing, or attempting to use or employ, in connection with a contract for sale of any commodity in interstate commerce, any manipulative or deceptive device or contrivance, in contravention of rules and regulations promulgated by the Commission; CEA section 9(a)(2), 7 U.S.C. 13(a)(2), which among other things makes it a felony for any person to manipulate or attempt to manipulate the price of any commodity in interstate commerce; and implementing Commission rules at part 180 of the CFTC’s regulations, 17 CFR part 180. In June 2023, the CFTC’s Whistleblower Office issued an alert notifying the public about how to identify and report potential CEA violations connected to fraud or manipulation in the carbon markets. See CFTC Whistleblower Alert, available at: https://www.whistleblower.gov/sites/ whistleblower/files/2023-06/06.20.23%20Carbon %20Markets%20WBO%20Alert.pdf. Also in June 2023, the CFTC’s Division of Enforcement announced the creation of an Environmental Fraud Task Force to combat environmental fraud and misconduct. Specifically, the Task Force’s mission is to address fraud and other misconduct in both the derivatives markets and the relevant spot markets (e.g., voluntary carbon markets) and to examine, among other things, fraud with respect to VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 iii. Second Voluntary Carbon Markets Convening In July 2023, Chairman Behnam held the Second Voluntary Carbon Markets Convening. The purpose of this convening was to discuss recent private sector initiatives for high quality carbon credits; current trends and developments in the cash and derivatives markets for carbon credits; public sector initiatives related to carbon markets; and market participants’ perspectives on how the CFTC can promote integrity for high quality carbon credit derivatives.60 D. Proposed Guidance Regarding the Listing of VCC Derivative Contracts On December 4, 2023, the Commission issued proposed guidance outlining factors for consideration by DCMs when addressing certain provisions of the CEA, and CFTC regulations thereunder, that are relevant to the listing for trading of VCC derivative contracts (the ‘‘Proposed Guidance’’).61 In developing the Proposed Guidance, the Commission considered those public comments on the RFI on Climate-Related Financial Risk that addressed product innovation and voluntary carbon markets. The Commission stated in the Proposed Guidance that, taking into account those public comments, it believed that guidance outlining factors for a DCM to consider in connection with the design and listing of VCC derivative contracts would further the mission of the CFTC, ‘‘and may help to advance the standardization of VCC derivative contracts in a manner that fosters transparency and liquidity, accurate pricing, and market integrity.’’ 62 With a focus, primarily, on the design and listing of physically-settled VCC derivative contracts, the Proposed Guidance addressed certain Core Principle compliance considerations, as well as certain requirements relating to the submission of new contracts, and contract amendments, to the Commission. More specifically, the Proposed Guidance addressed certain considerations with respect to Core Principles 3 and 4 for DCMs, and the the purported environmental benefits of purchased carbon credits. See CFTC Release Number 8736–23 (‘‘CFTC Division of Enforcement Creates Two New Task Forces’’), available at: https://www.cftc.gov/ PressRoom/PressReleases/8736-23. 60 For the official announcement of the convening and related materials, see CFTC Announces Second Voluntary Carbon Markets Convening on July 19, available at: https://www.cftc.gov/PressRoom/ Events/opaeventvoluntarycarbonmarkets071923. 61 Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts; Request for Comment, 88 FR 89410 (Dec. 27, 2023). 62 Id. at 89416. PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 83383 contract submission provisions set forth in CEA section 5c(c) and part 40 of the Commission regulations. The Proposed Guidance addressed, first, the DCM Core Principle 3 requirement that a DCM only list for trading derivative contracts that are not readily susceptible to manipulation.63 As discussed above, the Appendix C Guidance outlines certain relevant considerations for a DCM when developing a contract’s terms and conditions, and providing supporting documentation and data in connection with the submission of the contract to the Commission. The Commission takes these considerations into account when determining whether, with respect to the contract, the DCM is satisfying its DCM Core Principle 3 obligations. In connection with a physicallysettled derivative contract, the Appendix C Guidance states that the terms and conditions of the contract ‘‘should describe or define all of the economically significant characteristics or attributes of the commodity underlying the contract.’’ 64 In the Proposed Guidance, the Commission noted that, among other things, failure to specify the economically significant attributes of the underlying commodity may cause confusion among market participants, who may expect a commodity of different quality, or with other features, to underlie the contract. This may render the precise nature of the commodity that the contract is pricing ambiguous, and make the contract susceptible to manipulation or price distortion.65 The Appendix C Guidance further states that, for any particular contract, the specific attributes of the underlying commodity that should be described or defined in the contract’s terms and conditions ‘‘depend upon the individual characteristics of the commodity.’’ 66 The Commission stated in the Proposed Guidance that, in its view, the very fact that standardization and accountability mechanisms for VCCs are still developing is, itself, ‘‘an individual characteristic of the commodity’’ that a DCM should take into account when designing a VCC derivative contract and addressing the underlying commodity— the VCC—in the contract’s terms and conditions.67 The Commission additionally recognized in the Proposed Guidance that, while standardization and accountability mechanisms for VCCs are currently still being 63 CEA section 5(d)(3), 7 U.S.C. 7(d)(3). C Guidance, paragraph (b)(2)(i)(A). 65 88 FR 89410 at 89416. 66 Appendix C Guidance, paragraph (b)(2)(i)(A). 67 88 FR 89410 at 89416. 64 Appendix E:\FR\FM\15OCR5.SGM 15OCR5 83384 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations developed, there are certain characteristics that have been identified broadly—across both mandatory and voluntary carbon markets—as helping to inform the integrity of carbon credits.68 The Commission identified what it preliminarily believed these characteristics to be—referring to them, for purposes of the Proposed Guidance, as ‘‘VCC commodity characteristics’’— and stated that it believed that a DCM should take these VCC commodity characteristics into consideration when designing a physically-settled VCC derivative contract, and addressing in the contract’s terms and conditions the underlying VCC.69 The Proposed Guidance stated that, as a general matter, the Commission believed that a DCM should consider the VCC commodity characteristics when selecting one or more crediting programs from which eligible VCCs, meeting the contract’s specifications, may be delivered at the contract’s expiration.70 More specifically, the Commission stated that it preliminarily believed that a DCM should, at a minimum, consider the VCC commodity characteristics when addressing the following criteria in connection with contract design: • Quality standards • Delivery points and facilities • Inspection provisions These are among the criteria identified in the Appendix C Guidance as criteria relating to the underlying commodity that a DCM should consider addressing in the terms and conditions of a physically-settled derivative contract.71 As discussed above, addressing these criteria clearly in the contract’s terms and conditions, in a manner that reflects the underlying commodity’s individual characteristics, helps to ensure that trading in the contract is based on accurate information about the underlying commodity. This, in turn, helps to promote accurate contract pricing and reduce the susceptibility of the contract to manipulation. Moreover, when a contract’s terms and conditions help to ensure that, upon delivery, the quality and other attributes of the underlying 68 Id. khammond on DSKJM1Z7X2PROD with RULES5 69 Id. 70 For additional clarity, the final guidance states that a DCM should consider the VCC commodity characteristics when selecting one or more crediting programs from which eligible VCCs, meeting the contract’s specifications, may be delivered at the contract’s ‘‘settlement,’’ rather than expiration. 71 Appendix C Guidance, paragraph (b)(2)(1) (noting that for physical delivery contracts, an acceptable specification of terms and conditions would include, but may not be limited to, rules that address, as appropriate, the following criteria). VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 commodity will be as expected by position holders, this helps to prevent price distortions and fosters confidence in the contract that can incentivize trading and enhance liquidity. The Commission stated in the Proposed Guidance that, in connection with derivative contract design, it preliminarily believed that a DCM should consider the following VCC commodity characteristics when addressing quality standards for underlying VCCs: (a) transparency, (b) additionality, (c) permanence and accounting for the risk of reversal, and (d) robust quantification.72 When addressing delivery procedures for underlying VCCs, the Commission stated that it preliminarily believed that a DCM should consider the following VCC commodity characteristics: (a) governance, (b) tracking, and (c) no double counting.73 When addressing inspection or certification procedures for verifying compliance with quality requirements or any other related delivery requirements under the contract for underlying VCCs, the Commission stated that it preliminarily believed that a DCM should consider the validation and verification procedures of the crediting program.74 In addition to the above-described considerations in connection with DCM Core Principle 3, the Proposed Guidance also addressed considerations in connection with the requirement, under DCM Core Principle 4, for a DCM to prevent manipulation, price distortion, and disruptions of the physical delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures. The Commission stated that it preliminarily believed that the monitoring by a DCM of the terms and conditions of a VCC derivative contract, as contemplated under DCM Core Principle 4 and Commission regulations thereunder, should include continual monitoring of the appropriateness of the contract’s terms and conditions that includes, among other things, monitoring to ensure that the delivery instrument—that is, the underlying VCC—conforms or, where appropriate, updates to reflect the latest certification standard(s) applicable for that VCC.75 Finally, the Proposed Guidance highlighted certain requirements in connection with the submission of a VCC derivative contract to the Commission pursuant to CEA section 5c(c)(5)(C) and part 40 of the FR 89410 at 89417. at 89418 and 89419. 74 Id. at 89419. 75 Id. at 89420. Commission’s regulations, and the Commission’s expectation that information submitted to it by a DCM— including supporting documentation, evidence and data—to describe how the contract complies with the CEA and applicable Commission regulations, will be complete and thorough.76 The Proposed Guidance was subject to a 75-day public comment period. In addition to requesting comment on all aspects of the Proposed Guidance, the Commission requested comment on 17 specific questions relating to the listing of VCC derivative contracts. The public comment period closed on February 16, 2024. The Commission received approximately 90 comments on the Proposed Guidance, including the specific questions posed by the Commission. After thorough agency review of the comments received, the Commission has determined to finalize the Proposed Guidance with certain clarifications and revisions, as discussed below. II. Comments on the Proposed Guidance A. Overview Comments on the Proposed Guidance were submitted by a variety of interested parties, including derivatives exchanges, industry and trade associations, public interest organizations, climate advocacy groups, carbon credit rating agencies and standard setting bodies. Many commenters expressed their general support for the Proposed Guidance. For example, S&P Global Commodity Insights (‘‘S&P Global’’) stated that the Proposed Guidance correctly noted that outlining factors for a DCM to consider in connection with the design and listing of VCC derivatives may help the standardization of such products in a manner that promotes transparency and liquidity.77 Better Markets stated that ‘‘the Proposed Guideline is a good step in establishing a fair, transparent, and efficient market for voluntary carbon credits.’’ 78 The Food, Agriculture Climate Alliance (‘‘FACA’’) stated that the ‘‘CFTC can play a role in promoting integrity and building confidence in high-quality carbon credits.’’ 79 A number of commenters were supportive of the VCC commodity characteristics identified in the Proposed Guidance, or confirmed that they are characteristics that have been identified broadly as helping to inform 72 88 76 Id. 73 Id. 77 S&P PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 Global at 2. Markets at 3. 79 FACA at 2. 78 Better E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations the integrity of carbon credits.80 Certain commenters suggested additional characteristics that the Commission should recognize as helping to inform carbon credit integrity, or clarifications or revisions to the descriptions of the VCC commodity characteristics preliminarily identified by the Commission.81 Some commenters raised concerns related to the integrity of the voluntary carbon markets more generally, discussing issues addressed at a high level in Section I.B.2 hereto. Some commenters encouraged the Commission to prescribe the specific attributes that a VCC must possess in order to be eligible to serve as the underlying for a VCC derivative contract.82 Other commenters encouraged the Commission to ensure that the guidance was clearly tailored to reflect DCM obligations and expertise.83 A number of commenters recommended that the Commission acknowledge industry-recognized standards for highintegrity VCCs as tools that DCMs could look to, or rely upon, when considering the VCC commodity characteristics in light of a particular crediting program or particular VCCs.84 B. Specific Comments khammond on DSKJM1Z7X2PROD with RULES5 1. Scope and Application of Guidance Feedback from certain commenters indicated that their understanding was that the Commission’s guidance would establish new obligations for DCMs.85 The Commission emphasizes that its guidance does not establish new obligations for DCMs. The Commission’s guidance is not intended to modify or supersede existing statutory or regulatory obligations, or existing Commission guidance that addresses the listing of derivative contracts by CFTC-regulated exchanges, including the Appendix C Guidance. Rather, in recognition that VCC 80 See, e.g., Anew Climate at 3; Bipartisan Policy Center (‘‘BPC’’) at 2; Woodwell Climate Research Center (‘‘Woodwell’’) at 1; WWF at 1. 81 See, e.g., Americans for Financial Reform Education Fund (‘‘AFREF’’) at 9; The American Forest & Paper Association (‘‘AF&PA’’) at 6; BeZero Inc. (‘‘BeZero’’) at 5; Clean Air Task Force (‘‘CATF’’) at 12–13; Carbon Direct Inc. (‘‘Carbon Direct’’) at 2; California Climate Exchange at 1; Clean Energy Policy Institute (‘‘CEPI’’) at 3; Kita Earth Ltd. (‘‘Kita’’) at 1; Institute for Policy Integrity at NYU School of Law (‘‘NYU Policy Integrity’’) at 6–7; Sylvera at 2. 82 See, e.g., Business Alliance to Scale Climate Solutions (‘‘BASCS’’) at 1; EDF at 9; The Nature Conservancy (‘‘TNC’’) at 1; WWF at 1. 83 See, e.g., Better Markets at 13; CEWG at 3. 84 See, e.g., Center for Climate and Energy Solutions (‘‘C2ES’’) at 2; International Emissions Trading Association (‘‘IETA’’) at 2; ISDA at 2; Puro.earth Oy (‘‘Puro’’) at 2; Verra at 7. 85 See, e.g., CME at 2; ICE at 4; Nodal at 2–5. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 derivative contracts are a comparatively new and evolving class of products 86 which have certain unique attributes, as do voluntary carbon markets themselves, the Commission’s guidance is intended to assist DCMs in addressing existing obligations, when designing and listing such VCC derivatives. For example, the guidance takes into account that standardization and accountability mechanisms for VCCs are currently still developing, and outlines how that may inform a DCM’s contract design and listing considerations. A DCM’s obligations remain those that are set forth in the CEA and the Commission’s regulations, including (but not limited to) those statutory and regulatory requirements that are addressed in the Commission’s guidance, such as the obligation under DCM Core Principle 3 for a DCM only to list for trading contracts that are not readily susceptible to manipulation. Some commenters asserted that the existing contract listing framework for DCMs is both sufficient and appropriate for addressing the listing of VCC derivative contracts. For example, Nodal stated that it was not necessary for the Commission to adopt the Proposed Guidance because ‘‘the existing DCM regulatory framework . . . already provides the appropriate requirements, guidance, and flexibility to manage the listing of VCC derivatives.’’ 87 Intercontinental Exchange (‘‘ICE’’) and CME similarly stated that the existing contract listing framework is effective, and already enables DCMs to develop contract terms and conditions that account for relevant market factors, and that are appropriately designed to the characteristics of the underlying asset.88 Both ICE and Nodal noted that the Appendix C Guidance does not address a specific underlying asset class, with ICE adding that the Appendix C Guidance ‘‘does not mandate a set of criteria or attributes for any particular asset class.’’ 89 In this regard, the Commission reiterates that its guidance with respect to the listing of VCC derivative contracts is not intended to establish new obligations for DCMs, or modify or supersede existing statutory or regulatory requirements or the Appendix C Guidance. Rather, at this juncture in the evolution of VCC 86 In 2022, ISDA published a whitepaper providing background on the cash and derivatives markets for voluntary carbon credits. See Voluntary Carbon Markets: Analysis of Regulatory Oversight in the US. (2022), available at: https:// www.isda.org/2022/06/02/voluntary-carbonmarkets-analysis-of-regulatory-oversight-in-the-us/. 87 Nodal at 2. 88 See CME at 4; ICE at 5. 89 ICE at 5; Nodal at 4. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 83385 derivatives as a product class, and taking into account certain unique attributes of VCC derivatives and the voluntary carbon markets more generally,90 the Commission does believe that there is a benefit to outlining certain factors for consideration by a DCM in connection with the listing of VCC derivative contracts for trading. The guidance is intended as a tool for DCMs, to facilitate contract design, by helping to clarify how certain aspects of the existing contract listing framework may apply in the context of this particular class of products. The Commission believes that this can help to ensure that, upon delivery, the quality and other attributes of VCCs underlying a derivative contract will be as expected by position holders. The Commission believes that this, in turn, can support accurate pricing, help reduce the susceptibility of the contract to manipulation, and foster confidence in the contract that can enhance liquidity. As discussed in more detail below, certain commenters expressed concern that the Proposed Guidance, if adopted, could obligate a DCM to independently confirm the sufficiency of a crediting program’s policies and procedures for ensuring high-integrity VCCs—a responsibility which, these commenters asserted, extended beyond what was expected of DCMs under the existing contract listing framework and for which DCMs may not have the requisite expertise.91 For example, Nodal stated that while the existing contract listing framework contemplates consideration by a DCM of whether the commodities underlying a derivative contract are subject to quality standards, ‘‘DCMs are not required to possess the expertise necessary to opine on the sufficiency of these standards.’’ 92 BPC stated that, given their role within financial markets, DCMs ‘‘may not today have the in-house scientific or technical expertise needed to comprehensively evaluate’’ 93 carbon crediting programs. Likewise, Verra stated that performing an evaluation of VCC quality ‘‘requires substantial specialized technical expertise that DCMs may not adequately possess or be reasonably expected to acquire, given their specific roles. . . .’’ 94 Verra observed that it was not realistic to expect a DCM, whose core competency is derivatives 90 See supra, Sections I.B.1 and I.B.2. e.g., Ceres at 2–3; CME at 7; ICE at 10; IETA at 1; Nodal at 2; Public Citizen at 13; Terra Global Capital, LLC (‘‘Terra’’) at 6; Verra at 6; Xpansiv Limited (‘‘Xpansiv’’) at 4. 92 Nodal at 2. 93 BPC at 3. 94 Verra at 2. 91 See, E:\FR\FM\15OCR5.SGM 15OCR5 83386 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 markets, to develop the same level of expertise in the complexities of VCC issuance and certification as those that are directly involved in the voluntary carbon market infrastructure, such as standard setting bodies, crediting programs, and spot market participants. Other commenters similarly identified standard setting bodies, crediting programs, and/or market participants, as best positioned to establish, or assess adherence with, VCC integrity standards.95 Some of these commenters suggested that a DCM’s primary focus should be on whether the crediting program for underlying VCCs is making information about its policies and procedures, and the projects or activities that it credits, publicly available, to assist derivative market participants in making their own informed evaluations, and comparisons, of VCC quality. For example, CME expressed its belief that it is ‘‘preferable for the crediting program to publish its methodology . . . and for the market participants to render their own judgment.’’ 96 ICE stated that, while it is important for market participants to have sufficient information to make an informed decision about the quality of VCCs that may underlie a DCM contract, ‘‘such information is best created by the crediting program and reviewed in the context of other information published by the program.’’ 97 CME asserted that the ‘‘lion’s share’’ of the criteria identified by the Commission as informing the integrity of a VCC is publicly available: ‘‘As such, participants in the VCC derivatives markets are free to transact, or not, based on their assessment of the data points that matter to them.’’ 98 A number of commenters recommended an acknowledgment, in the Commission’s guidance, that industry-recognized standards for highintegrity VCCs are tools that may assist DCMs in their consideration, with respect to a particular crediting program, of the VCC commodity characteristics identified by the Commission in the guidance.99 For example, ICE noted that certain crediting program operators and their methodologies have been approved under standards set by private sector initiatives that have been subject to open consultation.100 ICE also noted the ongoing initiatives by the International 95 See, e.g., Ceres at 2–3; CME at 7; IETA at 1– 2; Terra at 6; Xpansiv at 4. 96 CME at 7. 97 ICE at 6. 98 CME at 8. 99 See, e.g., C2ES at 2; ICE at 7; IETA at 2; Puro at 5; Verra at 7. 100 ICE at 7. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 Organization of Securities Commissions (‘‘IOSCO’’) to develop a set of good practices to promote the integrity and orderly functioning of voluntary carbon markets.101 ICE recommended that the Commission permit DCMs to reasonably rely on assurances by a crediting program or registry that adheres to, and is audited against, threshold standards for high-quality carbon credits established by ‘‘international organizations such as IOSCO, The Integrity Council for the Voluntary Carbon Market (‘‘ICVCM’’), and International Civil Aviation Organization (‘‘ICAO’’), or similar standard setting bodies.’’ 102 Verra similarly recommended that the Commission permit DCMs ‘‘to rely on VCC certification and compliance set forth under relevant nongovernmental and governmental initiatives.’’ 103 Some commenters recommended that the Commission go so far as to require DCMs only to list VCC derivatives contracts whose underlying VCCs are approved or certified by an industryrecognized standards program for highintegrity VCCs.104 In responding to the above-described comments the Commission first addresses the suggestion that a DCM’s primary focus, when listing for trading a VCC derivative contract, should be on whether the crediting program for underlying VCCs is making information about the program publicly available. As discussed below, the Commission supports a DCM’s consideration of whether the crediting program for underlying VCCs is making detailed information about its policies and procedures, and the projects or activities that it credits, publicly available in a searchable and comparable manner.105 The Commission believes that making such information publicly available can assist market participants in evaluating the substance and sufficiency of crediting program policies and procedures, and making informed evaluations and comparisons of VCC quality. That said, DCMs do have statutory and regulatory obligations that are relevant to the design and listing for trading of derivative contracts, including an obligation under DCM Core Principle 3 to only list contracts that are not readily susceptible to manipulation. As discussed herein, the 101 ICE at 8. 102 ICE at 7. 103 Verra at 7. 104 See, e.g., Duke Financial Economics Center at 9; Puro at 1; Terra at 2. 105 See discussion of the VCC commodity characteristic of ‘‘Transparency,’’ in section II.B.2.iii.1, infra. PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 Appendix C Guidance outlines certain relevant considerations for DCMs in this regard, and the considerations that are outlined in the Appendix C Guidance are not limited to whether information regarding the commodity underlying a derivative contract is publicly available. For example, the Appendix C Guidance outlines certain criteria for a DCM to consider addressing in a derivative contract’s terms and conditions, including quality standards for the underlying commodity, delivery points and facilities, and inspection/ certification procedures for verifying compliance with quality standards or related delivery requirements under the contract. This guidance discusses certain characteristics that have been identified broadly as helping to inform the integrity of carbon credits, and addresses how consideration of these characteristics may inform the manner in which a DCM addresses quality standards, delivery points and facilities, and inspection/certification procedures—again, criteria already identified in the Appendix C Guidance—in connection with the design of a VCC derivative contract. The Commission further believes that consideration of these characteristics will help a DCM ensure that it understands economically significant attributes of the commodity—the VCC— underlying the contract. Notwithstanding the foregoing, and as more fully discussed below, the Commission has made certain revisions to this guidance to further ensure that the guidance appropriately reflects DCM obligations and expertise. Moreover, the Commission acknowledges the specialized, technical nature of crediting program policies, procedures, and technologies, as well as the fact that certain private sector and multilateral initiatives have engaged in extensive undertakings, involving public consultation, to develop standards for high-integrity VCCs against which such policies, procedures and methodologies can be assessed. The Commission is therefore clarifying its view that, as a general matter, industry-recognized standards for high-integrity VCCs can serve as tools for DCMs in connection with their consideration of the VCC commodity characteristics outlined in this guidance. 2. A DCM Shall Only List Derivative Contracts That Are Not Readily Susceptible to Manipulation—VCC Commodity Characteristics i. General A number of commenters expressed their support for the VCC commodity E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations characteristics identified in the Proposed Guidance.106 For example, API stated that it ‘‘supports the CFTC’s reference to the broad core principles of additionality, permanence, robust quantification of emissions reductions and removals, no double counting, effective governance, tracking, transparency, and robust independent third-party validation and verification in the Guidance.’’ 107 Similarly, a number of commenters confirmed that the VCC commodity characteristics identified in the Proposed Guidance were recognized broadly as helping to inform the integrity of carbon credits.108 For example, BPC expressed agreement that the Proposed Guidance ‘‘identifies appropriate VCC commodity characteristics that have also been part of the [voluntary carbon markets] literature and policy discourse for many years.’’ 109 khammond on DSKJM1Z7X2PROD with RULES5 ii. Social and Environmental Factors A number of commenters addressed the specific questions posed by the Commission in the Proposed Guidance, regarding whether, in addition to the VCC commodity characteristics preliminarily identified by the Commission, there were other characteristics informing the integrity of carbon credits that were relevant to the listing of VCC derivative contracts—or whether there were VCC commodity characteristics that were identified in the Proposed Guidance that were not relevant to the listing of VCC derivative contracts. In response to these questions, several commenters responded that the Commission should recognize the social and environmental impacts of a mitigation project or activity, beyond the project or activity’s GHG reduction or removal benefits, as characteristics that inform the integrity of the carbon credits issued with respect to such project or activity.110 For example, Carbon Direct stated that it considered avoidance of negative impact on economic, social, and environmental systems, maximization of benefits to local communities and ecosystems, and environmental justice (equitable distribution of environmental benefits and harms resulting from GHG removal projects) as characteristics that are ‘‘essential to evaluating the quality of a VCC.’’ 111 WWF recommended that 106 See, e.g., API at 2; Woodwell at 1; WWF at 1. at 2. 108 See, e.g., Carbon Direct at 2; Carbon Removal Alliance (‘‘CRA’’) at 2. 109 BPC at 2. 110 See, e.g., aDryada at 1; BASCS at 1; BCarbon Inc (‘‘BCarbon’’) at 3; Carbon Direct at 2; EDF at 9; ICVCM at 6; Terra at 7; TNC at 1; WWF at 1. 111 Carbon Direct at 2. 107 API VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 the Commission recognize a VCC commodity characteristic that explicitly addresses project safeguards,112 stating that such safeguards ‘‘are common attributes of high integrity development projects and should be included so that communities and surrounding ecology are not negatively impacted. . . .’’ 113 TNC and ICVCM suggested that the Commission should further align its guidance with ICVCM’s Core Carbon Principles by also including considerations with respect to social and environmental safeguards, as well as net zero alignment.114 BASCS and EDF also encouraged the Commission to consider guidance in this area that aligned with the ICVCM’s Core Carbon Principles.115 Similarly, the majority of commenters responding to a specific question on this matter in the Proposed Guidance expressed support for the consideration by a DCM, when designing a VCC derivative contract, of 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 GHG emissions, technologies or carbon intensive practices that are incompatible with the objective of achieving net zero GHG emissions by 2050.116 Several commenters stated that there was an association between the social and/or environmental impacts of a mitigation project or activity, and the price of the related VCCs. EDF asserted that ‘‘social safeguards . . . are economically significant attributes of the carbon credits. Sustainable development benefits and safeguards materially influence contract pricing, directly impact the extent to which the credit will be delivered and influence the political durability of those credits.’’ 117 TNC asserted that the social and environmental safeguards associated with a mitigation project or activity can significantly influence contract pricing, as projects infringing on the rights of local communities or adversely damaging ecosystems will be shunned by market stakeholders.’’ 118 112 Project safeguards are policies, standards and operational procedures designed to identify, avoid and mitigate adverse environmental and social impacts that may arise in connection with a carbon mitigation project or activity. 113 WWF at 1. 114 ICVCM at 6; TNC at 1. 115 BASCS at 5–6; EDF at 9. 116 See, e.g., AFF at 4–5; BASCS at 5–6; C2ES at 9; Flow Carbon at 5–6; TNC at 4; WWF at 1. 117 EDF at 9. 118 TNC at 3. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 83387 ICVCM stated that ‘‘verifiable social and environmental attributes beyond mitigation and credit revenues are generally perceived by buyers as increasing the quality of credits, driving higher market prices.’’ 119 Several commenters suggested that DCMs look to standards for highintegrity VCCs developed by private sector or multilateral initiatives, and adherence by a crediting program to such standards, when considering the crediting program’s measures with respect to social and environmental safeguards and/or net zero alignment. For example, TNC recommended that a DCM consider ‘‘whether a crediting program has procedures that follow the recommendations of CORSIA’s safeguard requirements,’’ and whether the crediting program requires projects or activities to generate net positive social and environmental outcomes.120 As noted above, TNC, as well as ICVCM, BASCS, and EDF, referenced the ICVCM’s Core Carbon Principles as a standard to inform consideration of social and environmental safeguards and net zero alignment. Charm Industrial (‘‘Charm’’) and CRA, meanwhile suggested that a DCM consider whether a crediting program ensures that a mitigation project or activity complies with applicable U.S. regulations and legal requirements,121 and Forest Peoples Programme Amerindian Peoples Association Rainforest Foundation US (‘‘Forest Peoples’’) stated that a DCM should consider whether a crediting program has social safeguard requirements that align with the rights of indigenous persons under international law, such as the UN human rights treaties and the UN Declaration on the Rights of Indigenous Peoples.122 A few commenters expressed concerns associated with the consideration, by a DCM, of a crediting program’s measures with respect to social and environmental safeguards and/or net zero alignment. Iconoclast Industries, LLC (‘‘Iconoclast’’) stated that consideration of a crediting program’s measures with respect to net zero alignment would ‘‘make this a zerosum game. Incremental steps should be acceptable and . . . the market will continue facilitating the evolution towards’’ the 2050 goal.123 Terra similarly raised concerns regarding a DCM’s consideration of whether a crediting program has measures with 119 ICVCM at 10. at 3. 121 See Charm at 5; CRA at 3. 122 Forest Peoples at 5. 123 Iconoclast at 5. 120 TNC E:\FR\FM\15OCR5.SGM 15OCR5 khammond on DSKJM1Z7X2PROD with RULES5 83388 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations respect to net zero alignment, and commented that ‘‘the perfect has been the enemy of the good over many years.’’ 124 As discussed above, a number of commenters on the Proposed Guidance stated that a crediting program’s measures with respect to social and environmental safeguards may have a bearing on how participants in the voluntary carbon markets evaluate the quality—and by extension the price—of the VCCs that are issued by the crediting program.125 Also as discussed above, addressing in a derivative contract’s terms and conditions the quality of the underlying commodity that would be delivered upon physical settlement, can help to promote accurate pricing and reduce the susceptibility of the contract to manipulation.126 After consideration of the comments received, the Commission agrees that a crediting program’s measures with respect to social and environmental safeguards may be relevant to how market participants evaluate VCC quality. Accordingly, 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 GHG emissions, technologies or carbon intensive practices that are incompatible with the objective of achieving net zero GHG emissions by 2050. The Commission has determined to finalize its guidance accordingly. The Commission emphasizes, however, that it does not expect that a DCM will necessarily be evaluating the specifics of the crediting program’s measures with respect to social and environmental safeguards and net zero alignment, and this guidance does not prescribe any such measures. The Commission is simply noting that, because such measures may be relevant to how market participants evaluate VCC quality, a DCM may decide to consider whether a crediting program has implemented such measures when addressing quality standards in connection with the design of a VCC derivative contract. The 124 Terra at 7. certain commenters disagreed that a DCM should consider such matters in connection with derivative contract design, their comments did not contradict those commenters who stated that market participants may recognize such matters as informing VCC quality. 126 See section I.A, supra. 125 While VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 Commission believes that, as a general matter, industry-recognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industry-recognized standard setting program, can serve as tools for a DCM, in connection with its consideration of the crediting program’s measures with respect to social and environmental safeguards and net zero alignment. iii. Quality a. Transparency Commenters broadly agreed that DCMs should provide, in a VCC derivative contract’s terms and conditions, information about the VCCs that are eligible for delivery under the contract, including information that readily specifies the crediting program(s) from which VCCs that are eligible for delivery under the contract may be issued.127 Ceres, ICE, and IETA agreed that the crediting programs for eligible VCCs should be identified in the contract’s terms and conditions.128 Better Markets supported the inclusion of ‘‘comprehensive information about the eligible VCCs for delivery,’’ and stated that such transparency would ensure that ‘‘contract pricing represents the quality of the underlying VCCs.’’ 129 Commenters also broadly agreed that DCMs should consider whether a crediting program for underlying VCCs is making information regarding the crediting program’s policies and procedures, and the projects or activities that it credits, publicly available.130 For example, Anew Climate stated that ‘‘a crucial component of high-quality VCCs is that the crediting program that issues those VCCs be transparent and make sufficient information about its projects and project activities publicly available.’’ 131 Certain commenters addressed the specific questions posed by the Commission in the Proposed Guidance, regarding whether there are criteria, factors or information that a DCM should take into account when considering and/or addressing in a VCC derivative contract’s terms and conditions whether a crediting program is providing sufficient access to 127 See, e.g., ANSI National Accreditation Board (‘‘ANAB’’) at 5; Better Markets at 8; CarbonPlan at 6–7; CATF at 8; Ceres at 3; CEWG at 11; Climeworks Corporation (‘‘Climeworks’’) at 3; Flow Carbon Inc. (‘‘Flow Carbon’’) at 3; IETA at 2; New York State Society of Certified Public Accountants (‘‘NYSSCPA’’) at 3; Xpansiv at 9. 128 Ceres at 3; ICE at 6; IETA at 2. 129 Better Markets at 8. 130 See, e.g., Anew Climate at 4; Flow Carbon at 3; Sylvera at 3–4. 131 Anew Climate at 4. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 information about the projects or activities that it credits, and whether there is sufficient transparency about credited projects or activities.132 CarbonPlan stated that DCMs should consider whether ‘‘data about VCCs are shared under terms that support both public access and reuse.’’ 133 Isometric HQ Limited (‘‘Isometric’’) stated that crediting programs ‘‘should be required to provide the highest degree of transparency possible (only excluding, where relevant, confidential information) in relation to all credits that they issue.’’ 134 ICE meanwhile, took the position that ‘‘market participants, and not DCMs, are best placed to assess whether the information made available by a crediting program is sufficient and detailed in respect of the crediting program’s policies and procedures and the projects or activities that it credits.’’ 135 Some commenters suggested that DCMs look to standards for highintegrity VCCs developed by private sector or multilateral initiatives, when considering a crediting program’s transparency measures.136 For example, C2ES and ICVCM referenced ICVCM’s standards with respect to transparency, particularly the requirement under the ICVCM Core Carbon Principle Assessment Framework that a crediting program ‘‘make all information about the projects and its project rules public.’’ 137 Berkeley and Sylvera, meanwhile, referred to California Assembly Bill 1305, the ‘‘Voluntary Market Disclosures Business Regulation Act,’’ which requires a business entity that is marketing or selling VCCs within the state to publicly disclose, among other things, specific details regarding the mitigation project in respect of which the VCCs are generated, as well as ‘‘[t]he pertinent data and calculation methods needed to independently reproduce and verify the number of emissions reduction or removal credits issued’’ for the project.138 Flow Carbon similarly suggested that publicly available project information should be sufficient to allow a buyer or third party to verify the accuracy of the claimed emission reductions.139 132 See, e.g., Anew Climate at 4; CarbonPlan at 6– 7; CATF at 8; Ceres at 3; Isometric at 3; Xpansiv at 9. 133 CarbonPlan at 6–7. 134 Isometric at 3. 135 ICE at 6. 136 See, e.g., ANAB at 5; Berkeley Carbon Trading Project (‘‘Berkeley’’) at 5; C2ES at 5; EDF at 6; ICVCM at 7; Sylvera at 3–4. 137 C2ES at 5; ICVCM at 7. 138 Berkeley at 5; Sylvera at 3–4. 139 Flow Carbon at 3. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 Some commenters recommended that DCMs should provide project- or activity-level information in the terms and conditions of a VCC derivative contract.140 For example, CATF stated that access to information at the level of the individual project or activity is necessary because of the flexibility that is given to project developers regarding the quantification of credits. CATF thus recommended that the terms and conditions for a VCC derivative contract provide buyers with access to specific information about how a crediting program’s protocols are implemented for a given project or activity, including ‘‘baseline scenario assumptions and quantification metrics. . . , verification reports, annual reports, risk rating and justification, and the location of projects.’’ 141 ICE, meanwhile, stated that while a VCC derivative contract ‘‘will have to identify clearly what is and is not deliverable under it . . . details as to the specific types of projects or activities for which [a crediting program] issues credits are made publicly available by the crediting programs on their websites and through their registries,’’ where they can be reviewed and assessed by market participants.142 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to transparency as proposed, with certain revisions. The Commission continues to believe that a DCM should provide, in the terms and conditions of a VCC derivative contract, information about the VCCs that are eligible for delivery under the contract.143 While the information that is provided about eligible VCCs need not be ‘‘comprehensive’’—for example, the terms and conditions would not necessarily have to identify each specific mitigation project or activity in respect of which VCCs that are eligible for delivery under the contract may be issued—the Commission agrees that the terms and conditions should make clear to market participants what is, and what is not, deliverable under the contract, including by providing information that readily specifies the crediting program, or programs, from which eligible VCCs 140 See, e.g., CATF at 8; Ceres at 3; Isometric at 3; Terra at 4. 141 CATF at 8. 142 ICE at 6. 143 See 88 FR 89410 at 89417. See also 17 CFR 40.1(j)(1)(i) (defining the ‘‘terms and conditions’’ of, inter alia, a futures contract to include quality and other standards that define the commodity or instrument underlying the contract). VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 may be issued.144 To the extent that eligible VCCs are associated with a specific category of mitigation project or activity—such as nature-based projects or activities—this also should be readily evident from the contract terms and conditions.145 Additionally, and after consideration of the comments received, the Commission continues to believe that, as part of the contract design process, a DCM should consider whether the crediting program for VCCs that are eligible for delivery under a derivative contract is making detailed information about the crediting program’s policies and procedures, and the projects or activities that it credits, publicly available in a searchable and comparable manner.146 Where such information is made available by a crediting program, it can assist market participants in making informed evaluations, and comparisons, of the quality of the VCCs that underlie derivative contracts, which can help to support accurate pricing. With respect to comments recommending that the terms and conditions of a VCC derivative contract should provide project- or activityspecific information, the Commission reiterates that this guidance focuses on considerations for a DCM at the crediting program level. As detailed more fully herein, the Commission believes that the policies and procedures that a crediting program has in place, along with its governance framework, inform the quality and other attributes of the VCCs that the crediting program issues. The Commission does not expect that a DCM will necessarily be considering the specific mitigation projects or activities for which eligible VCCs may be issued; the Commission expects that the DCM’s focus will be on its consideration of the crediting program itself. Nor, as discussed above, does the Commission expect that information regarding the specific mitigation projects or activities for which eligible VCCs may be issued would necessarily be included in the terms and conditions of a VCC derivative contract. The Commission’s view in this regard is predicated, however, on its view that the contract’s terms and conditions should include information that readily specifies the crediting program or programs from which eligible VCCs may be issued, so that market participants can evaluate the substance and sufficiency of projectand activity-level information that such crediting programs make publicly available. Likewise, while the Commission continues to believe that a DCM should consider a crediting program’s policies and procedures for making program information (including mitigation project and activity information) publicly available, the Commission is persuaded by comments stating that information regarding such policies and procedures is not the type of information that typically would be included in a derivative contract’s terms and conditions and has determined to revise its guidance accordingly. Finally, after taking into account comments received on the Proposed Guidance, the Commission clarifies its view that, as a general matter, industryrecognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industryrecognized standards setting program, can serve as tools for a DCM, in connection with its consideration of the crediting program’s transparency measures. b. Additionality In the Proposed Guidance, the Commission noted that additionality is viewed by many as a necessary element of a high quality VCC, and stated that it preliminarily believed that, as part of its contract design market research, a DCM should consider whether a crediting program can demonstrate that it has procedures in place to assess or test for additionality.147 The Commission preliminarily recognized VCCs as additional where they are credited for projects or activities that would not have been developed and implemented in the absence of the added monetary incentive created by the revenue from carbon credits. The Commission specifically requested comment on whether this was the appropriate way to characterize additionality for purposes of its guidance, and also specifically requested comment on whether there were particular criteria or factors that a DCM should take into account when considering whether the procedures that a crediting program has in place provide a reasonable assurance that GHG emission reductions or removals will be credited only if they are additional.148 Commenters on the Proposed Guidance generally supported a DCM’s consideration, as part of the contract design process, of whether a crediting program for underlying VCCs can demonstrate that it has in place 144 Id. 145 Id. 146 88 PO 00000 147 Id. FR 89410 at 89417. Frm 00013 Fmt 4701 148 Id. Sfmt 4700 83389 E:\FR\FM\15OCR5.SGM 15OCR5 83390 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 procedures to assess or test for additionality.149 Better Markets and Carbon Direct characterized additionality as a ‘‘cornerstone’’ of quality mitigation projects and their resulting carbon credits.150 However, some commenters raised concerns about recognizing additionality as a characteristic of a high-integrity VCC, due to challenges in evaluating and/or verifying this characteristic.151 The Center for International Environmental Law (‘‘CIEL’’) stated that ‘‘[t]he evaluation of whether or not a project is additional, or of whether a marginal ton of removed carbon dioxide is additional, will rarely be straightforward.’’ 152 Public Citizen similarly took the position that additionality ‘‘is simply not possible to guarantee, ensure, or measure.’’ 153 With respect to whether there are particular criteria or factors that a DCM should take into account when considering a crediting program’s procedures to assess or test for additionality, some commenters suggested that DCMs look to standards for high-integrity VCCs developed by private sector or multilateral initiatives.154 For example, Carbonplace suggested that DCMs should consider CORSIA standards, or third-party assessments of crediting programs by carbon credit ratings providers or under standards such as the ICVCM’s Core Carbon Principles.155 Meanwhile, ICE stated that, although it was reasonable for a DCM to consider whether a crediting program can demonstrate that it has procedures in place to assesses or test for additionality, ICE disagreed that DCMs should be required to assess whether those procedures are of sufficient rigor 149 See, e.g., Scientists affiliated with: Wilkes Center for Climate Science & Policy, University of Utah; University of California, Santa Barbara; University of California, Irvine (‘‘Affiliated Scientists’’) at 1–2; American Forest Foundation (‘‘AFF’’) at 3; Anew Climate at 4; BASCS at 3; Berkeley at 5; Better Markets at 9; C2ES at 5–6; Carbon Direct at 3; Carbonplace UK Ltd. (‘‘Carbonplace’’) at 3; CEPI at 5; Ceres at 3–4; EcoBalance Global LLC (‘‘Ecobalance’’) at 2; Flow Carbon at 3–4; ICVCM at 7; Isometric at 3; Kita at 3; Nodal at 5; Sky Harvest at 10; Sylvera at 4; Terra at 5; Xpansiv at 9–10. 150 Better Markets at 9; Carbon Direct at 3. 151 See, e.g., BCarbon at 2; CIEL at 17; Context Labs at 2; Harvard Business School, University of Oxford Blavatnik School of Government, Law School, Stanford Doerr School of Sustainability, and the E-liability Institute (‘‘Harvard et al’’) at 14; Iconoclast at 4–6; Nori at 8; Public Citizen at 14; Simon Counsell at 3. 152 CIEL at 17. 153 Public Citizen at 14. 154 See, e.g., AFF at 3; Anew Climate at 4; BASCS at 3; Carbonplace at 3; CarbonPlan at 8; CEPI at 5; ICVCM at 7; Terra at 5; Sylvera at 4. 155 Carbonplace at 3. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 to provide a reasonable assurance that GHG emission reductions or removals are credited only if they are additional: ‘‘This responsibility should be borne by the crediting program operators.’’ 156 CME likewise asserted that, while as a factual matter a DCM could confirm that procedures are in place to assess for additionality, ‘‘it should not be expected to opine on the accuracy, robustness, or appropriateness of such procedures.’’ 157 Similarly, Nodal recommended that, if the Commission chose to finalize the Proposed Guidance, then the Commission should omit the reference to a DCM’s consideration of whether a crediting program’s procedures are ‘‘sufficiently rigorous and reliable’’ to provide a reasonable assurance that GHG emission reductions or removals are credited only if they are additional.’’ 158 Several commenters supported how the Commission characterized additionality in the Proposed Guidance.159 CATF stated that ‘‘there is broad consensus for defining additionality as demonstrating that the project or activity would not have taken place without the monetary incentive of a carbon credit, especially for voluntary carbon credits.’’ 160 Similarly, Xpansiv stated that the characterization of additionality in the Proposed Guidance was ‘‘in line with the market consensus.’’ 161 As noted above, the Commission specifically requested comment in the Proposed Guidance on whether another characterization of additionality would be more appropriate, such as characterizing additionality as the reduction or removal of GHG emissions resulting from projects or activities that are not already required by law, regulation, or any other legally binding mandate applicable in the project’s or activity’s jurisdiction.162 Some commenters supported characterizing additionality with reference to this ‘‘regulatory test’’ for ‘‘legal’’ additionality, as well as with reference to ‘‘financial’’ additionality.163 For example, AFREF stated that ‘‘the Commission should add this regulatory test to its characterization of 156 ICE at 7. at 6. 158 Nodal at 5. 159 See, e.g., AFF at 3; Affiliated Scientists at 1– 2; Berkeley at 5; Carbon Direct at 3–4; CATF at 9; C2ES at 6; ICVCM at 7; Xpansiv at 10. 160 CATF at 9. 161 Xpansiv at 10. 162 88 FR 89410 at 89421. 163 See, e.g., AFF at 3; AFREF at 10; Berkeley at 5; Carbon Direct at 4; CarbonPlan at 8; Charm at 3; CRA at 3–4; Natural Resources Defense Council at 8; NYSSCPA at 4; NYU Policy Integrity at 1, 5–6; Public Citizen at 14; Sky Harvest at 10; WWF at 1. 157 CME PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 additionality.’’ 164 Meanwhile, Charm stated its view that legal additionality was implicit in the Commission’s proposed characterization of additionality, but should be explicitly stated ‘‘to ensure all projects meet both thresholds.’’ 165 Several commenters did not support recognizing additionality based on the ‘‘regulatory test.’’ 166 Affiliated Scientists stated that the regulatory test ‘‘is a necessary, but wholly insufficient element of a robust definition of additionality.’’ 167 CATF stated that ‘‘even where regulatory requirements focus on the legal minimum to determine additionality . . . demonstration of additionality requires a comparison to a conservative business-as usual scenario’’ to provide a ‘‘comparison to a counterfactual without the revenue provided from the credit.’’ 168 Meanwhile, Ecosystem Services Market Consortium (‘‘ESMC’’) stated that projects with additionality features ‘‘should be characterized as implemented in response to market incentives, and the definition should not extend beyond this marketincentives framework to incorporate emission reductions resulting from projects or activities that go above-andbeyond the letter of the law.’’ 169 Some commenters suggested other alternatives to the Commission’s proposed characterization of additionality.170 Ceres suggested that DCMs should consider a range of approaches for testing additionality and did not believe that the ‘‘financial’’ additionality described in the Proposed Guidance should be the only measure of additionality.171 Among other approaches, Ceres cited performance standards and barrier analysis.172 BeZero similarly believed that ‘‘the additionality of a carbon project cannot and should not be assessed through a single lens—e.g., carbon accounting, financial or legal. Rather, a holistic analysis considering a range of factors is necessary.’’ 173 BCarbon expressed concern that ‘‘[w]e see the continued conservation of thriving ecosystems as 164 AFREF at 10. at 3. 166 See, e.g., Affiliated Scientists at 1–2; CATF at 10; Institute for Agriculture and Trade Policy (‘‘IATP’’) at 21. 167 Affiliated Scientists at 1–2. 168 CATF at 10. 169 ESMC at 8. 170 See, e.g., BCarbon at 2; BeZero at 6; CATF at 10; Ceres at 3–4; Climeworks at 4; IATP at 21; Kita at 3; Sylvera at 4; TNC at 2. 171 Ceres at 3–4. 172 Ceres at 4. 173 BeZero at 6. 165 Charm E:\FR\FM\15OCR5.SGM 15OCR5 khammond on DSKJM1Z7X2PROD with RULES5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations essential to mitigation of climate change, yet the current form of additionality provides no mechanism for these activities to be financially valued.’’ 174 CATF, meanwhile, emphasized the need to take into account that the accepted meaning of the term additionality is likely to evolve.175 Similarly, Xpansiv stated that the characterization of additionality in the Commission’s guidance should not be ‘‘overly prescriptive to ensure DCMs are able to follow evolving VCC market developments, including revised or broadened definitions of key criteria.’’ 176 In that regard, CME noted that while there may be broad consensus that additionality is an important element of a high quality VCC, ‘‘the question of how additionality is defined and calculated is a complex and nuanced issue and does not appear to have reached industry consensus.’’ 177 According to CME, neither the Commission nor DCMs should dictate the definition.178 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to additionality as proposed, with certain revisions. While the Commission appreciates that there may be some complexity involved in characterizing, and measuring, additionality, the comments on the Proposed Guidance support the Commission’s observation that additionality is broadly understood to be a ‘‘cornerstone’’ characteristic of a high quality VCC. If holders of positions in a VCC derivative contract understand and intend for VCCs that are eligible for delivery under the contract to be additional, but in fact they may not be, then the pricing of the derivative contract may not accurately reflect the quality of the VCCs that may be delivered under the contract. Thus, the Commission continues to believe that, as part of the contract design process, a DCM should consider whether a crediting program has procedures to assess or test for additionality—and whether those procedures provide a reasonable assurance that GHG emission reductions or removals are credited only if they are additional. The comments on the Proposed Guidance indicate, however, that there is variation across the voluntary carbon markets in how, precisely, additionality 174 BCarbon at 2. 175 CATF at 10. 176 Xpansiv at 10. 177 CME at 6. 178 Id. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 is characterized. For example, while some commenters on the Proposed Guidance supported the Commission’s preliminary discussion of financial additionality, a number of commenters recommended other approaches, including performance standards, and approaches that addressed both financial additionality and legal additionality. The Commission further recognizes that as the voluntary carbon markets continue to develop, industry consensus on how to characterize additionality may evolve. Accordingly, the Commission has determined not to provide in its guidance a definition of additionality. Taking into account comments received on the Proposed Guidance, the Commission is clarifying its view that, as a general matter, industry-recognized standards for high-integrity VCCs can serve as tools for a DCM, both in connection with its consideration of a particular crediting program’s characterization of additionality, and in connection with the DCM’s consideration of whether the crediting program’s procedures to assess or test for additionality provide reasonable assurance that GHG emission reductions or removals will be credited only if they are additional, as so characterized. Further, the Commission is persuaded by comments stating that specific information regarding a crediting program’s procedures for assessing or testing for additionality is not the type of information that typically would be included in a derivative contract’s terms and conditions, and has determined to revise its guidance accordingly. c. Permanence and Accounting for the Risk of Reversal A number of commenters on the Proposed Guidance supported a DCM’s consideration, as part of the contract design process, of whether a crediting program for VCCs that are eligible for delivery under the contract has measures in place to address and account for the risk of reversal.179 However, certain commenters expressed concern about a DCM’s capacity and responsibility to assess the sufficiency of the crediting program’s measures in this regard. For example, Nodal recommended that, if the Commission finalized its guidance, the Commission should omit reference to a DCM’s consideration of whether the crediting 179 See, e.g., aDryada at 1; Anew Climate at 6; Better Markets at 9; BCarbon at 2–3; Carbonplace at 4; Carbon Market Watch at 5; Ceres at 4–5; CEPI at 5; Emergent at 2; ESMC at 5; Isometric at 5; Kita at 3; NYSSCPA at 5; NYU Policy Integrity at 1; Sylvera at 5; Terra at 6; TNC at 2; WWF at 1; Xpansiv at 11. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 83391 program’s measures provide reasonable assurance that, in the event of a reversal, an underlying VCC will be replaced by a VCC of comparably high quality that meets the contemplated specifications of the contract,180 arguing that the Commission would otherwise be asking DCMs ‘‘to evaluate the sufficiency of VCC quality standards, which are normally addressed by the underlying markets.’’ 181 BCarbon, meanwhile, stated that it would be helpful for the Commission to elaborate on what constitutes a ‘‘similar’’ VCC for purposes of replacement.182 The Commission specifically requested comment on whether there were criteria or factors that a DCM should take into account when considering a crediting program’s measures to address reversal risk, particularly where the underlying VCCs are sourced from nature-based products or activities such as agriculture, forestry or other land use initiatives.183 Some commenters suggested that a DCM consider a crediting program’s definition of ‘‘permanence,’’ as applied to mitigation projects or activities for which the crediting program issues VCCs, and the crediting program’s transparency regarding that definition.184 A number of commenters explicitly supported consideration of whether a crediting program has a buffer ‘‘pool’’ or ‘‘reserve’’ in place to address the risk of reversal.185 Some commenters recommended that DCMs should consider the quality of the VCCs in a crediting program’s buffer reserve.186 For example, Isometric suggested, one possibility would be to ensure that credits in the buffer reserve are derived from high-durability projects which themselves have a low risk of reversal, ‘‘in order to partially mitigate cascading risk events that could overwhelm the buffer [reserves’] ability to compensate for reversals.’’ 187 Other commenters similarly suggested that DCMs consider whether a crediting program has mechanisms in place to account for the continuing sufficiency of the buffer 180 Nodal at 5. 181 Id. 182 BCarbon at 2. FR 89410 at 89421. 184 See, e.g., aDryada at 1; Anew Climate at 5; Carbon Market Watch at 5; CRA at 4; C2ES at 6; NYSSCPA at 5; Sylvera at 5; TNC at 2. 185 See, e.g., Ceres at 4; WWF at 1; Xpansiv at 10. 186 See, e.g., Affiliated Scientists at 2; BCarbon at 2; CEPI at 5; Emergent at 2; Isometric at 4; Kita at 3. 187 Isometric at 4. 183 88 E:\FR\FM\15OCR5.SGM 15OCR5 83392 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 reserve.188 For example, Affiliated Scientists stated that ‘‘DCMs should only accept carbon credits from crediting programs that have updated (and will continue to update as the science evolves) their buffer pools to reflect the latest science on disturbance risk to make such buffer pools sufficiently capitalized.’’ 189 Meanwhile, BCarbon stated that it was worth noting that buffer pools are not the only measure that exists for mitigation of reversal risk.190 Some commenters suggested that DCMs look to standards for highintegrity VCCs developed by private sector or multilateral initiatives, and adherence by a crediting program to such standards, when considering the crediting program’s measures to address and account for the risk of reversal.191 For example, Sylvera noted that ‘‘industry initiatives such as IC–VCM have already developed quality frameworks that consider factors such as reversal risk,’’ and encouraged Commission alignment with these frameworks.192 Some commenters noted specific issues or factors for consideration when VCCs underlying a derivative contract are sourced from nature-based mitigation projects or activities, with many highlighting the heightened risk of reversal associated with such projects or activities.193 To provide more transparency regarding this risk, CATF recommended providing locationspecific data that adjusts with risk assessments over time.194 Public Citizen stated that ‘‘[d]ue to significant risk of reversal in the case of nature-based projects or activities, the DCM should either prohibit the listing of derivative contracts based on the same, or only list those whose underlying projects maintain a buffer pool equal to 100% of the carbon credit value.’’ 195 The Commission also specifically requested comment on how a DCM should account for a reversal, should one occur with respect to a VCC that is eligible for delivery under a derivative 188 See, e.g., Affiliated Scientists at 2; Carbonplace at 4; CarbonPlan at 9; Charm at 4; Terra at 5; Sky Harvest at 11. 189 Affiliated Scientists at 2. 190 BCarbon at 2. 191 See, e.g., Anew Climate at 5; CATF at 11; Carbonplace at 4; CEPI at 6; Charm at 4; C2ES at 6; Ducks Unlimited, Inc. (‘‘Ducks’’) at 3; Emergent at 2; Flow Carbon at 4; Sylvera at 5; Terra at 6. 192 Sylvera at 5. 193 See, e.g., CATF at 11; ESMC at 5; Public Citizen at 15; Simon Counsell at 4. 194 CATF at 11. The CATF recommends adaptive risk ratings because climate change has the potential to impact carbon credits in certain localities. 195 Public Citizen at 15. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 contract, and whether there are specific terms and conditions, or other rules that a DCM should consider including in a VCC derivative contract to account for reversal risk.196 Generally, commenters supported DCMs looking to the crediting program’s measures for addressing a reversal.197 For example, Anew Climate stated that DCMs should rely on the requirements and procedures of the respective crediting program: ‘‘The DCM should consider how the crediting program addresses avoidable and unavoidable reversals when they do occur and requirements related to buffer pool contributions.’’ 198 Some commenters suggested that DCMs should design contracts in a manner that differentiates VCCs based on assessments of reversal risk.199 For example, Isometric stated that VCCs based on projects with higher risk of reversal should be identifiable and distinct from those VCCs based on projects with low or negligible risks of reversals: ‘‘This will enable more effective price discovery and better functioning markets.’’ 200 Meanwhile, IATP stated that ‘‘[i]f we assume that reversals will become more frequent and severe’’ due to an increase in extreme weather events, then ‘‘DCMs should begin to account for the impact of reversals on VCC estimated deliverable supply and on the possibility of market disruption if uncompensated reversals become widespread.’’ 201 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to permanence and accounting for reversal risk as proposed, with certain revisions. After considering the comments, the Commission continues to believe that, in connection with the design of a VCC derivative contract, a DCM should consider whether the crediting program for underlying VCCs has measures in place to address and account for the risk of reversal.202 Market participants that are utilizing physically-settled VCC derivative contracts to help meet their carbon mitigation goals have an interest in 196 88 FR 89410 at 89421. e.g., aDryada at 1; Anew Climate at 6; BCarbon at 2–3; Better Markets at 9; Carbonplace at 4; Carbon Market Watch at 5; CEPI at 5; Ceres at 4–5; ESMC at 5; Emergent at 2; Isometric at 5; Kita at 3; NYSSCPA at 5; NYU Policy Integrity at 1; Sylvera at 5; Terra at 6; TNC at 2; WWF at 1; Xpansiv at 11. 198 Anew Climate at 5. 199 See, e.g., BCarbon at 2; IATP at 22; Isometric at 4; Terra at 6. 200 Isometric at 4. 201 IATP at 22. 202 See 88 FR 89410 at 89417. 197 See, PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 ensuring that, upon physical settlement, the underlying VCCs will actually reduce or remove the amount of emissions that they were intended to reduce or remove. Accordingly, the Commission believes that the risk of reversal—and the manner in which it is accounted for by a crediting program— is tied to the quality of the underlying VCCs and, by extension, to the pricing of the derivative contract. The Commission believes that comments on the Proposed Guidance support the Commission’s view that a DCM should consider whether a crediting program for underlying VCCs has a buffer reserve or other measures in place to address reversal risk 203—as well as the Commission’s view that relevant considerations with respect to a crediting program’s buffer reserve could include whether the crediting program regularly reviews the methodology by which the size of its buffer reserve is calculated, and whether there is a mechanism in place to audit the continuing sufficiency of the buffer reserve. In response to comments received, the Commission clarifies that a crediting program may, now or in the future, have measures other than, or in addition to, a buffer reserve to address the risk of credited emissions reductions or removals being reversed; this guidance contemplates that a DCM should consider whether a crediting program has a buffer reserve and/or other measures in place to address such risk.204 The Commission is also clarifying the statement, in the Proposed Guidance, that a DCM should consider whether a crediting program’s buffer reserve or other measures provide reasonable assurance that, in the event of a reversal, the VCCs intended to underlie a derivative contract will be replaced by VCCs of comparably high quality that meet the contemplated specifications of the contract. The Commission understands that VCCs in a buffer reserve are generally drawn down and cancelled to compensate for reversals associated with a project or activity, rather than being drawn upon to replace VCCs issued for such project or activity, and has determined to clarify its guidance accordingly. Furthermore, in response to comments received, the Commission is 203 See id. at 89418. Commission understands that each crediting program, and the registry that it operates or uses, may handle reversals in its own way. Measures to address reversals that do not involve the cancellation of credits in a buffer reserve may include limiting future sales of credits, cancelling unsold credits, or having affected projects procure credits from other projects to offset the reversal, among other measures. 204 The E:\FR\FM\15OCR5.SGM 15OCR5 khammond on DSKJM1Z7X2PROD with RULES5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations clarifying its view that, as a general matter, industry-recognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industry-recognized standards setting program, can serve as tools for a DCM, in connection with its consideration of a crediting program’s measures to address and account for the risk of reversal. While the Commission acknowledges comments stating that there is a heightened risk of reversal associated with nature-based mitigation projects and activities—including comments suggesting that VCCs issued for such projects or activities should not be permitted to underlie a derivative contract, or that derivative contracts should be designed in a manner that differentiates VCCs based on assessments of reversal risk—the Commission emphasizes that the purpose of this guidance is not for the Commission to make recommendations, or proscriptions, regarding the specific types of VCC derivative contracts that a DCM should list for trading. Rather, the guidance is intended to outline factors for the DCM, itself, to consider in connection with its contract design and listing activities, in order to help ensure that the DCM is complying with its statutory and regulatory obligations. The comments with respect to nature-based mitigation projects and activities do, however, underscore the Commission’s view that a VCC derivative contract’s terms and conditions should clearly identify what is deliverable under the contract—including by making it clear if eligible VCCs are associated with a specific category of mitigation projects or activities, such as nature-based products or activities. Transparency in this regard will help to make sure that market participants understand what VCCs can be expected to deliver under the contract, and to make an assessment of the VCCs’ quality, which will help to support accurate pricing. The Commission is persuaded by comments stating that specific information regarding a crediting program’s measures for estimating, monitoring, and addressing the risk of reversal is not the type of information that typically would be included in a derivative contract’s terms and conditions, and has determined to revise its guidance accordingly. d. Robust Quantification Commenters on the Proposed Guidance broadly agreed that the quantification methodologies or protocols used by a crediting program for calculating GHG reduction or VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 removal levels help to inform the quality of VCCs issued by the crediting program.205 In the Proposed Guidance, the Commission stated that it preliminarily believed that, as part of its contract design market research, a DCM should consider the methodology or protocol used by a crediting program to calculate emission reduction or removals for VCCs underlying a derivative contract, and whether the crediting program can demonstrate that such methodology or protocol is robust, conservative, and transparent.206 The Commission specifically requested comment on whether there were particular criteria or factors that a DCM should take into account when considering, and/or addressing in a VCC derivative contract’s terms or conditions, whether a crediting program applies a robust, conservative and transparent methodology or protocol.207 A number of commenters suggested criteria or factors.208 CEPI and Ducks recommended that DCMs consider whether there are independent review procedures for a crediting program’s quantification methodologies, such as a public consultation or peer review process.209 CEPI additionally recommended that DCMs consider whether a crediting program relies on scientific evidence to develop its quantification methodologies, and whether there are ‘‘mechanisms for the periodic review and/or revision of the methodologies.’’ 210 Similarly, TNC stated that any quantification methodology should use baselines that are periodically reviewed.211 CIEL stated that, in order to enable transparency, a crediting program ‘‘must make its methodology, and how it has been applied to individual projects, available to public scrutiny.’’ 212 Sylvera noted that robust quantification is only verifiable by third parties if there are sufficient disclosures by the project developers to allow third parties to check the accounting.213 NYU Policy 205 See, e.g., Anew Climate at 6; BCarbon at 2–3; Carbon Market Watch at 1; Carbonplace at 4; CEPI at 6; Ceres at 4–5; CIEL at 11; Context Labs at 2; Iconoclast at 5; Isometric at 5; NYSSCPA at 5; NYU Policy Integrity at 1; Puro at 7–8; Terra at 6; Sylvera at 5; Xpansiv at 11. 206 88 FR 89410 at 89418. 207 Id. at 89421. 208 See, e.g., Centre for Competition Policy at 4; CEPI at 6; Ceres at 3; Charm at 4; CIEL at 11; Context Labs at 2; Ducks at 4; Flow Carbon at 4; NYU Policy Integrity at 6; Sylvera at 3–4; TNC at 3. 209 See CEPI at 6; Ducks at 4. 210 CEPI at 6. 211 TNC at 3. 212 CIEL at 11. 213 Sylvera at 3–4. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 83393 Integrity and TNC believed that DCMs should consider ‘‘leakage risk’’ in quantification methodologies.214 Ceres cautioned against overly focusing on conservative accounting, which might lead to an underestimation of emission reductions or removals, and recommended balancing conservativeness with the ultimate goal of accuracy.215 Other commenters, meanwhile, raised concerns similar to those noted in Section I.B.2, regarding the lack of standardization across the voluntary carbon markets with respect to quantification methodologies and protocols, and how this may create issues with over-crediting and reliability.216 CEPI recommended that a crediting program have procedures in place to suspend or withdraw the use of a quantification methodology where there is sufficient evidence that the emission removals or reductions have been overstated.217 Some commenters did recommend quantification standards,218 such as the International Organization for Standardization (‘‘ISO’’) 14060 standards for quantifying, monitoring, reporting and validating GHG emissions,219 or the GHG Protocol.220 Certain commenters recommended that DCMs look to standards for highintegrity VCCs developed by private sector or multilateral initiatives, such as the robust quantification standards under the ICVCM’s Core Carbon Principles (‘‘CCP’’) and CCP Assessment Framework, and adherence by a crediting program to such standards.221 Other commenters expressed concern with the view that a DCM should consider whether a crediting program’s quantification methodology or protocol is robust, conservative and transparent.222 ICE stated that expecting a DCM to engage in such an assessment would lead to unnecessary duplication of extensive, public consultation processes to which crediting program methodologies already are subject.223 214 See NYU Policy Integrity at 6; TNC at 3. at 3. 216 See, e.g., CATF at 13; Center for American Progress at 4; Public Citizen at 13. 217 CEPI at 6. 218 See, e.g., Carbonplace at 4; NYSSCPA at 5; Sylvera at 5; Terra at 6. 219 See, e.g., Carbonplace at 4. Carbonplace suggested that at a minimum, DCMs focus on standards which are supported by ISO certification. 220 See NYSSCPA at 5. 221 See, e.g., BASCS at 4; Ceres at 4–5; C2ES at 6; Ducks at 4; ICVCM at 8; Sylvera at 5. 222 See, e.g., Center for American Progress at 4; Ceres at 2–3; CME at 7; ICE at 7; Nodal at 5; Public Citizen at 13; Verra at 6. 223 ICE at 7. 215 Ceres E:\FR\FM\15OCR5.SGM 15OCR5 khammond on DSKJM1Z7X2PROD with RULES5 83394 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations Verra expressed concern that carrying out such an assessment would require a DCM to obtain specialized technical expertise about topics that are beyond its core competency in overseeing derivatives markets.224 Likewise, CME stated that it would be impractical for DCMs to develop the expertise to make such an assessment of a crediting program’s quantification methodology or protocol, and stated that it was also possible, ‘‘if not likely,’’ that various DCMs and market participants could have different views as to what level of robustness, conservatism and transparency is sufficient.225 CME believed that ‘‘it is preferable for the crediting program to publish its methodology . . . and for market participants to render their own judgment.’’ 226 Ceres similarly stated that DCMs should not conduct additional due diligence and should rely on crediting programs to demonstrate they have processes/ procedures to achieve high quality credits.227 Nodal recommended that, if the Commission finalized its guidance, the Commission omit reference to a DCM’s consideration of whether the crediting program’s quantification methodology or protocol is ‘‘robust, conservative and transparent’’, arguing that the Commission would otherwise be asking DCMs ‘‘to evaluate the sufficiency of VCC quality standards, which are normally addressed by the underlying markets.’’ 228 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to robust quantification as proposed, with certain revisions. As recognized in the Proposed Guidance, and highlighted by some commenters, there are not currently standardized methodologies or protocols that are used across the voluntary carbon markets to quantify emission reduction or removal levels. Given the current absence of such standardized methodologies or protocols, the Commission continues to believe that robustness, conservativeness and transparency are factors that inform the extent to which a quantification methodology or protocol applied by a crediting program helps to ensure that the number of VCCs that are issued for a mitigation project or activity accurately reflects the emission reduction or removal levels 224 Verra 225 CME at 6. at 7. 226 Id. 227 Ceres at 2–3. at 5. 228 Nodal VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 associated with that project or activity.229 Market participants that are utilizing physically-settled VCC derivative contracts to help meet their carbon mitigation goals have an interest in ensuring that, upon physical settlement, the underlying VCCs will actually reduce or remove the amount of emissions that they were intended to reduce or remove. Accordingly, the Commission believes that the robustness, conservativeness and transparency of the quantification methodology or protocol that is applied with respect to the underlying VCCs can inform their quality—and, by extension, the pricing of the derivative contract. Furthermore, the Commission continues to believe that where the quantification methodology or protocol used to calculate the amount of VCCs for a particular project is robust, conservative, and transparent, the DCM should have a more reliable basis from which to form a deliverable supply estimate for exchange-set position limits purposes.230 Given the relevance with respect to VCC quality, as well as deliverable supply estimates, although the Commission acknowledges that a DCM may not have the specialized, technical expertise to determine whether a crediting program has demonstrated that the quantification methodology or protocol that it uses to calculate GHG emission reduction or removal levels for VCCs underlying a derivative contract is robust, conservative, and transparent, the Commission does believe that the DCM should consider whether there is reasonable assurance that the methodology or protocol used by the crediting program is robust, conservative and transparent.231 In this regard, the Commission acknowledges and supports commenters’ suggestions that factors that may inform the robustness, conservativeness, and transparency of a quantification methodology or protocol could include whether the methodology or protocol has been developed with reference to scientific evidence, whether the methodology or protocol has been 229 See 88 FR 89410 at 89418. The Commission agrees that, ultimately, the accuracy of estimations is a key objective—one that informs confidence that the voluntary carbon markets can serve as a tool to assist in emissions reduction efforts, as well as accurate pricing by market participants. 230 Id. 231 In the Proposed Guidance, the Commission generally referred to a crediting program’s methodology or protocol used for calculating the level of GHG reductions or removals associated with a mitigation project or activity. The Commission recognizes that crediting programs typically have multiple quantification methodologies or protocols, and has made certain revisions to its guidance to account for this. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 subject to independent review procedures, and whether there are mechanisms for the periodic review and/or revision of the methodology or protocol. In response to ICE’s comment suggesting that all crediting program methodologies are subject to extensive, public consultation procedures, the Commission notes that review and consultation procedures may be crediting-program specific and the implementation by any particular crediting program of extensive public consultation procedures should not be taken as a given. Furthermore, and particularly in light of the comments received that highlighted the technical and specialized nature of a crediting program’s quantification methodologies or protocols, the Commission is clarifying its view that, as a general matter, industry-recognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industry-recognized standard setting program, can serve as tools for a DCM, in connection with its consideration of a crediting program’s quantification methodologies or protocols, including consideration of whether there is reasonable assurance that the methodology or protocol used to calculate emission reductions or removals for VCCs underlying a derivative contract is robust, conservative and transparent. The Commission is persuaded by comments stating that specific information about the quantification methodology or protocol used by a crediting program to calculate GHG emissions reductions or removals is not the type of information that typically would be included in a derivative contract’s terms and conditions, and has determined to revise its guidance accordingly. iv. Delivery Points and Facilities a. Governance Generally, commenters agreed that, as part of the contract design process for a VCC derivative contract, a DCM should consider whether the crediting program for underlying VCCs has a governance framework that supports the program’s independence, transparency and accountability.232 Better Markets, for example, stated that ‘‘DCMs should rigorously evaluate the governance 232 See, e.g., AFREF at 6; ANAB at 5; Anew Climate at 6; BASCS at 4; Better Markets at 11; CATF at 13–14; C2ES at 7; Forest Peoples at 5; ICVCM at 8; Isometric at 5; NYSSCPA at 5; Simon Counsell at 4–5; Sylvera at 6; Terra at 6; WWF at 1; Xpansiv at 11. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations frameworks . . . employed by the crediting programs of the underlying VCCs.’’ 233 In the Proposed Guidance, the Commission stated that, with respect to a crediting program’s governance framework, it preliminarily believed that a DCM should consider, among other things, a crediting program’s decision-making procedures, reporting and disclosure procedures, public and stakeholder engagement processes, and risk management policies, as well as whether information regarding those procedures and policies is made publicly available.234 The Commission specifically requested comment on whether there were other criteria or factors that a DCM should take into account when considering, and/or addressing in a VCC derivative contract’s terms or conditions, whether a crediting program’s governance framework effectively supports transparency and accountability.235 Several commenters responded to highlight conflicts of interest considerations.236 For example, Anew Climate recommended that DCMs consider whether a crediting program has policies in place to identify and mitigate potential conflicts of interest between various stakeholders.237 ICVCM and C2ES similarly recommended that consideration of a crediting program’s governance framework include consideration of the program’s conflict of interest policy.238 Likewise, Simon Counsell believed that a crediting program’s governance framework should address conflicts of interest, and also should include independent review processes and an appeal process.239 Anew Climate similarly stated that DCMs should consider ‘‘whether a grievance process and procedures by which to address those grievances are in place.’’ 240 With respect to transparency, Xpansiv recommended that DCMs specifically consider a crediting program’s transparency and responsiveness in connection with significant changes to project or credit status.241 Some commenters suggested that DCMs look to standards for highintegrity VCCs developed by private sector or multilateral initiatives, such as 233 Better Markets at 11. FR 89410 at 89419. 235 Id. at 89421. 236 See, e.g., Anew Climate at 6; C2ES at 7; ICVCM at 8; Isometric at 5; Simon Counsell at 4– 5; Sky Harvest at 13. 237 Anew Climate at 6. 238 See C2ES at 7; ICVCM at 8. 239 Simon Counsell at 4–5. 240 Anew Climate at 6. 241 Xpansiv at 11. khammond on DSKJM1Z7X2PROD with RULES5 234 88 VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 the governance standards under CORSIA, the International Carbon Reduction and Offset Alliance (‘‘ICROA’’) and the ICVCM’s Core Carbon Principles, and adherence by a crediting program to such standards.242 ICE believed that a DCM should not be responsible for determining the adequacy of a crediting program’s governance, and that a DCM should instead be permitted to rely on recognized standard setting bodies, ‘‘to establish threshold standards for highquality carbon credits which the crediting programs should adhere to and be audited against.’’ 243 CME was similarly of the view that a DCM should not determine the effectiveness of a crediting program’s independence, transparency, and accountability, because ‘‘DCMs are not experts in registry governance structures, and it is impractical to expect DCMs to develop such expertise.’’ 244 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to governance as proposed, with certain revisions. Given the importance of a crediting program’s governance framework in ensuring the overall quality of the VCCs issued by the program, as well as the potential importance of a crediting program’s registry in facilitating delivery under a physically-settled VCC derivative contract, the Commission continues to believe that, as part of the contract design process, a DCM should consider the governance framework of the crediting program for underlying VCCs.245 More specifically, and after considering the comments received, the Commission believes that a DCM should consider whether the crediting program’s governance framework supports the crediting program’s independence, transparency, and accountability. With respect to particular criteria or factors that may inform such independence, transparency, and accountability, and in acknowledgment that a number of commenters highlighted these points, the Commission is revising its guidance to expressly recognize conflict of interest measures as a factor which may inform a crediting program’s independence, and appeals mechanisms as a factor which may inform a crediting program’s accountability. e.g., Sylvera at 6; Terra at 6. at 7. 244 CME at 7. 245 88 FR 89410 at 89419. Furthermore, in response to comments received, the Commission is clarifying its view that, as a general matter, industry-recognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industry-recognized standards setting program, can serve as tools for a DCM, in connection with its consideration of a crediting program’s governance framework, including whether the governance framework supports the crediting program’s independence, transparency, and accountability. Finally, the Commission is persuaded by comments stating that specific information regarding a crediting program’s governance framework is not the type of information that typically would be included in a derivative contract’s terms and conditions,246 and has determined to revise its guidance accordingly. b. Tracking In the Proposed Guidance, the Commission stated that it preliminarily believed that a DCM should consider whether a crediting program for underlying VCCs can demonstrate that it has processes and procedures in place to help ensure clarity and certainty with respect to the issuance, transfer, and retirement of VCCs.247 The Commission stated that the DCM should consider whether the crediting program operates or makes use of a registry that has measures in place to effectively track issuance, transfer, and retirement; to identify who owns or retires a VCC; and to make sure that each VCC is uniquely and securely identified and associated with a single emission reduction or removal of one metric ton of carbon dioxide equivalent.248 The Commission stated that, where the registry will serve as the delivery point for a physicallysettled VCC derivative contract, it may be appropriate for the DCM to include as a condition of the contract that the registry have such measures to address tracking in place.249 In its comments on the Proposed Guidance, ISDA highlighted that, because registries currently serve as delivery points for futures contracts, ‘‘[i]t is important to ensure registries have consistent and transparent rules on how VCCs are verified, counted and transferred. Failure to correctly track and safeguard carbon credits, or a gap in standards in the creation of a carbon credit itself, could lead to fraudulent 242 See 246 See 243 ICE 247 88 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 83395 e.g., CME at 7; ICE at 7. FR 89410 at 89419. 248 Id. 249 Id. E:\FR\FM\15OCR5.SGM 15OCR5 83396 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations practices, such as greenwashing and double counting.’’ 250 ISDA went on to say that it believes the ‘‘CFTC has a regulatory interest in ensuring that VCC registries (that act as delivery points for carbon futures contracts) adopt appropriate procedures for tracking the buying and selling of credits in the context of VCC futures and other bilateral markets.’’ 251 ICE stated that ‘‘[i]t is important to distinguish between the role of carbon crediting programs and registries,’’ noting that the two roles are often ‘‘conflated.’’ 252 ICE stated that ‘‘the physical delivery of VCCs is effectuated by transferring the VCC from the seller to the buyer in the registry operated by the crediting program.’’ 253 ICE stated that, because ‘‘market participants value the delivery mechanism as an important risk management function offered by DCMs and DCOs,’’ it believed that a ‘‘DCM should seek confirmation from a crediting program utilizing a registry that it has appropriate measures in place to effectively track the issuance, transfer and retirement of VCCs.’’ 254 The Commission received several responses to its request for comment regarding whether there were other factors, in addition to those identified in the Proposed Guidance, that a DCM should take into account when considering, and/or addressing in a VCC derivative contract’s terms and conditions, whether a crediting program’s registry has processes and procedures in place to help ensure clarity and certainty with respect to the issuance, transfer and retirement of VCCs.255 Like ISDA, some commenters highlighted the importance of transparent registry rules regarding VCC tracking and retirement.256 For example, Anew Climate responded that ‘‘DCMs should assess whether the crediting program has published transparent operating procedures for its registry activities, explaining how these processes work, as well as terms of use that govern participation in the 250 ISDA at 3. 251 Id. 252 ICE at 8. 253 Id. 257 Anew khammond on DSKJM1Z7X2PROD with RULES5 254 Id. 255 See, e.g., Anew Climate at 7; BASCS at 4; C2ES at 7; Carbon Direct at 7; Carbonplace at 5; CEPI at 6; Differentiated Gas Coordinating Council (‘‘DGCC’’) at 6; Ecobalance at 2; Flow Carbon at 5; Harvard et al at 18; Iconoclast at 5; ICVCM at 10; ISDA at 3; Nodal at 6; Nori at 5; NYSSCPA at 10; Public Citizen at 16; Sky Harvest at 14; Sylvera at 6; Terra at 6; Xpansiv at 12. 256 See, e.g., Anew Climate at 7; Carbon Direct at 7; DGCC at 6; Flow Carbon at 5; Harvard et al at 18; ISDA at 3; Nori at 5; Sky Harvest at 14. VerDate Sep<11>2014 program.’’ 257 Other commenters supported specific accounting frameworks for tracking to help ensure accuracy.258 NYSSCPA supported tracking VCCs by assigning them a ‘‘unique serial number’’ and having the crediting program, or registry, track the VCC throughout its life cycle, including changes in ownership following delivery and the VCC’s retirement.259 ICVCM similarly stated that unique identifiers ‘‘can dramatically improve transparency and reduce risk of double counting.’’ 260 Sylvera, BASCS, ICVCM, and C2ES responded in support of ICVCM’s standards with respect to tracking and double counting.261 The ICVCM CCP Assessment Framework requires crediting programs to have registry provisions that prevent double registration of mitigation activities, double use of a carbon credit after it has been cancelled or retired for a specific use, and measures to prevent double claiming with mandatory domestic mitigation programs or incentivization schemes (e.g., Renewable Energy Certificates).262 A few commenters expressed concern with the view that a DCM should consider the effectiveness of a crediting program’s tracking measures.263 Terra stated that this should be handled by the crediting program.264 Nodal recommended that, if the Commission finalized the Proposed Guidance, the Commission should omit reference to a DCM’s consideration of whether a crediting program operates or makes use of a registry that has measures in place to ‘‘effectively’’ track VCCs, arguing that the Commission would otherwise be asking DCMs ‘‘to evaluate the sufficiency of VCC quality standards, which are normally addressed by the underlying markets.’’ 265 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to tracking as proposed, with certain revisions. As discussed in the Proposed Guidance, market participants that are utilizing physically-settled VCC 19:08 Oct 11, 2024 Jkt 265001 Climate at 7. e.g., Carbon Direct at 7; Harvard et al at 18; Stanford Doerr School of Sustainability Stanford Law School (‘‘Stanford Doerr’’) at 1. 259 NYSSCPA at 10. 260 ICVCM at 10. 261 See, e.g., BASCS at 4; C2ES at 7; ICVCM at 10; Sylvera at 6. 262 ICVCM at 10. 263 See e.g., ICE at 8; Nodal at 5–6; Terra at 6. 264 Terra at 6. 265 Nodal at 5–6. 258 See, PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 derivative contracts to help meet carbon mitigation goals have an interest in ensuring that, upon physical settlement, the underlying VCCs will actually reduce or remove the emissions that they were intended to reduce or remove. It is therefore important for each credited VCC to be uniquely associated with a single emission reduction or removal of one metric ton of carbon dioxide. Processes and procedures to help ensure clarity and certainty with respect to the issuance, transfer and retirement of VCCs can help support this. Conversely, if there is not a reasonable assurance that the VCCs underlying a derivative contract are each unique, then, among other things, this could distort or obscure the accuracy of the derivative contract’s pricing. The fact that the current voluntary carbon market structure typically relies on the registries used or operated by crediting programs to effectuate the physical delivery of VCCs underlying a derivative contract further supports the Commission’s view that a DCM should consider whether there is reasonable assurance of the effectiveness of the tracking measures that a crediting program has in place. In response to comments received, the Commission is clarifying its view that, as a general matter, industry-recognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industry-recognized standard setting program, can serve as tools for a DCM, in connection with its consideration of the crediting program’s tracking measures. Finally, the Commission notes that the Proposed Guidance indicated that it may be appropriate, in certain circumstances, to include in a physically-settled VCC derivative contract certain conditions relating to the tracking measures that the registry used or operated by the crediting program for underlying VCCs has in place. While, based on the specific facts and circumstances in issue, a DCM may determine that inclusion of such conditions in a particular contract is appropriate, the Commission is persuaded by the broader comments that it received regarding the type of information that typically would, and would not, be included in a derivative contract’s terms and conditions,266 and has determined to revise its guidance accordingly. c. No Double-Counting In the Proposed Guidance, the Commission stated that it preliminarily 266 See, E:\FR\FM\15OCR5.SGM e.g., CME at 7; ICE at 7. 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 believed that a DCM should consider whether the crediting program for underlying VCCs can demonstrate that it has effective measures in place that provide reasonable assurance that credited emission reductions or removals are not double-counted: ‘‘That is, that the VCCs representing the credited emission reductions or removals are issued to only one registry and cannot be used after retirement or cancellation.’’ 267 Carbon Market Watch highlighted that the risk of double counting can manifest itself in many ways. For example, a given emission reduction may be claimed by multiple actors, such as various financers of the mitigation project or activity (e.g., a bank that issues a loan to the project or activity, as well as a company that purchases VCCs from the project or activity). 268 aDryada stated that it believes there is confusion in the voluntary carbon markets regarding the understanding of the term ‘‘double counting’’ (i.e., whether the term refers to double issuance, double use, or double claim).269 The AFF suggested a clarification to the Commission’s ‘‘no double-counting’’ characterization, to recognize that there is no double counting where emission reductions or removals from a mitigation project or activity are counted only once toward achieving mitigation targets or goals.270 The Commission specifically requested comment on whether there are particular criteria or factors that a DCM should take into account when considering, and/or addressing in a VCC derivative contract’s terms and conditions, whether it can be demonstrated that the registry operated or utilized by a crediting program has in place measures that provide reasonable assurance that credited emission reductions or removals are not double counted.271 CarbonPlan suggested that a DCM should consider whether a crediting program discloses ‘‘the precise location and boundaries of projects that generate VCCs.’’ 272 Bloomberg Philanthropies, ICVCM, and C2ES highlighted that the use of unique identifiers can reduce the risk of double counting.273 Other commenters supported specific accounting frameworks for tracking to help ensure accuracy.274 Some commenters provided information regarding blockchain technology or digital assets. In general, these commenters supported the use of blockchain or similar technology for VCC-related recordkeeping to help avoid double counting.275 A few commenters expressed concern with the view that a DCM should consider the effectiveness of a crediting program’s measures with respect to double counting.276 Terra stated that this should be handled by the crediting program.277 Nodal recommended that, if the Commission finalized the Proposed Guidance, the Commission should omit reference to a DCM’s consideration of whether the crediting program can demonstrate that it has ‘‘effective measures’’ in place with respect to double counting,278 arguing that the Commission would otherwise be asking DCMs ‘‘to evaluate the sufficiency of VCC quality standards, which are normally addressed by the underlying markets.’’ 279 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to double counting as proposed, with certain revisions. The Commission understands that the term ‘‘double counting’’ may be interpreted differently within the voluntary carbon markets, depending, for example, on the context. The Commission clarifies that, since this guidance is focused on considerations for DCMs in connection with the listing for trading of physicallysettled VCC derivative contracts, the Commission is primarily concerned with double issuance—i.e., the issuance of the same VCC more than once. After considering the comments received, the Commission believes that a DCM should consider whether a crediting program for underlying VCCs has measures in place that provide reasonable assurance that credited emission reductions or removals are not double counted. As discussed above in connection with tracking, it is important for each credited VCC to be uniquely associated with a single emission reduction or removal of one metric ton of carbon dioxide equivalent to help 274 See, e.g., Carbon Direct at 7; Harvard et al at 18. 267 88 FR 89410 at 89419. Market Watch at 4. 269 aDryada at 1. 270 AFF at 4. 271 88 FR 89410 at 89421. 272 CarbonPlan at 9–10. 273 See Bloomberg Philanthropies at 3; C2ES at 7; ICVCM at 9. 268 Carbon VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 275 See, e.g., BCarbon at 3; Context Labs at 1; DGCC at 6; Ecobalance at 2; Flow Carbon at 5; Harvard et al at 7; Iconoclast at 5; Nori at 6; NYSSCPA at 6; Stanford Doerr at 1. 276 See, e.g., Nodal at 6; Terra at 6. 277 Terra at 6. 278 Nodal at 6. 279 Id. at 5. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 83397 ensure that VCCs effectively further carbon mitigation goals, and, relatedly, to help avoid the distortion or opaqueness of a VCC derivative contract’s pricing. The Commission therefore believes that it is important for a DCM to consider whether a crediting program has measures in place, including measures with respect to double counting, that provide reasonable assurance that the VCCs issued by the crediting program are unique. In response to comments received, the Commission is clarifying that, as a general matter, industry-recognized standards for high-integrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industry-recognized standard setting program, can serve as tools for a DCM, in connection with its consideration of the crediting program’s measures to prevent double counting. v. Inspection Provisions—Third-Party Validation and Verification Certain commenters on the Proposed Guidance highlighted the role that effective crediting program validation and verification procedures play in supporting VCC quality, and supported the Commission’s recognition of the benefits of validation and verification by a reputable, disinterested party or body. Better Markets stated that the validation and verification processes ‘‘are vital for confirming that credited mitigation projects or activities adhere to the [crediting] program’s rules and standards, ensuring that the emission reductions or removals claimed are genuine and verifiable.’’ 280 Better Markets further stated that ‘‘the involvement of reputable, independent third-parties in the validation and verification of projects or activities is crucial. Such independent oversight provides assurance that the GHG emissions reductions or removals are accurately achieved, thereby enhancing the quality of the underlying VCCs.’’ 281 WWF, meanwhile, stated that a thirdparty verification process ‘‘should be a requirement to improve the integrity of the credit and ultimately the integrity of the voluntary carbon market.’’ 282 Better Markets stated that ‘‘best practices in third-party validation and verification should ensure diverse and impartial review by preventing exclusive reliance on a single validator for all projects or activities, and should include mechanisms for addressing performance issues, conducting periodic reviews of 280 Better Markets at 12. 281 Id. 282 WWF E:\FR\FM\15OCR5.SGM at 1. 15OCR5 83398 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations validators, and ensuring that ongoing validation and verification are carried out by different parties from those who performed the initial assessments.’’ 283 Most commenters responding to a specific request for comment on this point agreed that the delivery procedures for a physically-settled VCC derivative contract should describe the responsibilities of registries, crediting programs, or other third parties required to carry out the delivery process.284 Xpansiv stated that such a description enables buyers and sellers to trade VCClinked contracts ‘‘with a clear understanding of the delivery mechanism, the responsibilities of all parties involved in the delivery process and the chain of custody of VCCs being transferred in the delivery process.’’ 285 Flow Carbon stated that, ‘‘[f]or market participants, transparency around the settlement process, coupled with credible third-party review and independent verification, is critical to ensuring that firms have the confidence to deploy capital into these markets and products.’’ 286 Terra stated that delivery procedures should clearly outline the ‘‘responsibilities of all parties involved to ensure the integrity and authenticity of the VCCs upon delivery.’’ 287 ICVCM stated that contracts ‘‘should not have to describe the responsibilities of third parties if the roles of the third party are known to both parties, and the performance of those responsibilities by third parties can be managed through usual risk management in contracts by allocating that risk between the contract parties or providing for default/force majeure etc. type risks.’’ 288 ICE highlighted the role of the DCO in the delivery process.289 EDF noted that the ‘‘responsibilities of registries, crediting programs and other thirdparties required to carry out the delivery process are generally articulated in Terms of Use contracts available on registry websites and mandatory for registry account activation.’’ 290 EDF 283 Better Markets at 12. e.g., AFF at 4; Carbonplace at 5; CEPI at 7; EDF at 8; IATP at 23; Kita at 5; Public Citizen at 17; Terra at 5; Xpansiv at 12. 285 Xpansiv at 12. 286 Flow Carbon at 5. 287 Terra at 7. 288 ICVCM at 9. 289 ICE at 9–10, stating that the ‘‘delivery procedures used by the relevant DCO for the [VCC derivative contract] should take account of the functions provided by the relevant registries, specify the responsibilities of parties in the delivery process, and address the risks to the DCO and market participants for delivery failures, consistent with the DCO core principles.’’ The Commission reiterates that this guidance focuses considerations for DCMs in connection with the design, and listing, of VCC derivative contracts. 290 EDF at 8. khammond on DSKJM1Z7X2PROD with RULES5 284 See, VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 stated that ‘‘DCMs should specify which registry or registries will be used, and also how the respective Terms of Use satisfy governance, tracking mechanisms and double-counting prevention measures.’’ 291 A few commenters expressed concern that, under the Proposed Guidance, DCMs would be expected to assess the sufficiency of a crediting program’s procedures for validating and verifying that credited mitigation projects or activities meet the program’s rules and standards. CME stated that serving as arbiter of such procedures is not the appropriate role of a DCM.292 Nodal similarly recommended that, if the Commission finalized the Proposed Guidance, the Commission omit reference to a DCM’s consideration of whether a crediting program’s procedures contemplated validation and verification by a ‘‘reputable, disinterested’’ party or body, as well as reference to a DCM’s consideration of whether the crediting program is employing ‘‘best practices’’ with respect to third-party validation and verification.293 The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance with respect to inspection provisions as proposed, with certain revisions. Consistent with the Appendix C Guidance, the Commission continues to believe that inspection or certification procedures for verifying compliance with quality requirements or any other related delivery requirements for a physically-settled VCC derivative contract should be specified in the contract’s terms and conditions. With respect to comments on whether the delivery procedures for a physicallysettled VCC derivative contract should describe the responsibilities of registries, crediting programs or any other third parties required to carry out the delivery process, the Commission reminds exchanges and market participants that the Appendix C Guidance states that physically-settled derivative contracts should, among other things, specify appropriately detailed delivery procedures ‘‘that describe the responsibilities of deliverers, receivers, and any required third parties in carrying out the delivery process.’’ 294 The Commission clarifies that, in the specific context of physically-settled VCC derivative 291 Id. 292 CME at 8. at 6. 294 Appendix C Guidance, paragraph (b)(2)(i)(B). 293 Nodal PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 contracts, a registry or crediting program may be considered a deliverer, receiver or required third party as contemplated in the Appendix C Guidance. The Commission acknowledges comments asserting that a DCM may not have the specialized, technical expertise to make an independent determination regarding the conservativeness, robustness, and transparency of a crediting program’s validation and verification procedures. However, given the role played by a crediting program’s validation and verification procedures in informing the quality of VCCs issued by the crediting program, the Commission does believe that there should be reasonable assurance that the program’s validation and verification procedures are up-to-date, robust and transparent. The Commission believes that comments also support a DCM’s consideration of whether there is reasonable assurance that those procedures reflect best practices with respect to third-party validation and verification. The Commission clarifies that, while such best practices with respect to third-party validation and verification may include conducting reviews of the performance of validators, procedures for remediating performance issues, not using the same third-party validator to verify every project type or project category, and using a separate third party to conduct ongoing validation and verification from the third party that completed the initial validation and verification process, the Commission does not expect the DCM itself to conduct such reviews or implement such procedures. The Commission further clarifies that it does not expect a DCM to specify, in a VCC derivative contract’s terms and conditions, or rules, how a registry’s Terms of Use address the discussion in this guidance of governance, tracking and double counting. Taking into account comments received, the Commission is clarifying its view that, as a general matter, industry-recognized standards for highintegrity VCCs, and whether a particular crediting program has been approved or certified as adhering to an industryrecognized standard setting program, can serve as tools for a DCM, in connection with its consideration of the crediting program’s validation and verification procedures, including whether there is reasonable assurance that those procedures reflect best practices with respect to third-party validation and verification. E:\FR\FM\15OCR5.SGM 15OCR5 khammond on DSKJM1Z7X2PROD with RULES5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations 3. A DCM Shall Monitor a Derivative Contract’s Terms and Conditions as They Relate to the Underlying Commodity Market The Commission received a few comments regarding the Commission’s discussion in the Proposed Guidance of considerations for a DCM under DCM Core Principle 4. Better Markets supported the Commission’s proposal.295 Iconoclast stated that continual monitoring by the DCM of the appropriateness of a VCC derivative contract’s terms and conditions should include price.296 BPC noted that, given that DCMs ‘‘are at their root financial services companies,’’ they may not currently have ‘‘the in-house scientific or technical expertise needed to comprehensively evaluate and continuously monitor for changes in carbon crediting programs that may affect the terms and conditions of VCC derivative contracts.’’ 297 BPC suggested that the ‘‘Commission could consider facilitating a community of practice among DCMs to encourage sharing of best practices and developing common evaluation frameworks.’’ 298 The Commission appreciates the comments that it received on this subject and, after considering the comments, has determined to finalize its guidance with respect to DCM Core Principle 4 as proposed, with one revision. The Commission notes that implementing Commission regulations under DCM Core Principle 4 already require a DCM, among other things, to monitor a physically-settled derivative contract’s terms and conditions as they relate to the underlying commodity market and to the convergence of the contract price and the price of the underlying commodity.299 Given that VCC derivatives are a comparatively new and evolving class of products, and given that standardization and accountability mechanisms for VCCs are still being developed, the Commission does believe that it is appropriate for a DCM’s monitoring of a VCC derivative contract to include monitoring of the continued appropriateness of the contract’s terms and conditions that includes, among other things, monitoring to ensure that the underlying VCC conforms, or, where appropriate, updates to reflect the latest certification standard(s) applicable for that VCC. However, for enhanced clarity, the Commission is replacing its reference in the guidance to ‘‘continual’’ monitoring of a contract’s appropriateness, with a reference to ‘‘ongoing’’ monitoring of such appropriateness. For example, where there are changes to either the crediting program or the types of projects or activities associated with the underlying VCC, due for example to new standards or certifications, then the DCM should amend the contract’s terms and conditions to reflect this update. The Commission further notes that it is supportive of exchanges sharing best practices for statutory and regulatory compliance. 4. A DCM Must Satisfy the Product Submission Requirements Under Part 40 of the CFTC’s Regulations and CEA Section 5c(c) Some commenters on the Proposed Guidance responded to the Commission’s discussion of requirements in connection with the submission of a VCC derivative contract to the Commission under CEA section 5c(c)(5)(C) and part 40 of the Commission’s regulations. WWF believed the Commission should disallow self-certification of VCC derivative contracts ‘‘[d]ue to the limited number of voluntary carbon credit derivative contracts and the newness of this function for the CFTC.’’ 300 Similarly, AFREF and EDF supported the development by the Commission of a ‘‘heightened review framework for any self-certified climaterelated products.’’ 301 The Commission notes that, with specific limited exceptions, the CEA contemplates that a DCM may list a new derivative contract for trading, or amend an existing derivative contract, by way of selfcertification, provided that the DCM complies with the substantive and procedural requirements set forth in the statute and the Commission’s implementing regulations, including the requirement that the DCM submit certain prescribed information to the Commission, including but not limited to the contract’s terms and conditions.302 The Commission notes that the CEA also sets forth the standard that must be met by the DCM in order to list or amend a derivative contract— which would include a VCC derivative contract—namely, that the contract comply with the CEA and the regulations thereunder.303 300 WWF at 1. at 7; EDF at 2. 302 CEA section 5c(c)(1), 7 U.S.C. 7a–2(c)(1); 17 CFR 40.2. 303 CEA sections 5c(c)(1) and (5), 7 U.S.C. 7a– 2(c)(1) and (5). 295 See Better Markets at 13. 296 Iconoclast at 4. 297 BPC at 3. 298 Id. 299 See 17 CFR 38.252(a). VerDate Sep<11>2014 19:08 Oct 11, 2024 301 AFREF Jkt 265001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 83399 The Commission also received a comment regarding the requirement that a contract submission to the Commission—including a submission with respect to a VCC derivative contract—include an ‘‘explanation and analysis of the contract and its compliance with applicable provisions of the [CEA], including core principles and the Commission’s regulations thereunder.’’ 304 BPC urged the Commission to ‘‘encourage consistency across DCMs in their development of the required ‘explanation and analysis’ of how their VCC derivative contract meets . . . this proposed guidance.’’ 305 The Commission notes that each DCM has an obligation to ensure, through its own review and analysis, that the derivative contracts that it seeks to list for trading—including any VCC derivative contracts—comply with the CEA and the regulations thereunder, and the DCM’s contract submissions to the Commission should reflect this review and analysis. That said, by outlining certain relevant considerations for a DCM in connection with the design and listing of a VCC derivative contract, the Commission is hopeful that this guidance will help to support the standardization of such contracts in a manner that not only facilitates informed evaluations and comparisons by market participants, but also fosters greater consistency in VCC derivative product submissions to the Commission. The Commission appreciates all of the comments that it received on this subject. After considering the comments, the Commission has determined to finalize its guidance regarding the product submission requirements under part 40 of the CFTC’s regulations and CEA section 5c(c)(5)(C) as proposed. 5. Foreign Boards of Trade The Commission requested comment on whether the VCC commodity characteristics identified in the Proposed Guidance should be recognized as being relevant to submissions with respect to VCC derivative contracts made by a registered foreign board of trade (‘‘FBOT’’) under CFTC regulation § 48.10.306 Most commenters who 304 17 CFR 40.2(a)(3)(v) (for self-certification) and 40.3(a)(4) (for Commission approval). 305 BPC at 3. 306 88 FR 89410 at 89421. CEA section 4(b)(1)(A), 7 U.S.C. 6(b)(1)(A), provides that the Commission may adopt rules and regulations requiring registration with the Commission for an FBOT that provides the members or other participants located in the United States with direct access to the E:\FR\FM\15OCR5.SGM Continued 15OCR5 83400 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 responded were supportive of the VCC commodity characteristics being recognized as relevant to such FBOT submissions.307 For example, after noting that both DCMs and registered FBOTs are held to a ‘‘not readily susceptible to manipulation’’ standard,308 CME stated that if the Commission’s guidance was intended to guard against the listing of contracts readily susceptible to manipulation, then the scope of the guidance should extend to FBOTs.309 Conversely, one commenter stated that it did not support the application of the Commission’s guidance to contract submissions by registered FBOTs. ICE stated that under the Commission’s framework for registered FBOTs, the exchange’s home country regulator is generally tasked with the primary oversight of the FBOT’s contract terms.310 electronic trading and order matching system of the FBOT, including rules and regulations prescribing the procedures and requirements applicable to the registration of such FBOTs. CEA section 4(b)(1)(A)(i) provides that, in adopting such rules and regulations, the Commission shall consider, inter alia, whether any such FBOT is subject to comparable, comprehensive supervision and regulation by the appropriate governmental authorities in the FBOT’s home country. The Commission has adopted rules requiring the registration of FBOTs that seek to provide such direct access to members or other participants located in the United States, which among other things prescribe the procedures and requirements applicable to registration. These rules are set forth at part 48 of the Commission’s regulations. Commission regulation § 48.10(a), 17 CFR 48.10(a), provides that a registered FBOT that wishes to make an additional derivative contract available for trading via direct access to members or other participants located in the United States must submit a written request ‘‘prior to offering the contracts within the United States,’’ which must include specified information, including the contract’s terms and conditions. In general, the registered FBOT can make the contract available for trading by direct access 10 business days after the date of the Commission’s receipt of the written request, unless the Commission notifies the FBOT that additional time is needed to complete its review of policy or other issues pertinent to the contract. 307 See, e.g., AFREF at 9; Carbonplace at 3; CEPI at 4; Charm at 3; CME at 8; C2ES at 5; IATP at 20; ICVCM at 7; NYSSCPA at 3; Public Citizen at 13; Xpansiv at 9. 308 Commission regulation § 48.7(c)(1), 17 CFR 48.7(c)(1), provides, among other things, that that derivative contracts to be made available by a registered FBOT via direct access to members or other participants located in the United States must not be readily susceptible to manipulation. As discussed herein, DCM Core Principle 3, CEA section 5(d)(3), 7 U.S.C. 7(d)(3), provides that a DCM must only list derivative contracts that are not readily susceptible to manipulation. See also 17 CFR 38.200 and 38.201. 309 CME at 2. 310 ICE at 2. The Commission has adopted specific requirements for two types of derivative contracts offered by registered FBOTs for trading via direct access to members and other participants located in the United States: linked contracts and certain securities-related contracts. Commission regulation § 48.8(c), 17 CFR 48.8(c), imposes notification and VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 The Commission appreciates all of the comments that it received on this subject. The Commission acknowledges efforts that have been made across jurisdictions—by governmental bodies, private sector and multilateral initiatives, and derivative exchanges themselves—to support transparent markets for high-integrity VCCs. The Commission recognizes that its counterparts in other jurisdictions have similar regulatory interests in the manner in which VCC derivatives, as a product class, evolve—as well as in ensuring, more generally, that the financial markets that they oversee are liquid, fair, and stable, and free from manipulation and other abusive trading practices. The Commission further recognizes that, given the global nature of financial markets—including voluntary carbon markets—international coordination is critical to support market integrity. The Commission looks forward to continuing to coordinate with its regulatory counterparts on efforts to promote the integrity and orderly functioning of voluntary carbon markets, including markets for VCC derivative contracts. III. Guidance Regarding the Listing of VCC Derivative Contracts The Commission is issuing guidance that outlines factors for consideration by DCMs when addressing certain requirements under the CEA, and CFTC regulations, that are relevant to the listing for trading of VCC derivative contracts. The Commission recognizes that VCC derivatives are a comparatively new and evolving class of products, and believes that guidance that outlines factors for a DCM to consider in connection with the contract design and listing process may help to advance the standardization of such products in a manner that promotes transparency and liquidity. This guidance does not establish new obligations for DCMs. Unlike a binding rule adopted by the Commission, which would state with precision when particular requirements do and do not apply to particular situations, this guidance is a statement of the Commission’s views regarding factors that may be relevant in its evaluation of reporting requirements on registered FBOTs related to their offering for trading via direct access of contracts that settle to the price of a futures contract listed on a DCM (‘‘linked contracts’’). Commission regulation § 48.7(c)(2), 17 CFR 48.7(c)(2), provides that registered FBOTs may only offer via direct access non-narrow-based security index futures and option contracts that have been certified by the Commission pursuant to Commission regulation § 30.13, 17 CFR 30.13, in accordance with criteria set forth in Commission regulation § 40.11, 17 CFR 40.11. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 DCM compliance, and allows for flexibility in application to various situations, including consideration of all relevant facts and circumstances, whether or not explicitly discussed in the guidance. The Commission intends for this guidance to be an efficient and flexible vehicle to communicate the agency’s current views, in order to give DCMs the benefit of the Commission’s thinking as they address their Core Principle and regulatory compliance obligations.311 This guidance is not intended to modify or supersede existing Commission guidance that addresses the listing of derivative contracts by CFTCregulated exchanges, including the Appendix C Guidance. Rather, taking into account certain unique attributes of VCC derivatives and voluntary carbon markets, this guidance outlines particular matters for consideration by a DCM when designing and listing a VCC derivative contract. Among other things, this guidance addresses how certain aspects of the Appendix C Guidance may be considered in the specific context of VCC derivative contracts. This guidance focuses primarily on the listing by DCMs of physically-settled VCC derivative contracts. In part, this focus reflects the fact that all VCC derivative contracts that are currently listed for trading on DCMs are physically-settled contracts. To date, no DCM has listed for trading a cash-settled VCC derivative contract. In addition, the Commission believes that at this juncture in the evolution of VCC derivatives as a product class, it may be of particular benefit to outline considerations for a DCM that can help to ensure that, upon delivery, the quality and other attributes of VCCs underlying a derivative contract will be as expected by position holders. This will support accurate pricing, help reduce the susceptibility of the contract to manipulation, and foster confidence in the contract that can enhance liquidity. While this guidance focuses primarily on physically-settled VCC derivative contracts, the Commission continues to believe that, with respect to cash-settled derivative contracts, an acceptable specification of the cash settlement price would include rules that fully describe the essential economic 311 For a number of the statutory Core Principles for DCMs, the Commission has adopted rules that establish the manner in which a DCM must comply with the Core Principle. Unless otherwise determined by the Commission by rule or regulation, a DCM has reasonable discretion in establishing the manner in which it complies with a Core Principle. CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B). E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations characteristics of the underlying commodity.312 Accordingly, the Commission believes that discussions in this guidance of VCC commodity characteristics for consideration by a DCM in connection with the design and listing of a physically-settled VCC derivative contract, would also be relevant for cash-settled derivative contracts that settle to the price of a VCC, unless otherwise noted.313 Further, while this guidance focuses on the listing of VCC derivative contracts by DCMs, the Commission believes that the factors outlined for consideration also would be relevant for consideration by any SEF that may seek to permit trading in swap contracts that settle to the price of a VCC, or in physically-settled VCC swap contracts.314 In developing this guidance, the Commission has considered those public comments on the RFI on ClimateRelated Financial Risk that addressed product innovation and voluntary carbon markets, as well as comments received in response to the Proposed Guidance. Taking into account these comments, the Commission believes that this guidance furthers the agency’s mission and may help to advance the standardization of VCC derivative contracts in a manner that fosters transparency and liquidity.315 The Commission recognizes that VCC derivative products and voluntary carbon markets are evolving and that it 312 Appendix C Guidance, paragraph (c)(1). noted herein, and for the avoidance of doubt, this guidance is not intended to modify or supersede the Appendix C Guidance, which outlines considerations for both cash-settled and physically-settled derivative contracts—including considerations that are not touched on in this guidance. DCMs are reminded to consult and consider the Appendix C Guidance when developing rules, terms and conditions, and contract submissions to the Commission, for all derivative product types—including VCC derivative products. 314 As noted above, the Appendix C Guidance is also relevant for SEFs, which, like DCMs, are obligated by statute only to permit trading in contracts that are not readily susceptible to manipulation. CEA section 5h(f)(3), 7 U.S.C 7b– 3(f)(3). Like DCMs, SEFs also are subject to a statutory obligation to monitor trading in swaps to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process through surveillance, compliance, and disciplinary practices and procedures. CEA section 5h(f)(4) 7, U.S.C 7b–3(f)(4). See also 17 CFR 37.400 through 37.408. 315 See also, e.g., International Emissions Trading Association comment in response to the Second Voluntary Carbon Markets Convening at 5–6 (stating that the CFTC is in a fortunate position to leverage the evolving work of existing initiatives to support the drive for quality and integrity in the voluntary carbon markets), and BP America, Inc. comment in response to the Second Voluntary Carbon Markets Convening at 3 (supporting guidance for CFTC-regulated exchanges). khammond on DSKJM1Z7X2PROD with RULES5 313 As VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 may therefore be appropriate for the Commission to revisit this guidance or to issue additional guidance in the future,316 as VCC derivative products and voluntary carbon markets continue to develop and mature.317 A. A DCM Shall Only List Derivative Contracts That Are Not Readily Susceptible to Manipulation DCM Core Principle 3 provides that a DCM shall only list for trading derivative contracts that are not readily susceptible to manipulation.318 With respect to DCM Core Principle 3, the Appendix C Guidance (‘‘Demonstration of Compliance That a Contract is Not Readily Susceptible to Manipulation’’) 319 outlines certain relevant considerations for a DCM when developing contract terms and conditions, and providing supporting documentation and data in connection with the submission of a contract to the Commission.320 With respect to a physically-settled derivative contract, the Appendix C Guidance states that the terms and conditions of the contract should describe or define all of the economically significant characteristics or attributes of the commodity underlying the contract.321 Among other things, failure to specify the economically significant attributes of the underlying commodity may cause confusion among market participants, who may expect a commodity of different quality, or with other features, to underlie the contract. This may render the precise nature of the commodity that the contract is pricing ambiguous, and make the contract susceptible to manipulation or price distortion. The Appendix C Guidance states that, for any particular contract, the specific 316 For example, the Commission may in the future revisit this guidance, or issue additional guidance, to further address the listing of cashsettled VCC derivative contracts, including indexbased contracts, or to further address the listing of VCC derivative contracts by SEFs. 317 For the avoidance of doubt, this guidance does not address the regulatory treatment of any underlying VCC or associated offset project or activity, including whether any such product, project or activity may qualify as a swap or be eligible for the forward contract exclusion under Commission’s ‘‘swaps’’ definition. See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208 (August 13, 2012). 318 CEA section 5(d)(3), 7 U.S.C. 7(d)(3). 319 17 CFR part 38, appendix C. 320 See also section I.A., supra. As noted above, the Appendix C Guidance is also relevant to SEFs, which are similarly obligated by statute only to permit trading in derivative contracts that are not readily susceptible to manipulation. CEA section 5h(f)(3); 7 U.S.C 7b–3(f)(3). 321 Appendix C Guidance, paragraph (b)(2)(i)(A). PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 83401 attributes of the underlying commodity that should be described or defined in the contract’s terms and conditions ‘‘depend upon the individual characteristics of the commodity.’’ 322 Where the underlying commodity is a VCC, the Commission recognizes that standardization and accountability mechanisms for VCCs are currently still developing. The Commission believes that the fact that standardization and accountability mechanisms for VCCs are currently still developing is, itself, an ‘‘individual characteristic of the commodity’’ that should be taken into account by a DCM when designing a VCC derivative contract and addressing the underlying commodity in the contract’s terms and conditions. To that end, the Commission recognizes that, while standardization and accountability mechanisms for VCCs are currently still being developed, there are certain characteristics that have been identified broadly—across both mandatory and voluntary carbon markets—as helping to inform the integrity of carbon credits. The Commission believes that a DCM should take these characteristics— referred to in this guidance as ‘‘VCC commodity characteristics’’ and discussed more fully below—into consideration when designing a VCC derivative contract, and addressing in the contract’s terms and conditions the underlying VCC. As a general matter, the Commission believes that a DCM should consider the VCC commodity characteristics when selecting one or more crediting programs from which eligible VCCs, meeting the derivative contract’s specifications, may be delivered at the contract’s settlement. The Commission believes that consideration of these characteristics will assist the DCM in understanding key attributes of the commodity—the VCC—that underlies the derivative contract. More specifically, the Commission believes that, at a minimum, a DCM should consider the VCC commodity characteristics when addressing the following criteria in the design of a VCC derivative contract: • Quality standards, • Delivery points and facilities, and • Inspection provisions. These are among the criteria identified in the Appendix C Guidance as criteria for a DCM to consider addressing in the terms and conditions of a physically-settled derivative contract. As discussed above, addressing these three criteria clearly in 322 Id. E:\FR\FM\15OCR5.SGM 15OCR5 83402 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations the contract’s terms and conditions helps to ensure that trading in the contract is based on accurate information about the underlying commodity. This, in turn, helps to promote accurate pricing and helps to reduce the susceptibility of the contract to manipulation. The Commission believes that, as a general matter, industry-recognized standards for high-integrity VCCs can serve as tools for DCMs, in connection with their consideration, with respect to a particular crediting program, of the VCC commodity characteristics outlined in this guidance. Where a crediting program for VCCs that are eligible for delivery under a derivative contract has been approved or certified by an industry-recognized standards program for high-integrity VCCs, the DCM should consider clearly identifying the standards program in the contract terms and conditions, along with the crediting program itself. khammond on DSKJM1Z7X2PROD with RULES5 1. Quality Standards The Commission believes that a DCM should consider the following VCC commodity characteristics when addressing quality standards in connection with the design of a VCC derivative contract: (i) transparency, (ii) additionality, (iii) permanence and risk of reversal, and (iv) robust quantification.323 The Commission also understands that the measures that a crediting program has in place with respect to social and environmental safeguards, and net zero alignment, may have a bearing on how market participants evaluate the quality of the VCCs that are issued by the crediting program. In light of this, a DCM may determine that it is appropriate to consider, when addressing quality standards in connection with derivative contract design, 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 GHG emissions, technologies or carbon intensive practices that are incompatible with the objective of achieving net zero GHG emissions by 2050. 323 As is the case for physically-settled VCC derivative contracts, the Commission believes that for cash-settled derivative contracts that settle to the price of a VCC, it is important to clearly specify the VCC quality standards in the contract’s terms and conditions to help ensure that the pricing of the contract reflects the quality of the VCC underlying the contract. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 i. Transparency—Publicly Available Data To Promote Transparency As a threshold matter, the Commission believes that a DCM should provide, in the terms and conditions of a physically-settled VCC derivative contract, information about the VCCs that are eligible for delivery under the contract. The contract terms and conditions should clearly identify what is deliverable under the contract, including by providing information that readily specifies the crediting program or programs from which underlying VCCs may be issued. To the extent that underlying VCCs are associated with a specific category of mitigation project or activity—such as nature-based projects or activities—this also should be readily evident from the contract’s terms and conditions. Specifying which crediting programs and, as applicable, which types of projects or activities are eligible for purposes of delivery will help to provide clarity to market participants regarding the VCCs that can be expected to deliver under the contract, and will thereby help to ensure that the pricing of the contract accurately reflects the intended quality of the underlying VCCs. Where there is ambiguity or confusion about the quality of the VCCs that may be delivered under the contract, this may render the contract susceptible to manipulation or price distortion. The Commission believes that, when designing a VCC derivative contract, DCMs should also consider whether the crediting program for underlying VCCs is making detailed information about its policies and procedures, and the projects or activities that it credits— such as relevant project documentation—publicly available in a searchable and comparable manner. Making such information publicly available would assist market participants in understanding how GHG emission reductions or removals are calculated by the crediting program— including how additionality, which is discussed further below, is assessed— and how GHG emission reductions or removals are quantified. This would assist market participants in making informed evaluations and comparisons of the quality of the VCCs that underlie derivative contracts, which would help to support accurate pricing. ii. Additionality The Commission believes that, in connection with the design of a VCC derivative contract, a DCM should consider whether the crediting program for underlying VCCs has procedures in PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 place to assess or test for additionality. Additionality is recognized by many as an important element of a high-quality VCC. If holders of positions in a VCC derivative contract understand and intend for VCCs that are eligible for delivery under the contract to be additional, but in fact they may not be, then the pricing of the derivative contract may not accurately reflect the quality of the VCCs that may be delivered under the contract. The cheapest-to-deliver VCC,324 that otherwise meets the contract’s specifications, may not have additionality. Accordingly, the Commission believes the DCM should consider whether the procedures that a crediting program has in place to assess or test for additionality provide reasonable assurance that GHG emission reductions or removals will be credited only if they are additional. While additionality is recognized by many as an important element of a highquality VCC, the Commission understands that there currently is variation across the voluntary carbon markets in how, precisely, additionality is characterized. For example, an assessment of additionality may focus on whether 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. Alternatively or additionally, an assessment of additionality may focus on whether the project or activity is already required by law, regulation, or any other legally binding mandate applicable in the project’s or activity’s jurisdiction, or on other approaches such as performance standard approaches.325 The Commission understands that the factors that inform an assessment of additionality also may vary depending on the type of mitigation project or activity in issue, and that, as the voluntary carbon markets continue to develop, industry consensus on how to characterize and assess additionality may evolve. In recognition of the foregoing, the Commission is not providing in this guidance a definition of additionality. The Commission believes that, as a general matter, industry-recognized 324 The term ‘‘cheapest-to-deliver’’ refers to the least expensive commodity that can be delivered under the derivative contract that otherwise meets the contract’s specifications. 325 See Joint Policy Statement on Voluntary Carbon Markets, U.S. Department of the Treasury, May 2024, available at: https://home.treasury.gov/ system/files/136/VCM-Joint-Policy-Statement-andPrinciples.pdf. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 standards for high-integrity VCCs can serve as tools for a DCM, in connection with its consideration of a particular crediting program’s characterization of additionality, as well as the DCM’s consideration of whether the crediting program’s procedures to assess or test for additionality provide reasonable assurance that GHG emission reductions or removals will be credited only if they are additional, as so characterized. iii. Permanence and Accounting for the Risk of Reversal The Commission believes that, in connection with the design of a VCC derivative contract, a DCM should consider whether the crediting program for underlying VCCs has 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). The risk of reversal may impact the risk management needs of VCC derivative market participants. Market participants that are utilizing physically-settled VCC derivative contracts to help meet their carbon mitigation goals have an interest in ensuring that, upon physical settlement, the underlying VCCs will actually reduce or remove the amount of emissions that they were intended to reduce or remove. Accordingly, the risk of reversal—and the manner in which it is accounted for by a crediting program—is tied to the quality of the underlying VCCs and, by extension, to the pricing of the derivative contract. The crediting program’s measures to address and account for the risk of reversal may be particularly important where underlying VCCs are issued for project or activity types with a higher reversal risk. Most crediting programs have established VCC ‘‘buffer reserves’’ to help address the risk of credited GHG emission reductions or removals being reversed. Under this approach, VCCs are set aside into a common buffer reserve (or ‘‘pool’’). Reserved VCCs can be drawn upon and cancelled, proportional to the magnitude of the reversal. A DCM should consider whether a crediting program has a buffer reserve in place to help address the risk of reversal. Relevant considerations with respect to a crediting program’s buffer reserve could include whether the crediting program regularly reviews the methodology by which the size of its buffer pool is calculated in order to VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 address evolving developments that may heighten reversal risk, and whether there is a mechanism in place to audit the continuing sufficiency of the buffer reserve. The Commission recognizes, however, that a crediting program may, now or in the future, have measures other than, or in addition to, a buffer reserve to address the risk of reversal. This guidance contemplates that a DCM should consider whether a crediting program has a buffer reserve and/or other measures in place to address such risk. iv. Robust Quantification—GHG Emission Reductions or Removals Should Be Conservatively Quantified Given the current absence of a standardized methodology or protocol to quantify GHG emission reduction or removal levels 326—not only across crediting programs, but even by a particular crediting program, with respect to different types of projects or activities—the Commission believes that, in connection with the design of a VCC derivative contract, a DCM should consider whether there is reasonable assurance that the quantification methodology(ies) or protocol(s) used by the crediting program for calculating emission reductions or removals for 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. Moreover, the Commission notes that for the derivative contracts that they list, DCMs are required to adopt, as is necessary and appropriate, exchange-set position limits for speculators.327 To establish exchange-set position limits, a DCM should derive a quantitative estimate of the deliverable supplies of the underlying commodity for the delivery period specified in the 326 Related specifically to the agriculture and forest sector, the Office of Management and Budget, the White House Office of Science and Technology Policy, and White House Office of Domestic Climate Policy announced the release of the National Strategy to Advance an Integrated U.S. Greenhouse Gas Measurement, Monitoring, and Information System, a Strategy developed by the Greenhouse Gas Monitoring and Measurement Interagency Working Group (‘‘GHG IWG’’) to enhance coordination and integration of greenhouse gas measurement, monitoring, and information efforts across the Federal government. The GHG IWG issued this Federal Strategy on November 29, 2023, available at: https://www.whitehouse.gov/ostp/ news-updates/2023/11/29/national-strategy-toadvance-an-integrated-u-s-greenhouse-gasmeasurement-monitoring-and-information-system/. 327 CEA section 5(d)(5), 7 U.S.C. 7(d)(5). See also 17 CFR 38.300 and 38.301. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 83403 contract.328 A DCM’s estimate of a VCC’s deliverable supplies is likely to be informed by understanding how the relevant crediting program determines the amount of VCCs that are issued for credited projects or activities. Where the quantification methodology or protocol used to calculate the amount of VCCs is robust, conservative, and transparent, the DCM should have a more reliable basis from which to form its deliverable supply estimate. That deliverable supply estimate, in turn, can be used as the basis for effectively setting the DCM’s exchange-set speculative position limits to help reduce the possibility of corners or squeezes that may distort or manipulate the price of the derivative contract.329 2. Delivery Points and Facilities The Appendix C Guidance states that the delivery procedures for a physicallysettled derivative contract should, among other things, seek to minimize or eliminate any impediments to making or taking delivery by both deliverers and takers of delivery, to help ensure convergence of cash and derivative contract prices at the expiration of the derivative contract.330 When addressing delivery procedures in connection with the design of a physically-settled VCC derivative contract, the Commission believes that a DCM should consider the governance framework and tracking mechanisms of the crediting program for underlying VCCs, as well as the crediting program’s measures to prevent double counting.331 i. Governance The Commission believes that a DCM should consider whether the crediting program for underlying VCCs has in place a governance framework that supports the crediting program’s independence, transparency and accountability. As a threshold matter, a governance framework that supports independence, transparency and 328 Guidance on estimating deliverable supply can be found in the Appendix C Guidance. 329 For a cash-settled VCC derivative contract, a DCM may similarly consider the deliverable supply of the underlying VCCs when setting exchange-set speculative position limits or historical open interest when establishing non-spot month position accountability levels. See 17 CFR 150.5 and appendix F to part 150, title 17. 330 Appendix C Guidance, paragraph (b)(2)(i)(B). 331 While cash-settled VCC derivative contracts do not result in the delivery of a VCC, the Commission believes that considering the VCC commodity characteristics of governance, tracking and no double counting when developing the terms and conditions of a cash-settled VCC derivative contract will help to ensure that the contract terms and conditions address essential economic characteristics of the underlying VCC in a manner that promotes accurate pricing and helps to reduce the susceptibility of the contract to manipulation. E:\FR\FM\15OCR5.SGM 15OCR5 83404 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations accountability helps to ensure the overall quality of the VCCs issued by a crediting program. Furthermore, it is the Commission’s understanding that a crediting program’s registry may be used as a delivery point to facilitate physical settlement for a VCC derivative contract. A registry is a repository for tracking mitigation projects or activities and associated VCCs. An effective crediting program governance framework can help to ensure that the crediting program operates or makes use of a registry that has appropriate measures in place to facilitate the physical settlement of a VCC derivative contract. Relevant factors when considering a crediting program’s governance framework could include, among other things, the program’s decision-making procedures, including who is responsible for administration of the program and conflict of interest measures such as how the independence of key functions is ensured; reporting and disclosure procedures; public and stakeholder engagement processes, including whether there are appeals mechanisms; and risk management policies, such as financial resources/reserves, cybersecurity, and anti-money laundering policies. A DCM should consider whether detailed information regarding a crediting program’s governance framework, such as information regarding the above-described procedures and policies, is made publicly available. khammond on DSKJM1Z7X2PROD with RULES5 ii. Tracking The Commission believes that a DCM should consider whether the crediting program for the underlying VCCs has processes and procedures in place to help ensure clarity and certainty with respect to the issuance, transfer, and retirement of VCCs. The DCM should consider whether the crediting program operates or makes use of a registry, and whether there is reasonable assurance that the registry has effective measures in place to track the issuance, transfer, and retirement of VCCs; to identify who owns or retires a VCC; and to make sure that each VCC is uniquely and securely identified and associated with a single emission reduction or removal of one metric ton of carbon dioxide equivalent. iii. No Double-Counting The Commission believes that a DCM should consider whether the crediting program for the underlying VCCs has measures in place that provide reasonable assurance that credited emission reductions or removals are not double counted. That is, that the VCCs representing the credited emission VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 reductions or removals are issued to only one registry and cannot be used after retirement or cancelation. As discussed above in connection with the VCC commodity characteristics of additionality and permanence, market participants that are utilizing physically-settled VCC derivative contracts to help meet carbon mitigation goals have an interest in ensuring that, upon physical settlement, the underlying VCCs will actually reduce or remove the emissions that they were intended to reduce or remove. In order for VCCs to effectively further carbon mitigation goals, it is important for each credited VCC to be uniquely associated with a single emission reduction or removal of one metric ton of carbon dioxide equivalent; a crediting program should have measures in place that provide reasonable assurance of this. If there is not a reasonable assurance that the VCCs underlying a derivative contract are each unique, then, among other things, this could distort or obscure the accuracy of the derivative contract’s pricing. In the context of evolving national and international carbon markets and emissions trading frameworks, effective measures to ensure that emission reductions or removals are not double counted may include, among other things, procedures for conducting crosschecks across multiple carbon credit registries. 3. Inspection Provisions—Third-Party Validation and Verification Consistent with the Appendix C Guidance, the Commission believes that any inspection or certification procedures for verifying compliance with quality requirements or any other related delivery requirements for physically-settled VCC derivative contracts should be specified in the contract’s terms and conditions.332 The Commission believes that these inspection or certification procedures should be consistent with the latest procedures in the voluntary carbon markets. Additionally, the Commission believes that, when designing a VCC derivative contract, a DCM should consider whether there is reasonable assurance that the crediting program for underlying VCCs has up-to-date, robust 332 Appendix C Guidance, paragraph (b)(2)(i)(G) (noting that to the extent that formal inspection procedures are not used in the cash market, an acceptable specification would contain provisions that assure accuracy in assessing the commodity, that are available at a low cost, that do not pose an obstacle to delivery on the contract and that are performed by reputable, disinterested third party or by qualified designated contract market employees). PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 and transparent procedures for validating and verifying that credited mitigation projects or activities meet the crediting program’s rules and standards. By providing independent confirmation that mitigation projects or activities are achieving the claimed GHG emission reductions or removals, third-party validation and verification can help to ensure that the underlying VCC accurately reflects the quality intended by the DCM and supports voluntary carbon market integrity.333 Accordingly, a DCM should consider whether there is reasonable assurance that the crediting program’s procedures reflect best practices with respect to third party validation and verification. Such best practices may include: crediting program reviews of the performance of its validators; procedures for remediating performance issues; not using the same third-party validator to verify every project type or project category; and using a separate third-party to conduct ongoing validation and verification from the third-party that completed the initial validation and verification process. B. A DCM Shall Monitor a Derivative Contract’s Terms and Conditions as They Relate to the Underlying Commodity Market DCM Core Principle 4 requires a DCM to prevent manipulation, price distortion, and disruptions of the physical delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures.334 For physicallysettled derivative contracts, implementing Commission regulations under DCM Core Principle 4 require a DCM, among other things, to monitor the contract’s terms and conditions as they relate to the underlying commodity market, and to the convergence between the contract price and the price of the underlying commodity, and to monitor the supply of the underlying commodity in light of the contract’s delivery requirements.335 Such monitoring will help a DCM identify circumstances that may cause the contract to become susceptible to price manipulation or distortions, and to assess whether the terms and conditions of the contract continue to be appropriate—or whether a change in circumstances should be addressed, for example, through changes to the contract’s terms and conditions.336 333 Id. 334 CEA section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR 38.250 through 38.258. 335 17 CFR 38.252. 336 The Commission has, similarly, recognized that a DCM has a responsibility to monitor the E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations Given that VCC derivatives are a comparatively new and evolving class of products, and given that standardization and accountability mechanisms for VCCs are still being developed, the Commission believes that the monitoring by a DCM of the terms and conditions of a physically-settled VCC derivative contract should include ongoing monitoring of the appropriateness of the contract’s terms and conditions that includes, among other things, monitoring to ensure that the delivery instrument—that is, the underlying VCC—conforms or, where appropriate, updates to reflect the latest certification standard(s) applicable for that VCC. For example, where there are changes to either the crediting program or the types of projects or activities associated with the underlying VCC, due for example to new standards or certifications, then the DCM should amend the contract’s terms and conditions to reflect this update. In such circumstances, the DCM should also ensure that it is monitoring the adequacy of the estimated deliverable supply of the underlying VCC to satisfy the contract’s delivery requirements. Finally, the Commission reminds market participants that Commission regulations implementing DCM Core Principle 4 require DCMs to have rules requiring their market participants to keep records of their trading that include records of their activity in the underlying commodity and related derivatives markets.337 A DCM’s rules also must require market participants to make such records available upon request to the DCM.338 As such, DCM market participants are required, upon request, to make records of their trading in underlying VCC cash markets available to the DCM, in order to assist the DCM in fulfilling its market monitoring obligations. These records also are subject to Commission inspection under applicable Commission recordkeeping rules. khammond on DSKJM1Z7X2PROD with RULES5 C. A DCM Must Satisfy the Product Submission Requirements Under Part 40 of the CFTC’s Regulations and CEA Section 5c(c) There are generally two processes by which a DCM may list a new derivative contract for trading.339 The DCM may elect to list the contract for trading by providing the Commission with a continued appropriateness of the terms and conditions of a cash-settled derivative contract. See, e.g., 17 CFR 38.253(a)(2). 337 17 CFR 38.254(a). 338 Id. 339 SEFs also may generally list new contracts by way of either of these two processes. See, generally, CEA section 5c(c), 7 U.S.C. 7a–2(c). VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 written certification—a ‘‘selfcertification’’—that the contract complies with the CEA, including the CFTC’s regulations thereunder.340 Alternatively, the DCM may elect voluntarily to seek prior Commission approval of the contract.341 In each case, the DCM must submit prescribed information to the Commission, including but not limited to the contract’s terms and conditions.342 Amendments to an existing derivative contract also must be submitted to the Commission, along with prescribed information, either by way of selfcertification or for prior Commission approval.343 This guidance highlights 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 selfcertification or with prior Commission approval. These requirements generally apply with respect to the listing by a DCM of a derivative contract, regardless of the underlying asset class. However, the Commission wishes to remind DCMs of the importance of fully complying with these requirements in a submission for a VCC derivative contract. The relevant requirements provide, first, that a contract submission to the Commission must include an ‘‘explanation and analysis’’ of the contract and the contract’s compliance with applicable provisions of the CEA, including core principles and the Commission’s regulations thereunder.344 Second, the relevant requirements provide that the explanation and analysis of the contract either be accompanied by the documentation relied upon to establish the basis for compliance with applicable law, or incorporate information contained in such documentation, with appropriate citations to data sources.345 83405 Third, the relevant requirements provide that, if requested by Commission staff, a DCM must provide any additional evidence, information or data that demonstrates that the contract meets, initially or on a continuing basis, the requirements of the CEA or the Commission’s regulations or policies thereunder.346 Since VCC derivatives are a comparatively new and evolving class of products, and since standardization and accountability mechanisms for VCCs are still being developed, the Commission anticipates that in connection with the submission for a VCC derivative contract, a DCM may provide qualitative explanations and analysis to assist in addressing the three above-described requirements. The Commission expects that the information—including supporting documentation, evidence and data—provided by the DCM to describe how the contract complies with the CEA and applicable Commission regulations, will be complete and thorough. This is especially important given unique and developing aspects of VCCs and VCC derivative markets. Including complete and thorough information will assist the Commission and its staff in their understanding of the contract and their analysis of the contact’s compliance with applicable statutory and regulatory requirements, including whether or not the contract is readily susceptible to manipulation. Issued in Washington, DC, on October 2, 2024, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts— Voting Summary and Chairman’s and Commissioner’s Statements Appendix 1—Voting Summary 340 CEA section 5c(c)(1), 7 U.S.C. 7a–2(c)(1). See also 17 CFR 40.2. The Commission must receive the DCM’s self-certified submission at least one business day before the contract’s listing. 17 CFR 40.2(a)(2). 341 CEA sections 5c(c)(4) and (5), 7 U.S.C. 7a– 2(c)(4) and (5). See also 17 CFR 40.3. 342 17 CFR 40.2 and 40.3. 343 17 CFR 40.5 and 40.6. 344 17 CFR 40.2(a)(3)(v) (for self-certification) and 40.3(a)(4) (for Commission approval). The ‘‘explanation and analysis’’ requirement for selfcertified contracts provides for such explanation and analysis to be ‘‘concise.’’ The ‘‘explanation and analysis’’ requirement for contracts submitted for prior Commission approval does not include the ‘‘concise’’ qualifier. The Commission requires DCMs to provide a more detailed explanation and analysis of contracts that are submitted for affirmative Commission approval. 345 17 CFR 40.2(a)(3)(v) (for self-certification) and 40.3(a)(4) (for Commission approval). PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 On this matter, Chairman Behnam and Commissioner Goldsmith Romero voted in the affirmative. Commissioners Johnson and Pham voted to concur. Commissioner Mersinger voted in the negative. Appendix 2—Statement of Support of Chairman Rostin Behnam The Commission’s final guidance for designated contract markets (DCMs or Contract Markets) that list derivatives on voluntary carbon credits (VCCs) as the underlying commodity is a critical step in support of the development of high-integrity voluntary carbon markets (VCMs). For the first time ever, a U.S. financial regulator is 346 17 CFR 40.2(b) (for self-certification) and 40.3(a)(10) (for Commission approval). E:\FR\FM\15OCR5.SGM 15OCR5 83406 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations khammond on DSKJM1Z7X2PROD with RULES5 issuing regulatory guidance for contract markets that list financial contracts aimed at providing tools to manage risk, promote price discovery, and foster the allocation of capital towards decarbonization efforts. The publication of this final guidance marks the culmination of over five years 1 of work with a diverse group of market participants, including agricultural stakeholders, ranchers, foresters, landowners, commercial end users, energy market stakeholders, emission-trading focused entities, carbon-credit rating agencies, crediting programs, CFTC-registered exchanges and clearinghouses, public interest groups, academics, and others. This guidance also represents a whole-ofgovernment approach in coordination with our partners across the U.S. federal complex. Each step has been intentional. I sponsored the Market Risk Advisory Committee’s Climate-Related Market Risk Subcommittee, which issued a first-of-its-kind report on Managing Climate Risk in the U.S. Financial System in September 2020, that identified pricing carbon as a fundamental element for financial markets to efficiently allocate capital to reduce greenhouse gas emissions (GHGs).2 I established the CFTC’s Climate Risk Unit in March 2021 to support the Commission’s building of subject matter expertise through external engagement, cooperation, and coordination regarding the role that climate-related derivatives play in pricing and managing climate-related financial risk.3 I hosted two Voluntary Carbon Markets Convenings in June 2022 and July 2023 to gather information from a wide variety of market participants to better understand the potential role of the official sector in these markets, particularly as we began to see the emergence of listed futures products that reference underlying VCC cash markets.4 The CFTC issued a Request for Information on Climate-Related Financial Risk in June 2022 that received 80 comments on ten priority areas of interest including VCMs and product innovation.5 The 1 See, e.g., CFTC, Event: Advisory Committee Meetings, CFTC’s Market Risk Advisory Committee to Meet June 12 to Discuss Climate-related Financial Risk (Jun. 12, 2019), https://www.cftc.gov/ PressRoom/Events/opaeventmrac051219. 2 Managing Climate Risk in the U.S. Financial System, Report to the CFTC’s Market Risk Advisory Committee by the Climate-Related Market Risk Subcommittee (Sept. 2020), https://www.cftc.gov/ sites/default/files/2020-09/9-9-20%20Report%20 of%20the%20Subcommittee%20on%20ClimateRelated%20Market%20Risk%20-%20Managing% 20Climate%20Risk%20in%20the%20U.S.%20 Financial%20System%20for%20posting.pdf. 3 See Press Release Number 8368–21, CFTC Acting Chairman Behnam Creates New Climate Risk Unit (Mar. 17, 2021), https://www.cftc.gov/ PressRoom/PressReleases/8368-21. 4 CFTC, Event: Commission Meetings, CFTC Announces Voluntary Carbon Markets Convening (Jun. 2, 2022), https://www.cftc.gov/PressRoom/ Events/opaeventcftccarbonmarketconvene060222; and CFTC, Event: Commission Meetings, CFTC Announces Second Voluntary Carbon Markets Convening, (July 19, 2023), https://www.cftc.gov/ PressRoom/Events/opaeventvoluntary carbonmarkets071923. 5 Request for Information on Climate-Related Financial Risk, 87 FR 34856 (Jun. 8, 2022), available at https://www.cftc.gov/sites/default/files/2022/06/ 2022-12302a.pdf. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 Commission then issued proposed guidance with a request for public comment in December 2023, that received over 85 comments,6 the majority of which generally supported the proposal. I have also testified before Congress on several occasions specifically on the role of financial markets in addressing the climate crisis and my views on the CFTC’s role in supporting marketbased solutions.7 The primary takeaway from this research, public engagement, and consultation is clear; the Commission should act, consistent with its statutory authority under the Commodity Exchange Act (CEA), to strengthen market integrity, transparency, and liquidity for derivatives with underlying voluntary carbon credits that are real, additional, permanent, verifiable, and each represent a unique metric ton of GHG emissions reduced or removed from the atmosphere. While VCC derivatives are a comparatively new and evolving class of products, Contract Markets must ensure that any listed derivatives comply with the CEA and Commission regulations. The guidance outlines factors that Contract Markets may consider in connection with the VCC derivative contract design and listing process including: Core Principle 3, which requires Contract Markets to list only contracts that are not readily susceptible to manipulation; Core Principle 4, which requires Contract Markets to have the capacity and responsibility to prevent manipulation, price distortion, and other market disruptions through market surveillance, compliance, and enforcement practices and procedures; the Commission’s regulations promulgated for these Core Principles; and the product submission provisions set forth in CEA section 5c(c) and part 40 of the Commission regulations. The guidance is not intended to modify or supersede existing statutory or regulatory requirements, or existing Commission guidance that addresses a Contract Market’s listing of derivative contracts, such as appendix C to part 38 of the Commission’s regulations. Instead, the guidance outlines VCC characteristics for a Contract Market to consider in connection with the contract design and listing process for VCC derivatives to address certain requirements under the CEA and the Commission’s rules. These voluntary carbon credit characteristics are: (i) transparency, 6 Proposed Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts and Request for Comment, 88 FR 89410 (Dec. 27, 2023), https://www.cftc.gov/sites/default/ files/2023/12/2023-28532a.pdf; See comment file available at https://comments.cftc.gov/Public Comments/CommentList.aspx?id=7463&ctl00_ ctl00_cphContentMain_MainContent_gvComment ListChangePage=1_50. 7 See, e.g., Rostin Behnam, Chairman, CFTC, Testimony by Chairman Rostin Behnam Before the Subcommittee on Agriculture, Rural Development, Food and Drug Administration and Related Agencies Committee on Appropriations, U.S. House of Representatives (Mar. 28, 2023), https:// www.cftc.gov/PressRoom/SpeechesTestimony/ opabehnam35; Rostin Behnam, CFTC, Testimony of Commissioner Rostin Behnam before the House Select Committee on the Climate Crisis (Oct. 1, 2020), https://www.cftc.gov/PressRoom/ SpeechesTestimony/opabehnam16. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 additionality, permanence and accounting for the risk of reversal, and robust quantification of emissions reductions or removals, for consideration when addressing quality standards; (ii) governance, tracking mechanisms, and measures to prevent double counting, for consideration when addressing delivery procedures; and (iii) third-party validation and verification, for consideration when addressing inspection or certification procedures. A Contract Market’s consideration of these characteristics in connection with the design of the contract and the listing process should promote accurate pricing, reduce susceptibility of the contract to manipulation, help prevent price distortions, and foster confidence in the voluntary carbon credit contracts. Consistent with the current statutory and regulatory requirements, Contract Markets would retain reasonable discretion to comply with the DCM Core Principles and the Commission’s regulations. This guidance is the product of a strong public-private partnership that I have strived to achieve with both the CFTC’s traditional stakeholders, as well as a variety of new stakeholders, including carbon market participants to support transparency, liquidity, market integrity, and ultimately scale in these markets. Today’s guidance outlines well-researched VCC commodity characteristics that build on several mature private sector and multilateral initiatives that have made great strides to strengthen VCC credit integrity standards through technical analysis, expertise, and broad coalition building. With the benefit of public comment, the CFTC’s final guidance specifically recognizes that private sector recognized standards for high-integrity VCCs can serve as tools for CFTC Contract Markets in connection with their consideration of the VCC commodity characteristics. Recognizing the global nature of derivatives markets, the VCC guidance complements the important work underway by the International Organization of Securities Commissions (IOSCO) through its Sustainable Finance Task Force’s Carbon Market Workstream, which I am leading with Verena Ross, the Chair of the European Securities and Market Authority. While this Commission guidance focuses on what Contract Markets may consider in designing and monitoring their proprietary listed VCC derivative contracts, IOSCO’s work over nearly three years has been focused on how regulators can promote sound market structure and enhance financial integrity in the VCMs so that high-quality carbon credits can be traded in an orderly and transparent way. IOSCO is hard at work reviewing the many helpful comments received in response to the December 2023 VCM Consultation Report. I am looking forward to the next deliverable of that workstream, which is expected later this year.8 The CFTC’s unique mission focused on risk mitigation and price discovery puts us on the front lines of the now global nexus 8 International Organization of Securities Commissions (IOSCO), CR06/2023 Voluntary Carbon Markets, Consultation Report (Dec. 2023), https://www.iosco.org/library/pubdocs/pdf/ IOSCOPD749.pdf. E:\FR\FM\15OCR5.SGM 15OCR5 Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / Rules and Regulations between financial markets and decarbonization efforts. Leveraging the CFTC’s personnel and expertise demonstrates our commitment to taking a thoughtful and deliberate step toward building a financial system that provides effective tools in achieving emission reductions. I thank my fellow commissioners for enabling the Commission to issue this final guidance. I greatly appreciate the expertise and the tremendous work done by staff in the Division of Market Oversight, the Office of the General Counsel, and in my office on this final guidance. Appendix 3—Dissenting Statement of Commissioner Summer K. Mersinger Today’s non-binding VCC 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 khammond on DSKJM1Z7X2PROD with RULES5 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. VerDate Sep<11>2014 19:08 Oct 11, 2024 Jkt 265001 ‘‘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 4 CFTC Announces Second Voluntary Carbon Markets Convening (July 19, 2023) available at: https://www.cftc.gov/PressRoom/Events/opaevent voluntarycarbonmarkets071923; 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 27. PO 00000 Frm 00031 Fmt 4701 Sfmt 9990 83407 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. [FR Doc. 2024–23105 Filed 10–11–24; 8:45 am] BILLING CODE 6351–01–P 6 VCC E:\FR\FM\15OCR5.SGM Guidance at page 39. 15OCR5

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 89, Number 199 (Tuesday, October 15, 2024)]
[Rules and Regulations]
[Pages 83378-83407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23105]



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Vol. 89

Tuesday,

No. 199

October 15, 2024

Part VI





 Commodity Futures Trading Commission





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17 CFR Part 38





Commission Guidance Regarding the Listing of Voluntary Carbon Credit 
Derivative Contracts; Final Rule

Federal Register / Vol. 89, No. 199 / Tuesday, October 15, 2024 / 
Rules and Regulations

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 38

RIN 3038-AF40


Commission Guidance Regarding the Listing of Voluntary Carbon 
Credit Derivative Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Final guidance.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') is issuing this guidance to outline factors for 
consideration by designated contract markets (``DCMs''), when 
addressing certain provisions of the Commodity Exchange Act (``CEA''), 
and CFTC regulations thereunder, that are relevant to the listing for 
trading of voluntary carbon credit (``VCC'') derivative contracts. The 
Commission recognizes that VCC derivatives are a comparatively new and 
evolving class of products, and believes that guidance that outlines 
factors for consideration by a DCM, in connection with the contract 
design and listing process, may help to advance the standardization of 
such products in a manner that promotes transparency and liquidity.

DATES: Issued on October 15, 2024.

FOR FURTHER INFORMATION CONTACT: Lillian A. Cardona, Assistant Chief 
Counsel, (202) 418-5012, [email protected]; Steven Benton, Industry 
Economist, (202) 418-5617, [email protected]; Samantha Li, Industry 
Economist, (202) 418-5622, [email protected], Nora Flood, Chief Counsel, 
(202) 418-6059, [email protected]; Division of Market Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581, or Julia Wood, Assistant Chief 
Counsel, (202) 853-4877, [email protected], Division of Market Oversight, 
Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800, 
Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. The Regulatory Framework for DCMs
    B. Voluntary Carbon Markets
    1. Overview of Voluntary Carbon Markets
    2. Initiatives To Promote Transparency, Integrity and 
Standardization in the Voluntary Carbon Markets
    C. The Commission and Voluntary Carbon Markets
    1. Derivative Contracts on Environmental Commodities, Including 
VCCs
    2. CFTC Initiatives Relating to Voluntary Carbon Markets
    D. Proposed Guidance Regarding the Listing of VCC Derivative 
Contracts
II. Comments on the Proposed Guidance
    A. Overview
    B. Specific Comments
    1. Scope and Application of Guidance
    2. A DCM Shall Only List Derivative Contracts That Are Not 
Readily Susceptible to Manipulation--VCC Commodity Characteristics
    3. A DCM Shall Monitor a Derivative Contract's Terms and 
Conditions as They Relate to the Underlying Commodity Market
    4. A DCM Must Satisfy the Product Submission Requirements Under 
Part 40 of the CFTC's Regulations and CEA Section 5c(c)
    5. Foreign Boards of Trade
III. Guidance Regarding the Listing of VCC Derivative Contracts
    A. A DCM Shall Only List Derivative Contracts That Are Not 
Readily Susceptible to Manipulation
    B. A DCM Shall Monitor a Derivative Contract's Terms and 
Conditions as They Relate to the Underlying Commodity Market
    C. A DCM Must Satisfy the Product Submission Requirements Under 
Part 40 of the CFTC's Regulations and CEA Section 5c(c)

I. Background

A. The Regulatory Framework for DCMs

    The CFTC's mission is to promote the integrity, resilience, and 
vibrancy of the U.S. derivatives markets through sound regulation.\1\ 
An independent agency of the U.S. Federal Government, the CFTC 
exercises the authorities granted to it under the CEA to promote market 
integrity, prevent price manipulation and other market disruptions, 
protect customer funds, and avoid systemic risk, while fostering 
responsible innovation and fair competition in the derivatives 
markets.\2\
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    \1\ CFTC Mission Statement, available at: https://www.cftc.gov/About/AboutTheCommission.
    \2\ See CEA section 3(b), 7 U.S.C. 5(b).
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    DCMs are CFTC-regulated exchanges that provide participants in the 
derivatives markets with the ability to execute or trade derivative 
contracts with one another.\3\ In order to obtain and maintain 
designation with the CFTC, DCMs must comply with statutory ``Core 
Principles'' that are set forth in the CEA,\4\ as well as applicable 
CFTC rules and regulations.\5\ The statutory Core Principles for DCMs 
reflect the important role that these exchanges play in promoting the 
integrity of derivatives markets. DCMs are self-regulatory 
organizations, and each DCM has Core Principle obligations to, among 
other things, establish and enforce rules for trading on the DCM; \6\ 
provide a competitive, open and efficient market for trading; \7\ and 
monitor trading activity.\8\ For example, DCM Core Principle 4 requires 
a DCM to have the capacity and responsibility to prevent manipulation, 
price distortion, and disruptions of the delivery or cash settlement 
process, through market surveillance, compliance, and enforcement 
practices and procedures.\9\ DCM Core Principle 5 requires a DCM to 
adopt for each contract that it lists for trading, as is necessary and 
appropriate, position limitations or position accountability for 
speculators, in order to reduce the potential threat of market 
manipulation or congestion, especially during trading in the delivery 
month.\10\ DCM Core Principle 12 requires a DCM to establish and 
enforce rules to protect markets and market participants from abusive

[[Page 83379]]

practices, and to promote fair and equitable trading on the DCM.\11\
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    \3\ See CEA section 1a(6), 7 U.S.C. 1a(6). (The term ``board of 
trade'' means any organized exchange or other trading facility); CEA 
section 1a(51)(A), 7 U.S.C. 1a(51)(A) (The term ``trading facility'' 
means a person or group of persons that constitutes, maintains, or 
provides a physical or electronic facility or system in which 
multiple participants have the ability to execute or trade 
agreements, contracts, or transactions-- (i) by accepting bids or 
offers made by other participants that are open to multiple 
participants in the facility or system; or (ii) through the 
interaction of multiple bids or multiple offers within a system with 
a pre-determined non-discretionary automated trade matching or 
execution algorithm); and CEA section 5(d)(1)(A), 7 U.S.C. 
7(d)(1)(A) (To be designated, and maintain a designation, as a 
contract market, a board of trade shall comply with--(i) any core 
principle described in this subsection; and (ii) any requirement 
that the Commission may impose by rule or regulation pursuant to CEA 
section 8a(5)).
    \4\ See, generally, CEA section 5(d), 7 U.S.C. 7(d). There are 
23 statutory Core Principles for DCMs.
    \5\ CEA section 5(d)(1)(A), 7 U.S.C. 7(d)(1)(A).
    \6\ DCM Core Principle 2 requires, among other things, that a 
DCM establish, monitor, and enforce compliance with the rules of the 
DCM, including access requirements, the terms and conditions of any 
contracts to be traded on the DCM, and rules prohibiting abusive 
trade practices on the DCM. DCM Core Principle 2 also requires a DCM 
to have the capacity to detect, investigate, and apply appropriate 
sanctions to any person that violates any rule of the DCM. CEA 
section 5(d)(2), 7 U.S.C. 7(d)(2). See also 17 CFR 38.150 through 
38.160. DCM Core Principle 13 requires that a DCM establish and 
enforce disciplinary procedures that authorize the DCM to 
discipline, suspend, or expel members or market participants that 
violate the DCM's rules. CEA section 5(d)(13), 7 U.S.C. 7(d)(13). 
See also 17 CFR 38.700 through 38.712.
    \7\ DCM Core Principle 9 requires, among other things, that a 
DCM provide a competitive, open, and efficient market and mechanism 
for executing transactions that protects the price discovery process 
of trading in the centralized market of the DCM. CEA section 
5(d)(9), 7 U.S.C. 7(d)(9). See also 17 CFR 38.500.
    \8\ See, e.g., DCM Core Principles 4, 5, and 12, discussed 
infra.
    \9\ CEA section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR 
38.250 through 38.258.
    \10\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5). See also 17 CFR 
38.300 through 38.301.
    \11\ CEA section 5(d)(12), 7 U.S.C. 7(d)(12). See also 17 CFR 
38.650 through 38.651.
---------------------------------------------------------------------------

    Additionally, each DCM has a specific statutory obligation, under 
DCM Core Principle 3, to only list for trading derivative contracts 
that are not readily susceptible to manipulation.\12\ As discussed in 
greater detail below, a DCM may elect to list a new derivative contract 
for trading either by certifying to the Commission that the contract 
complies with the CEA and CFTC regulations,\13\ or by seeking 
Commission approval of the contract.\14\ In either case, the DCM must 
submit the contract's terms and conditions, and other prescribed 
information relating to the contract, to the Commission prior to 
listing.\15\
---------------------------------------------------------------------------

    \12\ CEA section 5(d)(3), 7 U.S.C. 7(d)(3). See also 17 CFR 
38.200 through 38.201.
    \13\ CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1). See also 17 CFR 
40.2.
    \14\ CEA sections 5c(c)(4) through (5), 7 U.S.C. 7a-2(c)(4) 
through (5). See also 17 CFR 40.3.
    \15\ See, generally, 17 CFR 40.2 and 40.3. Amendments to 
contract terms and conditions also must be submitted to the 
Commission in accordance with procedures set forth at CEA section 
5c(c), 7 U.S.C. 7a-2(c), and part 40 of the Commission's 
regulations.
---------------------------------------------------------------------------

    For a number of the statutory Core Principles for DCMs, the 
Commission has adopted rules that establish the manner in which a DCM 
must comply with the Core Principle.\16\ These implementing rules are 
set forth in part 38 of the Commission's regulations.\17\ The 
Commission has also adopted, in appendix B to part 38,\18\ guidance and 
acceptable practices for DCMs to consider with respect to certain of 
the Core Principles.\19\
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    \16\ Unless otherwise determined by the Commission by rule or 
regulation, a DCM has reasonable discretion in establishing the 
manner in which it complies with a Core Principle. CEA section 
5(d)(1)(B), 7 U.S.C. 7(d)(1)(B).
    \17\ 17 CFR part 38.
    \18\ 17 CFR part 38, appendix B.
    \19\ Guidance provides contextual information regarding a Core 
Principle, including important concerns which the Commission 
believes should be considered in complying with the Core Principle. 
The guidance for a DCM Core Principle is illustrative only of the 
types of matters that a DCM may address, and is not intended to be 
used as a mandatory checklist. Acceptable practices are more 
detailed examples of how a DCM may satisfy particular requirements 
of a DCM Core Principle. Similar to guidance, acceptable practices 
are for illustrative purposes only, and do not establish a mandatory 
means of Core Principle compliance. 17 CFR part 38, appendix B.
---------------------------------------------------------------------------

    With respect to the DCM Core Principle 3 requirement that a DCM 
only list for trading derivative contracts that are not readily 
susceptible to manipulation, the Commission has adopted guidance that 
is set forth in appendix C to part 38--Demonstration of Compliance That 
a Contract is Not Readily Susceptible to Manipulation (the ``Appendix C 
Guidance'').\20\ The Appendix C Guidance outlines certain relevant 
considerations for a DCM when designing a derivative contract, and 
providing supporting documentation and data in connection with the 
submission of the derivative contract to the Commission.\21\ The 
Commission takes the considerations outlined in the Appendix C Guidance 
into account when determining whether, with respect to the contract, 
the DCM is satisfying its DCM Core Principle 3 obligation only to list 
derivative contracts that are not readily susceptible to manipulation.
---------------------------------------------------------------------------

    \20\ See 17 CFR part 38, appendix C. Guidance set forth in 
appendix B to part 38 states that a DCM may use the Appendix C 
Guidance as guidance in meeting DCM Core Principle 3 for both new 
product listings and existing listed contracts. 17 CFR part 38, 
appendix B, Core Principle 3 Guidance.
    \21\ See Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36612 at 36632 (June 19, 2012). The Appendix 
C Guidance is also relevant to swap execution facilities (``SEFs''), 
another category of CFTC-regulated exchange that provides eligible 
contract participants with the ability to execute or trade 
derivative contracts that are swaps with one another. Like DCMs, 
SEFs are obligated by statute only to permit trading in contracts 
that are not readily susceptible to manipulation. See CEA section 
5h(f)(3), 7 U.S.C. 7b-3(f)(3); 17 CFR 37.301.
---------------------------------------------------------------------------

    Among other things, the Appendix C Guidance outlines, for both 
physically-settled and cash-settled derivative contracts, certain 
considerations in connection with the design of the contract's rules 
and terms and conditions.\22\ With respect to physically-settled 
derivative contracts, the Appendix C Guidance states, among other 
things, that the contract's terms and conditions should conform to the 
most common commercial practices and conditions in the cash market for 
the underlying commodity.\23\ The Appendix C Guidance also states that 
the contract's terms and conditions should be designed to avoid 
impediments to the delivery of the underlying commodity, so as to 
promote convergence between the price of the contract and the cash 
market value of the underlying commodity at the expiration of trading 
in the contract.\24\ The Appendix C Guidance outlines certain criteria 
for a DCM to consider addressing in the contract's terms and 
conditions,\25\ including contract size, the period for making and 
taking delivery under the contract, delivery points, quality standards 
for the underlying commodity, and inspection/certification procedures 
for verifying compliance with those quality standards or any other 
related delivery requirements under the contract.\26\
---------------------------------------------------------------------------

    \22\ Physically-settled derivative contracts are contracts that 
may settle directly into the commodity underlying the contract. If 
the holder of a position in a physically-settled derivative contract 
still has an open position at the expiration of trading in the 
contract, then the position holder must, in accordance with the 
rules for delivery set forth in the contract, make or take delivery 
(as applicable) of the underlying commodity. By contrast, cash-
settled derivative contracts are, at the expiration of trading in 
the contract, settled by way of a cash payment instead of physical 
delivery of the underlying commodity.
    \23\ Appendix C Guidance, paragraph (b)(1).
    \24\ Id.
    \25\ Appendix C Guidance, paragraph (b)(2)(1) (nothing that for 
physical delivery contracts, an acceptable specification of terms 
and conditions would include, but may not be limited to, rules that 
address, as appropriate, the following criteria).
    \26\ Appendix C Guidance, paragraph (b)(2).
---------------------------------------------------------------------------

    The criteria outlined in the Appendix C Guidance that relate to the 
quality and other attributes of the underlying commodity that would be 
delivered under a physically-settled derivative contract upon the 
expiration of trading, inform the pricing of the derivative contract. 
Addressing these criteria clearly in the derivative contract's terms 
and conditions, in a manner that reflects the individual 
characteristics of the underlying commodity, helps to ensure that 
trading in the derivative contract is based on accurate information 
about the underlying commodity. This, in turn, helps to promote 
accurate pricing and helps to reduce the susceptibility of the 
derivative contract to manipulation. Further, when a derivative 
contract's terms and conditions help to ensure that, upon delivery, the 
quality and other attributes of the underlying commodity will be as 
expected by position holders, this helps to prevent price distortions 
and fosters confidence in the contract that can incentivize trading and 
enhance liquidity.
    With respect to cash-settled derivative contracts, the Appendix C 
Guidance states that an acceptable specification of the cash settlement 
price would, among other things, include rules that fully describe the 
essential economic characteristics of the underlying commodity, as well 
as how the final settlement price is calculated.\27\ The Appendix C 
Guidance states that the utility of a cash-settled contract for risk 
management and price discovery purposes would be significantly impaired 
if the cash settlement price is not a reliable or robust indicator of 
the value of the underlying commodity.\28\ The Appendix C Guidance 
states that, accordingly, careful consideration should be given to the 
potential for manipulation or distortion of the cash settlement price, 
as well as the reliability of that price as an indicator

[[Page 83380]]

of cash market values.\29\ Appropriate consideration also should be 
given to the commercial acceptability, public availability, and 
timeliness of the price series that is used to calculate the cash 
settlement price.\30\
---------------------------------------------------------------------------

    \27\ Appendix C Guidance, paragraph (c)(1).
    \28\ Appendix C Guidance, paragraph (c)(2).
    \29\ Id.
    \30\ Id.
---------------------------------------------------------------------------

B. Voluntary Carbon Markets

1. Overview of Voluntary Carbon Markets
    As discussed further below, this final Commission guidance 
addresses an emerging class of climate-related derivative contracts 
listed for trading by DCMs, where the underlying commodity is a 
VCC.\31\
---------------------------------------------------------------------------

    \31\ This guidance uses the term ``voluntary carbon credits'' 
rather than ``verified carbon credits,'' since the guidance is 
focused on the quality and other attributes of the intangible 
commodity underlying a derivative contract. The Commission 
recognizes that market participants in the cash or secondary market 
for voluntary carbon credits may choose to use a set of standardized 
terms for the trading and retirement of ``verified carbon credits,'' 
as defined by the International Swaps and Derivatives Association 
(``ISDA''), in the market participants' physically-settled spot, 
forward or option transactions. See 2022 ISDA Verified Carbon Credit 
Transactions Definitions (``VCC Definitions'') Frequently Asked 
Questions, available at: 2022-ISDA-Verified-Carbon-Credit-
Transactions-Definitions-FAQs-061323.pdf.
---------------------------------------------------------------------------

    In addition to direct greenhouse gas (``GHG'') emissions reduction 
initiatives, market-based mechanisms, such as carbon markets,\32\ have 
developed to support emissions reduction efforts. A carbon market 
generally refers to an economic mechanism to support the buying and 
selling of environmental commodities \33\ that represent GHG emission 
reductions or removals from the atmosphere. Carbon markets are intended 
to harness market forces to incentivize carbon mitigation activities. 
Carbon markets generally fall into two categories: (i) mandatory (or 
compliance) markets, and (ii) voluntary carbon markets.
---------------------------------------------------------------------------

    \32\ While the term ``carbon'' is generally intended to also 
include other GHGs, such as methane, nitrous oxide, sulfur 
hexafluoride, hydro fluorocarbons and perfluorocarbons, most 
emissions trading involves emissions trading of carbon dioxide.
    \33\ An agreement, contract or transaction in an environmental 
commodity may qualify for the forward exclusion from the ``swap'' 
definition set forth in section 1a(47) of the CEA, 7 U.S.C. 1a(47), 
if the agreement, contract or transaction is intended to be 
physically-settled. For further discussion of the Commission's 
interpretation of whether agreements, contracts, or transactions in 
environmental commodities fall within the forward exclusion from the 
swap definition, see Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48208 
(August 13, 2012).
---------------------------------------------------------------------------

    Mandatory markets, such as cap-and-trade programs, emissions 
trading systems and allowance trading systems, are established and 
regulated by national, regional, or international governmental 
bodies.\34\ Entities subject to the requirements of a mandatory market 
generally must demonstrate compliance by directly reducing their 
emissions from their own operations or activities, or by purchasing 
eligible compliance credits representing emission reductions or 
removals achieved by others.
---------------------------------------------------------------------------

    \34\ See, for example, the United Nation's Clean Development 
Mechanism (``CDM''), the California Compliance Offset Program, the 
Regional Greenhouse Gas Initiative (``RGGI''), the Alberta Emission 
Offset System (``AEOS''), and the EU Emissions Trading System 
(``ETS'').
---------------------------------------------------------------------------

    Voluntary carbon markets are not established by any government 
body. They enable market participants to purchase, on a voluntary 
basis, carbon credits that upon retirement represent reductions or 
removals of GHG emissions. A voluntary carbon credit, or ``VCC,'' is a 
tradeable intangible instrument that is issued by a carbon crediting 
program (``crediting program'').\35\ The general industry standard is 
for a VCC to represent a GHG emissions reduction to, or removal from, 
the atmosphere equivalent to one metric ton of carbon dioxide.\36\
---------------------------------------------------------------------------

    \35\ See, e.g., The Integrity Council for the Voluntary Carbon 
Market Carbon Core Principles, Section 5 Definitions, available at: 
https://icvcm.org/wp-content/uploads/2023/07/CCP-Section-5-R2-FINAL-26Jul23.pdf.
    \36\ This is calculated as the difference in GHG emission 
reductions or removals from a baseline scenario, to the emission 
reductions or removals occurring under the carbon mitigation project 
or activity, with any adjustments for leakage. See The Integrity 
Council for the Voluntary Carbon Market Carbon Core Principles, 
Section 5 Definitions, available at: https://icvcm.org/wp-content/uploads/2023/07/CCP-Section-5-R2-FINAL-26Jul23.pdf.
---------------------------------------------------------------------------

    A participant in the voluntary carbon markets may purchase a VCC, 
representing an emissions reduction or removal by another party, to 
supplement emissions reductions or removals achieved from the 
participant's own operations or activities. Liquid and transparent 
markets in high-integrity VCCs may serve as a tool to facilitate 
emissions reduction efforts.\37\
---------------------------------------------------------------------------

    \37\ The Board of the International Organization of Securities 
Commissions (``IOSCO'') published, in November 2022, a Voluntary 
Carbon Markets consultation for public comment. The IOSCO 
consultation paper sought feedback on a potential approach that 
regulatory authorities and market participants could take to foster 
sound and well-functioning voluntary carbon market structure and, as 
a consequence, scale up these markets to allow them to achieve their 
environmental objectives. See, Voluntary Carbon Markets, Discussion 
Paper, CR/06/22, November 2022, available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD718.pdf. In December 2023, IOSCO 
published its Voluntary Carbon Markets Consultation Report, CR/06/
23, December 2023 (outlining a proposed set of good practices to 
promote the integrity and orderly functioning of voluntary carbon 
markets) available at: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD749pdf. See also, Voluntary Carbon Markets Joint Policy 
Statement and Principles (``Joint Policy Statement on Voluntary 
Carbon Markets''), U.S. Department of the Treasury, May 2024, 
available at: https://home.treasury.gov/system/files/136/VCM-Joint-Policy-Statement-and-Principles.pdf.
---------------------------------------------------------------------------

    The process by which VCCs are issued deserves careful 
consideration, as that process informs VCC quality and, by extension, 
the overall integrity and effective functioning of voluntary carbon 
markets. Generally, parties that play a role in the issuance of a VCC 
include: (1) the developer of a mitigation project or activity that is 
intended to reduce or remove GHG emissions from the atmosphere 
(``project developer''); (2) a crediting program that, among other 
things, issues VCCs for mitigation projects or activities that satisfy 
the crediting program's standards; \38\ and (3) an independent third 
party that verifies and validates the mitigation project or activity.
---------------------------------------------------------------------------

    \38\ Currently, the four main crediting programs in the 
voluntary carbon markets are the American Carbon Registry, the 
Climate Action Reserve, the Gold Standard and the Verified Carbon 
Standard.
---------------------------------------------------------------------------

    A project developer must first select the crediting program with 
which it seeks to certify its mitigation project or activity. The 
crediting program will certify the project or activity if it satisfies 
the crediting program's standards for issuing VCCs. A crediting program 
generally engages an independent third party to review project or 
activity documentation, including, among other things, to verify the 
accuracy of the estimated amount of emission reductions or removals 
that are expected to be associated with the project or activity, based 
on the project's or activity's baseline scenario \39\ and the crediting 
program's methodology or protocol for quantifying reduction or removal 
levels. The estimated emission reductions or removals serve as the 
basis for the determination of the number of VCCs to be issued for the 
project or activity.
---------------------------------------------------------------------------

    \39\ A baseline scenario is the predicted or assumed outcome in 
the absence of the incentives created by carbon credits, holding all 
other factors constant. See, e.g., The Integrity Council for the 
Voluntary Carbon Market, Core Carbon Principles Section 5: 
Definitions; January 2024, Version 2, at 104.
---------------------------------------------------------------------------

    Once the crediting program determines that the mitigation project 
or activity satisfies the crediting program's standards for issuing 
VCCs, the project or activity will be certified. The crediting program 
typically operates or makes use of a registry, which serves as a 
central repository for tracking certified mitigation projects or 
activities and their associated VCCs. Once registered, VCCs associated 
with a certified mitigation project or activity may be

[[Page 83381]]

bought and sold to end users (businesses or individuals) or to 
intermediaries such as brokers or aggregators that provide liquidity to 
voluntary carbon market participants.\40\
---------------------------------------------------------------------------

    \40\ Funding by investors for a mitigation project or activity 
could begin as early as the planning stage. Early investors may 
enter into agreements with a project developer for funding in 
exchange for discounted VCCs, if and when issued.
---------------------------------------------------------------------------

2. Initiatives To Promote Transparency, Integrity and Standardization 
in the Voluntary Carbon Markets
    As the voluntary carbon markets have continued to develop and 
mature, private sector and multilateral initiatives have sought to 
address certain issues--relevant to both the supply side (generation of 
VCCs from carbon mitigation projects or activities), and the demand 
side (businesses or individuals purchasing VCCs)--impacting the speed 
at which transparent, robustly traded markets for high-integrity VCCs 
are scaled.
    On the supply side, a key focus has been on the quality of VCCs, 
and particularly, whether they accurately represent the nature and 
level of GHG emission reductions or removals that they are intended to 
represent. Given the current absence of a standardized methodology or 
protocol to quantify emissions reduction or removal levels, there is a 
possibility that methodologies or protocols of differing degrees of 
robustness may calculate different reduction or removal impacts for two 
projects that are identical in type and size (or even for the same 
project). This could result in different amounts of carbon credits 
being issued for each project, despite their actual reduction or 
removal impact being the same. It may also create incentives for 
project developers to seek to apply the quantification protocol or 
methodology, or to seek to certify with the crediting program, that 
would result in the issuance of the most credits. Among other things, 
these possibilities create challenges for accurately pricing VCCs. 
Further, it can be difficult to discern the extent to which the price 
of any particular VCC reflects the price of one metric ton of carbon 
dioxide equivalent reduced or removed from the atmosphere, and the 
extent to which the price of the VCC reflects understandings or 
concerns relating to the mitigation project or activity for which the 
VCC was issued, or other aspects of the process for issuing the 
VCC.\41\
---------------------------------------------------------------------------

    \41\ Factors that may affect the price of VCCs issued for any 
particular mitigation project or activity may include the type of 
the project or activity, the geographic location of the project or 
activity, and the methodology or protocol used to measure the levels 
of emission reductions or removals associated with the project or 
activity. Types of carbon mitigation projects or activities for 
which VCCs are issued include renewable energy, industrial gas 
capture, energy efficiency, forestry initiatives (avoiding 
deforestation), regenerative agriculture, wind power, and biogas. 
The location of a mitigation project or activity may, for example, 
impact the cost of implementing and/or operating the project or 
activity. Mitigation projects and activities for which VCCs are 
issued are located in countries worldwide. See Berkeley Voluntary 
Registry Offsets Database, available at: https://gspp.berkeley.edu/research-and-impact/centers/cepp/projects/berkeley-carbon-trading-project/offsets-database.
---------------------------------------------------------------------------

    Challenges with respect to accurately ascertaining VCC quality, and 
associated pricing challenges,\42\ can erode confidence in voluntary 
carbon markets. Furthermore, opaque or inadequate calculation 
methodologies or protocols, which can obscure or mischaracterize the 
carbon impact of a mitigation project or activity, can undermine both 
the integrity and purpose of voluntary carbon markets.
---------------------------------------------------------------------------

    \42\ Observed trading of VCCs is not as readily transparent as 
for other financial instruments. Spot markets for VCCs are still 
largely bespoke, with buyers purchasing directly from project 
developers or via intermediaries. Some exchanges for trading VCCs 
have been established and are evolving. For example, the AirCarbon 
Exchange (https://acx.net/acx-singapore/), located in Singapore; 
Carbon Trade Exchange (https://ctxglobal.com/), located in the 
United Kingdom; and Xpansiv CBL (https://xpansiv.com/cbl/), located 
in the United States.
---------------------------------------------------------------------------

    On the demand side, concerns have been raised that, in connection 
with meeting their carbon mitigation goals, businesses or individuals 
may be utilizing low integrity VCCs which do not accurately reflect the 
nature or level of GHG emission reductions or removals that are 
associated with the projects or activities for which the VCCs have been 
issued.\43\ This can raise questions not only about the business's or 
individual's progress towards their carbon mitigation goals, but also 
about whether any claims related to those goals are misleading.\44\ 
Market participants that are purchasing VCCs to help meet their carbon 
mitigation goals may be focused largely or primarily on price, and also 
may not have ready access to all of the information that they need to 
make informed evaluations, and comparisons, of VCC quality. All of this 
may incentivize, intentionally or not, the purchase of lower quality 
VCCs. This may be facilitated by the opaque pricing of VCCs.
---------------------------------------------------------------------------

    \43\ See, e.g., Forbes, Carbon Neutral Claims Under 
Investigation In Greenwashing Probe (June 16, 2023), available at: 
https://www.forbes.com/sites/amynguyen/2023/06/16/carbon-neutral-claims-under-investigation-in-greenwashing-probe/?sh=2a6170466431.
    \44\ See, e.g., Federal Trade Commission, Guides for the Use of 
Environmental Marketing Claims, Regulatory Review Notice and Request 
for Public Comment, 87 FR 77766 (December 20, 2022) (Federal Trade 
Commission request for public comment on updating its Green Guides 
to include claims made regarding carbon offsets).
---------------------------------------------------------------------------

    Private sector and multilateral efforts have spearheaded the 
development of various initiatives to address the above challenges, and 
to promote transparency, integrity and standardization in the voluntary 
carbon markets. To support and promote VCC quality, these private 
sector and multilateral initiatives have focused on developing 
standards for high-integrity VCCs.\45\ Among other things, these 
standards are intended to help provide assurance that the VCCs that 
have been issued for a carbon mitigation project or activity accurately 
reflect the actual GHG emissions reduction or removal levels associated 
with that project or activity. These standards also generally highlight 
the importance of effective crediting program processes, procedures, 
and governance arrangements, in ensuring that a crediting program is 
issuing high-integrity VCCs.
---------------------------------------------------------------------------

    \45\ See, e.g., The Integrity Council for the Voluntary Carbon 
Market's Core Carbon Principles (July 2023), available at: https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL-26Jul23.pdf; 
the International Civil Aviation Organization's Carbon Offsetting 
and Reduction Scheme for International Aviation (``CORSIA'') (2023), 
available at: https://www.icao.int/environmental-protection/CORSIA/Pages/default.aspx; the G7 Principles of High Integrity Carbon 
Markets (2023), available at: https://www.meti.go.jp/information/g7hirosima/energy/pdf/Annex004.pdf. See also, Joint Policy Statement 
on Voluntary Carbon Markets, available at: https://home.treasury.gov/system/files/136/VCM-Joint-Policy-Statement-and-Principles.pdf.
---------------------------------------------------------------------------

    Standards that assist market participants in making informed 
evaluations, and comparisons, of VCC quality may promote accurate 
pricing and enhance confidence that the voluntary carbon markets can 
serve as a tool to assist in emissions reduction efforts. Such 
standards can thereby play a valuable role in supporting market 
transparency and liquidity, and the scaling of high-integrity voluntary 
carbon markets.
    Such standards may also support initiatives being developed to 
address concerns about the accuracy of claims made by purchasers of 
VCCs regarding the role that VCCs play in the purchasers' progress 
toward carbon mitigation goals.\46\ Such standards could serve as a 
foundation for criteria that purchasers of VCCs could

[[Page 83382]]

voluntarily adhere to, in order to demonstrate their commitment to 
using high-integrity VCCs to support their carbon mitigation goals, and 
to being transparent in their progress towards those goals.
---------------------------------------------------------------------------

    \46\ See, e.g., the World Wildlife Fund (``WWF''), Environmental 
Defense Fund (``EDF'') and Oeko-Institut's Carbon Credit Quality 
Initiative (https://carboncreditquality.org/); the Tropical Forest 
Credit Integrity Guide for Companies: Differentiating Tropical 
Forest Carbon Credit by Impact, Quality, and Scale (https://tfciguide.org/); and the Voluntary Carbon Markets Integrity 
Initiative's Claims Code of Practice (https://vcmintegrity.org/vcmi-claims-code-of-practice/).
---------------------------------------------------------------------------

C. The Commission and Voluntary Carbon Markets

1. Derivative Contracts on Environmental Commodities, Including VCCs
    Derivative contracts on environmental commodities have been trading 
on CFTC-regulated exchanges for decades. Derivative contracts on 
mandatory emissions program instruments have been trading since 2005, 
with GHG emissions-related instruments first listed for trading in 
2007.\47\ There are currently over 150 derivative contracts on 
mandatory emissions program instruments listed for trading on DCMs.\48\ 
As of August 2024, twenty-nine derivative contracts on voluntary carbon 
market products have been listed for trading by DCMs.\49\ Three of 
those contracts currently have open interest.\50\
---------------------------------------------------------------------------

    \47\ The Chicago Climate Futures Exchange (``CCFE'') listed a 
Sulfur Financial Instruments Current Vintage Delivery futures 
contract in 2005. In 2006, the New York Mercantile Exchange 
(``NYMEX'') listed a nitrogen oxide (``NOX'') Emissions 
Allowance futures contract. In 2007, CCFE listed the first Carbon 
Financial Instrument futures contract and other emission contracts. 
In 2008, NYMEX listed the first RGGI futures contract. In 2011, 
Green Exchange listed its European Union Allowance futures contract. 
In 2012, NYMEX listed its California Carbon Allowance futures 
contract. To date, there have been over 1,500 futures and options 
contracts on mandatory emissions program instruments listed for 
trading on various DCMs. The vast majority of these contracts are no 
longer listed for trading.
    \48\ Examples of derivatives contracts on mandatory emissions 
program instruments, such as renewable energy credits (``RECs'') and 
renewable fuel standards (``RFS''), that currently have open 
interest include: the ICE Futures US (``ICE US'') PJM Tri Qualified 
Renewable Energy Certificate Class I futures contract; the ICE US 
Texas Compliance Renewable Energy Certificate from CRS Listed 
Facilities Front Half Specific futures contract; the ICE US New 
Jersey Compliance Renewable Energy Certificate Class II futures 
contract; the Chicago Mercantile Exchange (``CME'') Ethanol T2 FOB 
Rotterdam Including Duty (Platts) futures contract; the ICE US 
Biofuel Outright--D4 RINS (OPIS) futures contract; the ICE US RGGI 
Vintage 2024 futures contract; and the ICE US California Carbon 
Allowance Current Auction futures contract.
    \49\ NYMEX lists the following physically-settled futures 
contracts on voluntary carbon market products: (1) the CBL Global 
Emissions Offset (GEO) futures contract; (2) the CBL Nature-Based 
Global Emissions Offset (N-GEO) futures contract; (3) the CBL Core 
Global Emissions Offset (C-GEO) futures contract; (4) the CBL 
Nature-Based Global Emissions Offset Trailing futures contract; and 
(5) the CBL Core Global Emissions Offset Trailing futures contract. 
Nodal Exchange (``Nodal'') lists the following physically-settled 
futures and options contracts on voluntary carbon market products: 
(1) Verified Emission Reduction--Nature-Based Vintage 2017 futures 
and options contracts; (2) Verified Emission Reduction--Nature-Based 
Vintage 2018 futures and options contracts; (3) Verified Emission 
Reduction--Nature-Based Vintage 2019 futures and options contracts; 
(4) Verified Emission Reduction--Nature-Based Vintage 2020 futures 
and options contracts; (5) Verified Emission Reduction--Nature-Based 
Vintage 2021 futures and options contracts; (6) Verified Emission 
Reduction--Nature-Based Vintage 2022 futures and options contracts; 
(7) Verified Emission Reduction--Nature-Based Vintage 2023 futures 
and options contracts; (8) Verified Emission Reduction--Nature-Based 
Vintage 2024 futures and options contracts; (9) Verified Emission 
Reduction--Nature-Based Vintage 2025 futures and options contracts; 
(10) Verified Emission Reduction--Nature-Based futures and options 
contracts; (11) Verified Emission Reduction--CORSIA-Eligible futures 
and options contracts; (12) Carbon Removal futures contract; and 
(13) Global Emission Reduction futures contract.
    \50\ The NYMEX CBL GEO futures contract; the NYMEX CBL N-GEO 
futures contract; and the NYMEX CBL C-GEO futures contract are 
currently the only futures contacts listed for trading on DCMs with 
open interest and trading volume. Information is available at: 
https://www.cmegroup.com/markets/energy/emissions/cbl-global-emissions-offset.volume.html.
---------------------------------------------------------------------------

    Physically-settled derivative contracts on VCCs base their price on 
the spot price of VCCs. If the holder of a position in a physically-
settled VCC derivative contract still has an open position at the 
expiration of trading in the contract, then the position holder must, 
in accordance with the rules for delivery set forth in the contract, 
make or take delivery (as applicable) of VCCs that meet the contract's 
rules for delivery eligibility.\51\
---------------------------------------------------------------------------

    \51\ For example, NYMEX's CBL Global Environmental Offset 
futures contracts, and Nodal's Verified Emission Reduction futures 
and options contracts, are physically-settled contracts. The NYMEX 
futures contracts permit VCCs to be delivered from the Verified 
Carbon Standard (``VCS'') Verra Registry, and the registries of the 
American Carbon Registry (``ACR''), and the Climate Action Reserve 
(``CAR''). The Nodal futures and options contracts permit VCCs to be 
delivered from VCS's Verra Registry and from the Gold Standard 
Impact Registry, as well as from the ACR registry for certain 
contracts.
---------------------------------------------------------------------------

2. CFTC Initiatives Relating to Voluntary Carbon Markets
i. First Voluntary Carbon Markets Convening
    In June 2022, Chairman Behnam held the first-ever Voluntary Carbon 
Markets Convening to discuss issues related to the supply of and demand 
for high-quality carbon credits, including product standardization and 
the data necessary to support the integrity of carbon credits' GHG 
emissions removal and reduction claims.\52\ A further goal of the 
convening was to gather information from a wide variety of participants 
in the voluntary carbon markets to better understand the potential role 
of the official sector in these markets, particularly in connection 
with the emergence of CFTC-regulated derivatives referencing VCCs. The 
convening included participants from carbon credit standard setting 
bodies, a crediting program, private sector integrity initiatives, spot 
platforms, DCMs, intermediaries, end-users, public interest groups, and 
others.
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    \52\ For the official announcement of the convening and related 
materials, see CFTC Announces Voluntary Carbon Markets Convening, 
available at: https://www.cftc.gov/PressRoom/Events/opaeventcftccarbonmarketconvene060222.
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ii. Commission Request for Information
    In June 2022, the Commission issued for public comment a Request 
for Information (``RFI on Climate-Related Financial Risk'') \53\ in 
order to better inform the Commission on how, consistent with its 
statutory authority, to address climate-related financial risk as 
pertinent to the derivatives markets and underlying commodities 
markets.\54\
---------------------------------------------------------------------------

    \53\ Request for Information on Climate-Related Financial Risk, 
87 FR 34856 (June 8, 2022) (``RFI on Climate-Related Financial 
Risk'').
    \54\ In addition to soliciting public feedback on all aspects of 
climate-related financial risk as it may pertain to the derivatives 
markets, underlying commodities markets, registered entities, 
registrants, and other related market participants, the RFI on 
Climate-Related Financial Risk requested feedback on specific 
questions relating to: (1) Data, (2) Scenario Analysis and Stress 
Testing, (3) Risk Management, (4) Disclosure, (5) Product 
Innovation, (6) Voluntary Carbon Markets, (7) Digital Assets, (8) 
Financially Vulnerable Communities, (9) Public-Private Partnerships/
Engagement, and (10) Capacity Coordination. The RFI on Climate-
Related Financial Risk stated that the Commission may use 
information provided in response to the RFI on Climate-Related 
Financial Risk to inform potential future actions including, but not 
limited to, the issuance of new or amended guidance, 
interpretations, policy statements, or regulations, or other 
potential Commission action. Id.
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    The responsive comments that the Commission received included 
feedback on specific questions relating to product innovation and 
voluntary carbon markets.\55\ Several commenters expressed support for 
the Commission to take steps that could support transparency and 
confidence in the

[[Page 83383]]

voluntary carbon markets, particularly through recognition or support 
of private sector and multilateral initiatives to promote 
standardization and integrity.\56\ In connection with product 
innovation, certain commenters expressed the view that the Commission's 
current statutory framework and regulations are sufficient to regulate 
voluntary carbon market derivatives products.\57\ While there were 
comments expressing different views on the reach of the Commission's 
jurisdiction to regulate voluntary carbon markets,\58\ many commenters 
supported the Commission utilizing its spot market anti-fraud and anti-
manipulation authority in the voluntary carbon market space.\59\
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    \55\ Twenty-five commenters on the RFI on Climate-Related 
Financial Risk responded to questions regarding product innovation 
and 44 commenters on the RFI on Climate-Related Financial Risk 
responded to questions regarding the voluntary carbon markets.
    \56\ See, e.g., International Swaps and Derivatives Association 
(``ISDA'') response to the RFI on Climate-Related Financial Risk, at 
6; American Petroleum Institute (``API'') response to the RFI on 
Climate-Related Financial Risk, at 4; Center for American Progress 
response to the RFI on Climate-Related Financial Risk, at 10; 
Environmental Defense Fund (``EDF'') response to the RFI on Climate-
Related Financial Risk, at 12; Futures Industry Association 
(``FIA'') response to the RFI on Climate-Related Financial Risk, at 
9; Intercontinental Exchange, Inc. (``ICE'') response to the RFI on 
Climate-Related Financial Risk, at 4.
    \57\ See, e.g., CME Group (``CME'') response to the RFI on 
Climate-Related Financial Risk, at 10, FIA response to the RFI on 
Climate-Related Financial Risk, at 3; ISDA response to the RFI on 
Climate-Related Financial Risk, at 7.
    \58\ See, e.g., Heritage Foundation response to the RFI on 
Climate-Related Financial Risk, at 7; API response to the RFI on 
Climate-Related Financial Risk, at 2-4; Commercial Energy Working 
Group (``CEWG'') response to the RFI on Climate-Related Financial 
Risk, at 2-3.
    \59\ See, e.g., API response to the RFI on Climate-Related 
Financial Risk, at 3; ISDA response to the RFI on Climate-Related 
Financial Risk, at 6; Verra response to the RFI on Climate-Related 
Financial Risk, at 2. With respect to the Commission's spot market 
anti-fraud and anti-manipulation authority, as well as its spot 
market authority with respect to false reporting, see, e.g., CEA 
section 6(c)(1), 7 U.S.C. 9(1), which among other things prohibits 
any person from using or employing, or attempting to use or employ, 
in connection with a contract for sale of any commodity in 
interstate commerce, any manipulative or deceptive device or 
contrivance, in contravention of rules and regulations promulgated 
by the Commission; CEA section 9(a)(2), 7 U.S.C. 13(a)(2), which 
among other things makes it a felony for any person to manipulate or 
attempt to manipulate the price of any commodity in interstate 
commerce; and implementing Commission rules at part 180 of the 
CFTC's regulations, 17 CFR part 180. In June 2023, the CFTC's 
Whistleblower Office issued an alert notifying the public about how 
to identify and report potential CEA violations connected to fraud 
or manipulation in the carbon markets. See CFTC Whistleblower Alert, 
available at: https://www.whistleblower.gov/sites/whistleblower/files/2023-06/06.20.23%20Carbon%20Markets%20WBO%20Alert.pdf. Also in 
June 2023, the CFTC's Division of Enforcement announced the creation 
of an Environmental Fraud Task Force to combat environmental fraud 
and misconduct. Specifically, the Task Force's mission is to address 
fraud and other misconduct in both the derivatives markets and the 
relevant spot markets (e.g., voluntary carbon markets) and to 
examine, among other things, fraud with respect to the purported 
environmental benefits of purchased carbon credits. See CFTC Release 
Number 8736-23 (``CFTC Division of Enforcement Creates Two New Task 
Forces''), available at: https://www.cftc.gov/PressRoom/PressReleases/8736-23.
---------------------------------------------------------------------------

iii. Second Voluntary Carbon Markets Convening
    In July 2023, Chairman Behnam held the Second Voluntary Carbon 
Markets Convening. The purpose of this convening was to discuss recent 
private sector initiatives for high quality carbon credits; current 
trends and developments in the cash and derivatives markets for carbon 
credits; public sector initiatives related to carbon markets; and 
market participants' perspectives on how the CFTC can promote integrity 
for high quality carbon credit derivatives.\60\
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    \60\ For the official announcement of the convening and related 
materials, see CFTC Announces Second Voluntary Carbon Markets 
Convening on July 19, available at: https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923.
---------------------------------------------------------------------------

D. Proposed Guidance Regarding the Listing of VCC Derivative Contracts

    On December 4, 2023, the Commission issued proposed guidance 
outlining factors for consideration by DCMs when addressing certain 
provisions of the CEA, and CFTC regulations thereunder, that are 
relevant to the listing for trading of VCC derivative contracts (the 
``Proposed Guidance'').\61\ In developing the Proposed Guidance, the 
Commission considered those public comments on the RFI on Climate-
Related Financial Risk that addressed product innovation and voluntary 
carbon markets. The Commission stated in the Proposed Guidance that, 
taking into account those public comments, it believed that guidance 
outlining factors for a DCM to consider in connection with the design 
and listing of VCC derivative contracts would further the mission of 
the CFTC, ``and may help to advance the standardization of VCC 
derivative contracts in a manner that fosters transparency and 
liquidity, accurate pricing, and market integrity.'' \62\
---------------------------------------------------------------------------

    \61\ Commission Guidance Regarding the Listing of Voluntary 
Carbon Credit Derivative Contracts; Request for Comment, 88 FR 89410 
(Dec. 27, 2023).
    \62\ Id. at 89416.
---------------------------------------------------------------------------

    With a focus, primarily, on the design and listing of physically-
settled VCC derivative contracts, the Proposed Guidance addressed 
certain Core Principle compliance considerations, as well as certain 
requirements relating to the submission of new contracts, and contract 
amendments, to the Commission. More specifically, the Proposed Guidance 
addressed certain considerations with respect to Core Principles 3 and 
4 for DCMs, and the contract submission provisions set forth in CEA 
section 5c(c) and part 40 of the Commission regulations.
    The Proposed Guidance addressed, first, the DCM Core Principle 3 
requirement that a DCM only list for trading derivative contracts that 
are not readily susceptible to manipulation.\63\ As discussed above, 
the Appendix C Guidance outlines certain relevant considerations for a 
DCM when developing a contract's terms and conditions, and providing 
supporting documentation and data in connection with the submission of 
the contract to the Commission. The Commission takes these 
considerations into account when determining whether, with respect to 
the contract, the DCM is satisfying its DCM Core Principle 3 
obligations.
---------------------------------------------------------------------------

    \63\ CEA section 5(d)(3), 7 U.S.C. 7(d)(3).
---------------------------------------------------------------------------

    In connection with a physically-settled derivative contract, the 
Appendix C Guidance states that the terms and conditions of the 
contract ``should describe or define all of the economically 
significant characteristics or attributes of the commodity underlying 
the contract.'' \64\ In the Proposed Guidance, the Commission noted 
that, among other things, failure to specify the economically 
significant attributes of the underlying commodity may cause confusion 
among market participants, who may expect a commodity of different 
quality, or with other features, to underlie the contract. This may 
render the precise nature of the commodity that the contract is pricing 
ambiguous, and make the contract susceptible to manipulation or price 
distortion.\65\
---------------------------------------------------------------------------

    \64\ Appendix C Guidance, paragraph (b)(2)(i)(A).
    \65\ 88 FR 89410 at 89416.
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    The Appendix C Guidance further states that, for any particular 
contract, the specific attributes of the underlying commodity that 
should be described or defined in the contract's terms and conditions 
``depend upon the individual characteristics of the commodity.'' \66\ 
The Commission stated in the Proposed Guidance that, in its view, the 
very fact that standardization and accountability mechanisms for VCCs 
are still developing is, itself, ``an individual characteristic of the 
commodity'' that a DCM should take into account when designing a VCC 
derivative contract and addressing the underlying commodity--the VCC--
in the contract's terms and conditions.\67\ The Commission additionally 
recognized in the Proposed Guidance that, while standardization and 
accountability mechanisms for VCCs are currently still being

[[Page 83384]]

developed, there are certain characteristics that have been identified 
broadly--across both mandatory and voluntary carbon markets--as helping 
to inform the integrity of carbon credits.\68\ The Commission 
identified what it preliminarily believed these characteristics to be--
referring to them, for purposes of the Proposed Guidance, as ``VCC 
commodity characteristics''--and stated that it believed that a DCM 
should take these VCC commodity characteristics into consideration when 
designing a physically-settled VCC derivative contract, and addressing 
in the contract's terms and conditions the underlying VCC.\69\
---------------------------------------------------------------------------

    \66\ Appendix C Guidance, paragraph (b)(2)(i)(A).
    \67\ 88 FR 89410 at 89416.
    \68\ Id.
    \69\ Id.
---------------------------------------------------------------------------

    The Proposed Guidance stated that, as a general matter, the 
Commission believed that a DCM should consider the VCC commodity 
characteristics when selecting one or more crediting programs from 
which eligible VCCs, meeting the contract's specifications, may be 
delivered at the contract's expiration.\70\ More specifically, the 
Commission stated that it preliminarily believed that a DCM should, at 
a minimum, consider the VCC commodity characteristics when addressing 
the following criteria in connection with contract design:
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    \70\ For additional clarity, the final guidance states that a 
DCM should consider the VCC commodity characteristics when selecting 
one or more crediting programs from which eligible VCCs, meeting the 
contract's specifications, may be delivered at the contract's 
``settlement,'' rather than expiration.

 Quality standards
 Delivery points and facilities
 Inspection provisions

    These are among the criteria identified in the Appendix C Guidance 
as criteria relating to the underlying commodity that a DCM should 
consider addressing in the terms and conditions of a physically-settled 
derivative contract.\71\ As discussed above, addressing these criteria 
clearly in the contract's terms and conditions, in a manner that 
reflects the underlying commodity's individual characteristics, helps 
to ensure that trading in the contract is based on accurate information 
about the underlying commodity. This, in turn, helps to promote 
accurate contract pricing and reduce the susceptibility of the contract 
to manipulation. Moreover, when a contract's terms and conditions help 
to ensure that, upon delivery, the quality and other attributes of the 
underlying commodity will be as expected by position holders, this 
helps to prevent price distortions and fosters confidence in the 
contract that can incentivize trading and enhance liquidity.
---------------------------------------------------------------------------

    \71\ Appendix C Guidance, paragraph (b)(2)(1) (noting that for 
physical delivery contracts, an acceptable specification of terms 
and conditions would include, but may not be limited to, rules that 
address, as appropriate, the following criteria).
---------------------------------------------------------------------------

    The Commission stated in the Proposed Guidance that, in connection 
with derivative contract design, it preliminarily believed that a DCM 
should consider the following VCC commodity characteristics when 
addressing quality standards for underlying VCCs: (a) transparency, (b) 
additionality, (c) permanence and accounting for the risk of reversal, 
and (d) robust quantification.\72\ When addressing delivery procedures 
for underlying VCCs, the Commission stated that it preliminarily 
believed that a DCM should consider the following VCC commodity 
characteristics: (a) governance, (b) tracking, and (c) no double 
counting.\73\ When addressing inspection or certification procedures 
for verifying compliance with quality requirements or any other related 
delivery requirements under the contract for underlying VCCs, the 
Commission stated that it preliminarily believed that a DCM should 
consider the validation and verification procedures of the crediting 
program.\74\
---------------------------------------------------------------------------

    \72\ 88 FR 89410 at 89417.
    \73\ Id. at 89418 and 89419.
    \74\ Id. at 89419.
---------------------------------------------------------------------------

    In addition to the above-described considerations in connection 
with DCM Core Principle 3, the Proposed Guidance also addressed 
considerations in connection with the requirement, under DCM Core 
Principle 4, for a DCM to prevent manipulation, price distortion, and 
disruptions of the physical delivery or cash-settlement process through 
market surveillance, compliance, and enforcement practices and 
procedures. The Commission stated that it preliminarily believed that 
the monitoring by a DCM of the terms and conditions of a VCC derivative 
contract, as contemplated under DCM Core Principle 4 and Commission 
regulations thereunder, should include continual monitoring of the 
appropriateness of the contract's terms and conditions that includes, 
among other things, monitoring to ensure that the delivery instrument--
that is, the underlying VCC--conforms or, where appropriate, updates to 
reflect the latest certification standard(s) applicable for that 
VCC.\75\
---------------------------------------------------------------------------

    \75\ Id. at 89420.
---------------------------------------------------------------------------

    Finally, the Proposed Guidance highlighted certain requirements in 
connection with the submission of a VCC derivative contract to the 
Commission pursuant to CEA section 5c(c)(5)(C) and part 40 of the 
Commission's regulations, and the Commission's expectation that 
information submitted to it by a DCM--including supporting 
documentation, evidence and data--to describe how the contract complies 
with the CEA and applicable Commission regulations, will be complete 
and thorough.\76\
---------------------------------------------------------------------------

    \76\ Id.
---------------------------------------------------------------------------

    The Proposed Guidance was subject to a 75-day public comment 
period. In addition to requesting comment on all aspects of the 
Proposed Guidance, the Commission requested comment on 17 specific 
questions relating to the listing of VCC derivative contracts. The 
public comment period closed on February 16, 2024. The Commission 
received approximately 90 comments on the Proposed Guidance, including 
the specific questions posed by the Commission. After thorough agency 
review of the comments received, the Commission has determined to 
finalize the Proposed Guidance with certain clarifications and 
revisions, as discussed below.

II. Comments on the Proposed Guidance

A. Overview

    Comments on the Proposed Guidance were submitted by a variety of 
interested parties, including derivatives exchanges, industry and trade 
associations, public interest organizations, climate advocacy groups, 
carbon credit rating agencies and standard setting bodies. Many 
commenters expressed their general support for the Proposed Guidance. 
For example, S&P Global Commodity Insights (``S&P Global'') stated that 
the Proposed Guidance correctly noted that outlining factors for a DCM 
to consider in connection with the design and listing of VCC 
derivatives may help the standardization of such products in a manner 
that promotes transparency and liquidity.\77\ Better Markets stated 
that ``the Proposed Guideline is a good step in establishing a fair, 
transparent, and efficient market for voluntary carbon credits.'' \78\ 
The Food, Agriculture Climate Alliance (``FACA'') stated that the 
``CFTC can play a role in promoting integrity and building confidence 
in high-quality carbon credits.'' \79\
---------------------------------------------------------------------------

    \77\ S&P Global at 2.
    \78\ Better Markets at 3.
    \79\ FACA at 2.
---------------------------------------------------------------------------

    A number of commenters were supportive of the VCC commodity 
characteristics identified in the Proposed Guidance, or confirmed that 
they are characteristics that have been identified broadly as helping 
to inform

[[Page 83385]]

the integrity of carbon credits.\80\ Certain commenters suggested 
additional characteristics that the Commission should recognize as 
helping to inform carbon credit integrity, or clarifications or 
revisions to the descriptions of the VCC commodity characteristics 
preliminarily identified by the Commission.\81\
---------------------------------------------------------------------------

    \80\ See, e.g., Anew Climate at 3; Bipartisan Policy Center 
(``BPC'') at 2; Woodwell Climate Research Center (``Woodwell'') at 
1; WWF at 1.
    \81\ See, e.g., Americans for Financial Reform Education Fund 
(``AFREF'') at 9; The American Forest & Paper Association 
(``AF&PA'') at 6; BeZero Inc. (``BeZero'') at 5; Clean Air Task 
Force (``CATF'') at 12-13; Carbon Direct Inc. (``Carbon Direct'') at 
2; California Climate Exchange at 1; Clean Energy Policy Institute 
(``CEPI'') at 3; Kita Earth Ltd. (``Kita'') at 1; Institute for 
Policy Integrity at NYU School of Law (``NYU Policy Integrity'') at 
6-7; Sylvera at 2.
---------------------------------------------------------------------------

    Some commenters raised concerns related to the integrity of the 
voluntary carbon markets more generally, discussing issues addressed at 
a high level in Section I.B.2 hereto. Some commenters encouraged the 
Commission to prescribe the specific attributes that a VCC must possess 
in order to be eligible to serve as the underlying for a VCC derivative 
contract.\82\ Other commenters encouraged the Commission to ensure that 
the guidance was clearly tailored to reflect DCM obligations and 
expertise.\83\ A number of commenters recommended that the Commission 
acknowledge industry-recognized standards for high-integrity VCCs as 
tools that DCMs could look to, or rely upon, when considering the VCC 
commodity characteristics in light of a particular crediting program or 
particular VCCs.\84\
---------------------------------------------------------------------------

    \82\ See, e.g., Business Alliance to Scale Climate Solutions 
(``BASCS'') at 1; EDF at 9; The Nature Conservancy (``TNC'') at 1; 
WWF at 1.
    \83\ See, e.g., Better Markets at 13; CEWG at 3.
    \84\ See, e.g., Center for Climate and Energy Solutions 
(``C2ES'') at 2; International Emissions Trading Association 
(``IETA'') at 2; ISDA at 2; Puro.earth Oy (``Puro'') at 2; Verra at 
7.
---------------------------------------------------------------------------

B. Specific Comments

1. Scope and Application of Guidance
    Feedback from certain commenters indicated that their understanding 
was that the Commission's guidance would establish new obligations for 
DCMs.\85\ The Commission emphasizes that its guidance does not 
establish new obligations for DCMs. The Commission's guidance is not 
intended to modify or supersede existing statutory or regulatory 
obligations, or existing Commission guidance that addresses the listing 
of derivative contracts by CFTC-regulated exchanges, including the 
Appendix C Guidance. Rather, in recognition that VCC derivative 
contracts are a comparatively new and evolving class of products \86\ 
which have certain unique attributes, as do voluntary carbon markets 
themselves, the Commission's guidance is intended to assist DCMs in 
addressing existing obligations, when designing and listing such VCC 
derivatives. For example, the guidance takes into account that 
standardization and accountability mechanisms for VCCs are currently 
still developing, and outlines how that may inform a DCM's contract 
design and listing considerations. A DCM's obligations remain those 
that are set forth in the CEA and the Commission's regulations, 
including (but not limited to) those statutory and regulatory 
requirements that are addressed in the Commission's guidance, such as 
the obligation under DCM Core Principle 3 for a DCM only to list for 
trading contracts that are not readily susceptible to manipulation.
---------------------------------------------------------------------------

    \85\ See, e.g., CME at 2; ICE at 4; Nodal at 2-5.
    \86\ In 2022, ISDA published a whitepaper providing background 
on the cash and derivatives markets for voluntary carbon credits. 
See Voluntary Carbon Markets: Analysis of Regulatory Oversight in 
the US. (2022), available at: https://www.isda.org/2022/06/02/voluntary-carbon-markets-analysis-of-regulatory-oversight-in-the-us/.
---------------------------------------------------------------------------

    Some commenters asserted that the existing contract listing 
framework for DCMs is both sufficient and appropriate for addressing 
the listing of VCC derivative contracts. For example, Nodal stated that 
it was not necessary for the Commission to adopt the Proposed Guidance 
because ``the existing DCM regulatory framework . . . already provides 
the appropriate requirements, guidance, and flexibility to manage the 
listing of VCC derivatives.'' \87\ Intercontinental Exchange (``ICE'') 
and CME similarly stated that the existing contract listing framework 
is effective, and already enables DCMs to develop contract terms and 
conditions that account for relevant market factors, and that are 
appropriately designed to the characteristics of the underlying 
asset.\88\ Both ICE and Nodal noted that the Appendix C Guidance does 
not address a specific underlying asset class, with ICE adding that the 
Appendix C Guidance ``does not mandate a set of criteria or attributes 
for any particular asset class.'' \89\ In this regard, the Commission 
reiterates that its guidance with respect to the listing of VCC 
derivative contracts is not intended to establish new obligations for 
DCMs, or modify or supersede existing statutory or regulatory 
requirements or the Appendix C Guidance. Rather, at this juncture in 
the evolution of VCC derivatives as a product class, and taking into 
account certain unique attributes of VCC derivatives and the voluntary 
carbon markets more generally,\90\ the Commission does believe that 
there is a benefit to outlining certain factors for consideration by a 
DCM in connection with the listing of VCC derivative contracts for 
trading. The guidance is intended as a tool for DCMs, to facilitate 
contract design, by helping to clarify how certain aspects of the 
existing contract listing framework may apply in the context of this 
particular class of products. The Commission believes that this can 
help to ensure that, upon delivery, the quality and other attributes of 
VCCs underlying a derivative contract will be as expected by position 
holders. The Commission believes that this, in turn, can support 
accurate pricing, help reduce the susceptibility of the contract to 
manipulation, and foster confidence in the contract that can enhance 
liquidity.
---------------------------------------------------------------------------

    \87\ Nodal at 2.
    \88\ See CME at 4; ICE at 5.
    \89\ ICE at 5; Nodal at 4.
    \90\ See supra, Sections I.B.1 and I.B.2.
---------------------------------------------------------------------------

    As discussed in more detail below, certain commenters expressed 
concern that the Proposed Guidance, if adopted, could obligate a DCM to 
independently confirm the sufficiency of a crediting program's policies 
and procedures for ensuring high-integrity VCCs--a responsibility 
which, these commenters asserted, extended beyond what was expected of 
DCMs under the existing contract listing framework and for which DCMs 
may not have the requisite expertise.\91\ For example, Nodal stated 
that while the existing contract listing framework contemplates 
consideration by a DCM of whether the commodities underlying a 
derivative contract are subject to quality standards, ``DCMs are not 
required to possess the expertise necessary to opine on the sufficiency 
of these standards.'' \92\ BPC stated that, given their role within 
financial markets, DCMs ``may not today have the in-house scientific or 
technical expertise needed to comprehensively evaluate'' \93\ carbon 
crediting programs. Likewise, Verra stated that performing an 
evaluation of VCC quality ``requires substantial specialized technical 
expertise that DCMs may not adequately possess or be reasonably 
expected to acquire, given their specific roles. . . .'' \94\ Verra 
observed that it was not realistic to expect a DCM, whose core 
competency is derivatives

[[Page 83386]]

markets, to develop the same level of expertise in the complexities of 
VCC issuance and certification as those that are directly involved in 
the voluntary carbon market infrastructure, such as standard setting 
bodies, crediting programs, and spot market participants.
---------------------------------------------------------------------------

    \91\ See, e.g., Ceres at 2-3; CME at 7; ICE at 10; IETA at 1; 
Nodal at 2; Public Citizen at 13; Terra Global Capital, LLC 
(``Terra'') at 6; Verra at 6; Xpansiv Limited (``Xpansiv'') at 4.
    \92\ Nodal at 2.
    \93\ BPC at 3.
    \94\ Verra at 2.
---------------------------------------------------------------------------

    Other commenters similarly identified standard setting bodies, 
crediting programs, and/or market participants, as best positioned to 
establish, or assess adherence with, VCC integrity standards.\95\ Some 
of these commenters suggested that a DCM's primary focus should be on 
whether the crediting program for underlying VCCs is making information 
about its policies and procedures, and the projects or activities that 
it credits, publicly available, to assist derivative market 
participants in making their own informed evaluations, and comparisons, 
of VCC quality. For example, CME expressed its belief that it is 
``preferable for the crediting program to publish its methodology . . . 
and for the market participants to render their own judgment.'' \96\ 
ICE stated that, while it is important for market participants to have 
sufficient information to make an informed decision about the quality 
of VCCs that may underlie a DCM contract, ``such information is best 
created by the crediting program and reviewed in the context of other 
information published by the program.'' \97\ CME asserted that the 
``lion's share'' of the criteria identified by the Commission as 
informing the integrity of a VCC is publicly available: ``As such, 
participants in the VCC derivatives markets are free to transact, or 
not, based on their assessment of the data points that matter to 
them.'' \98\
---------------------------------------------------------------------------

    \95\ See, e.g., Ceres at 2-3; CME at 7; IETA at 1-2; Terra at 6; 
Xpansiv at 4.
    \96\ CME at 7.
    \97\ ICE at 6.
    \98\ CME at 8.
---------------------------------------------------------------------------

    A number of commenters recommended an acknowledgment, in the 
Commission's guidance, that industry-recognized standards for high-
integrity VCCs are tools that may assist DCMs in their consideration, 
with respect to a particular crediting program, of the VCC commodity 
characteristics identified by the Commission in the guidance.\99\ For 
example, ICE noted that certain crediting program operators and their 
methodologies have been approved under standards set by private sector 
initiatives that have been subject to open consultation.\100\ ICE also 
noted the ongoing initiatives by the International Organization of 
Securities Commissions (``IOSCO'') to develop a set of good practices 
to promote the integrity and orderly functioning of voluntary carbon 
markets.\101\ ICE recommended that the Commission permit DCMs to 
reasonably rely on assurances by a crediting program or registry that 
adheres to, and is audited against, threshold standards for high-
quality carbon credits established by ``international organizations 
such as IOSCO, The Integrity Council for the Voluntary Carbon Market 
(``ICVCM''), and International Civil Aviation Organization (``ICAO''), 
or similar standard setting bodies.'' \102\ Verra similarly recommended 
that the Commission permit DCMs ``to rely on VCC certification and 
compliance set forth under relevant nongovernmental and governmental 
initiatives.'' \103\ Some commenters recommended that the Commission go 
so far as to require DCMs only to list VCC derivatives contracts whose 
underlying VCCs are approved or certified by an industry-recognized 
standards program for high-integrity VCCs.\104\
---------------------------------------------------------------------------

    \99\ See, e.g., C2ES at 2; ICE at 7; IETA at 2; Puro at 5; Verra 
at 7.
    \100\ ICE at 7.
    \101\ ICE at 8.
    \102\ ICE at 7.
    \103\ Verra at 7.
    \104\ See, e.g., Duke Financial Economics Center at 9; Puro at 
1; Terra at 2.
---------------------------------------------------------------------------

    In responding to the above-described comments the Commission first 
addresses the suggestion that a DCM's primary focus, when listing for 
trading a VCC derivative contract, should be on whether the crediting 
program for underlying VCCs is making information about the program 
publicly available. As discussed below, the Commission supports a DCM's 
consideration of whether the crediting program for underlying VCCs is 
making detailed information about its policies and procedures, and the 
projects or activities that it credits, publicly available in a 
searchable and comparable manner.\105\ The Commission believes that 
making such information publicly available can assist market 
participants in evaluating the substance and sufficiency of crediting 
program policies and procedures, and making informed evaluations and 
comparisons of VCC quality.
---------------------------------------------------------------------------

    \105\ See discussion of the VCC commodity characteristic of 
``Transparency,'' in section II.B.2.iii.1, infra.
---------------------------------------------------------------------------

    That said, DCMs do have statutory and regulatory obligations that 
are relevant to the design and listing for trading of derivative 
contracts, including an obligation under DCM Core Principle 3 to only 
list contracts that are not readily susceptible to manipulation. As 
discussed herein, the Appendix C Guidance outlines certain relevant 
considerations for DCMs in this regard, and the considerations that are 
outlined in the Appendix C Guidance are not limited to whether 
information regarding the commodity underlying a derivative contract is 
publicly available. For example, the Appendix C Guidance outlines 
certain criteria for a DCM to consider addressing in a derivative 
contract's terms and conditions, including quality standards for the 
underlying commodity, delivery points and facilities, and inspection/
certification procedures for verifying compliance with quality 
standards or related delivery requirements under the contract. This 
guidance discusses certain characteristics that have been identified 
broadly as helping to inform the integrity of carbon credits, and 
addresses how consideration of these characteristics may inform the 
manner in which a DCM addresses quality standards, delivery points and 
facilities, and inspection/certification procedures--again, criteria 
already identified in the Appendix C Guidance--in connection with the 
design of a VCC derivative contract. The Commission further believes 
that consideration of these characteristics will help a DCM ensure that 
it understands economically significant attributes of the commodity--
the VCC--underlying the contract.
    Notwithstanding the foregoing, and as more fully discussed below, 
the Commission has made certain revisions to this guidance to further 
ensure that the guidance appropriately reflects DCM obligations and 
expertise. Moreover, the Commission acknowledges the specialized, 
technical nature of crediting program policies, procedures, and 
technologies, as well as the fact that certain private sector and 
multilateral initiatives have engaged in extensive undertakings, 
involving public consultation, to develop standards for high-integrity 
VCCs against which such policies, procedures and methodologies can be 
assessed. The Commission is therefore clarifying its view that, as a 
general matter, industry-recognized standards for high-integrity VCCs 
can serve as tools for DCMs in connection with their consideration of 
the VCC commodity characteristics outlined in this guidance.
2. A DCM Shall Only List Derivative Contracts That Are Not Readily 
Susceptible to Manipulation--VCC Commodity Characteristics
i. General
    A number of commenters expressed their support for the VCC 
commodity

[[Page 83387]]

characteristics identified in the Proposed Guidance.\106\ For example, 
API stated that it ``supports the CFTC's reference to the broad core 
principles of additionality, permanence, robust quantification of 
emissions reductions and removals, no double counting, effective 
governance, tracking, transparency, and robust independent third-party 
validation and verification in the Guidance.'' \107\ Similarly, a 
number of commenters confirmed that the VCC commodity characteristics 
identified in the Proposed Guidance were recognized broadly as helping 
to inform the integrity of carbon credits.\108\ For example, BPC 
expressed agreement that the Proposed Guidance ``identifies appropriate 
VCC commodity characteristics that have also been part of the 
[voluntary carbon markets] literature and policy discourse for many 
years.'' \109\
---------------------------------------------------------------------------

    \106\ See, e.g., API at 2; Woodwell at 1; WWF at 1.
    \107\ API at 2.
    \108\ See, e.g., Carbon Direct at 2; Carbon Removal Alliance 
(``CRA'') at 2.
    \109\ BPC at 2.
---------------------------------------------------------------------------

ii. Social and Environmental Factors
    A number of commenters addressed the specific questions posed by 
the Commission in the Proposed Guidance, regarding whether, in addition 
to the VCC commodity characteristics preliminarily identified by the 
Commission, there were other characteristics informing the integrity of 
carbon credits that were relevant to the listing of VCC derivative 
contracts--or whether there were VCC commodity characteristics that 
were identified in the Proposed Guidance that were not relevant to the 
listing of VCC derivative contracts. In response to these questions, 
several commenters responded that the Commission should recognize the 
social and environmental impacts of a mitigation project or activity, 
beyond the project or activity's GHG reduction or removal benefits, as 
characteristics that inform the integrity of the carbon credits issued 
with respect to such project or activity.\110\ For example, Carbon 
Direct stated that it considered avoidance of negative impact on 
economic, social, and environmental systems, maximization of benefits 
to local communities and ecosystems, and environmental justice 
(equitable distribution of environmental benefits and harms resulting 
from GHG removal projects) as characteristics that are ``essential to 
evaluating the quality of a VCC.'' \111\ WWF recommended that the 
Commission recognize a VCC commodity characteristic that explicitly 
addresses project safeguards,\112\ stating that such safeguards ``are 
common attributes of high integrity development projects and should be 
included so that communities and surrounding ecology are not negatively 
impacted. . . .'' \113\ TNC and ICVCM suggested that the Commission 
should further align its guidance with ICVCM's Core Carbon Principles 
by also including considerations with respect to social and 
environmental safeguards, as well as net zero alignment.\114\ BASCS and 
EDF also encouraged the Commission to consider guidance in this area 
that aligned with the ICVCM's Core Carbon Principles.\115\
---------------------------------------------------------------------------

    \110\ See, e.g., aDryada at 1; BASCS at 1; BCarbon Inc 
(``BCarbon'') at 3; Carbon Direct at 2; EDF at 9; ICVCM at 6; Terra 
at 7; TNC at 1; WWF at 1.
    \111\ Carbon Direct at 2.
    \112\ Project safeguards are policies, standards and operational 
procedures designed to identify, avoid and mitigate adverse 
environmental and social impacts that may arise in connection with a 
carbon mitigation project or activity.
    \113\ WWF at 1.
    \114\ ICVCM at 6; TNC at 1.
    \115\ BASCS at 5-6; EDF at 9.
---------------------------------------------------------------------------

    Similarly, the majority of commenters responding to a specific 
question on this matter in the Proposed Guidance expressed support for 
the consideration by a DCM, when designing a VCC derivative contract, 
of 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 GHG 
emissions, technologies or carbon intensive practices that are 
incompatible with the objective of achieving net zero GHG emissions by 
2050.\116\
---------------------------------------------------------------------------

    \116\ See, e.g., AFF at 4-5; BASCS at 5-6; C2ES at 9; Flow 
Carbon at 5-6; TNC at 4; WWF at 1.
---------------------------------------------------------------------------

    Several commenters stated that there was an association between the 
social and/or environmental impacts of a mitigation project or 
activity, and the price of the related VCCs. EDF asserted that ``social 
safeguards . . . are economically significant attributes of the carbon 
credits. Sustainable development benefits and safeguards materially 
influence contract pricing, directly impact the extent to which the 
credit will be delivered and influence the political durability of 
those credits.'' \117\ TNC asserted that the social and environmental 
safeguards associated with a mitigation project or activity can 
significantly influence contract pricing, as projects infringing on the 
rights of local communities or adversely damaging ecosystems will be 
shunned by market stakeholders.'' \118\ ICVCM stated that ``verifiable 
social and environmental attributes beyond mitigation and credit 
revenues are generally perceived by buyers as increasing the quality of 
credits, driving higher market prices.'' \119\
---------------------------------------------------------------------------

    \117\ EDF at 9.
    \118\ TNC at 3.
    \119\ ICVCM at 10.
---------------------------------------------------------------------------

    Several commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives, 
and adherence by a crediting program to such standards, when 
considering the crediting program's measures with respect to social and 
environmental safeguards and/or net zero alignment. For example, TNC 
recommended that a DCM consider ``whether a crediting program has 
procedures that follow the recommendations of CORSIA's safeguard 
requirements,'' and whether the crediting program requires projects or 
activities to generate net positive social and environmental 
outcomes.\120\
---------------------------------------------------------------------------

    \120\ TNC at 3.
---------------------------------------------------------------------------

    As noted above, TNC, as well as ICVCM, BASCS, and EDF, referenced 
the ICVCM's Core Carbon Principles as a standard to inform 
consideration of social and environmental safeguards and net zero 
alignment. Charm Industrial (``Charm'') and CRA, meanwhile suggested 
that a DCM consider whether a crediting program ensures that a 
mitigation project or activity complies with applicable U.S. 
regulations and legal requirements,\121\ and Forest Peoples Programme 
Amerindian Peoples Association Rainforest Foundation US (``Forest 
Peoples'') stated that a DCM should consider whether a crediting 
program has social safeguard requirements that align with the rights of 
indigenous persons under international law, such as the UN human rights 
treaties and the UN Declaration on the Rights of Indigenous 
Peoples.\122\
---------------------------------------------------------------------------

    \121\ See Charm at 5; CRA at 3.
    \122\ Forest Peoples at 5.
---------------------------------------------------------------------------

    A few commenters expressed concerns associated with the 
consideration, by a DCM, of a crediting program's measures with respect 
to social and environmental safeguards and/or net zero alignment. 
Iconoclast Industries, LLC (``Iconoclast'') stated that consideration 
of a crediting program's measures with respect to net zero alignment 
would ``make this a zero-sum game. Incremental steps should be 
acceptable and . . . the market will continue facilitating the 
evolution towards'' the 2050 goal.\123\ Terra similarly raised concerns 
regarding a DCM's consideration of whether a crediting program has 
measures with

[[Page 83388]]

respect to net zero alignment, and commented that ``the perfect has 
been the enemy of the good over many years.'' \124\
---------------------------------------------------------------------------

    \123\ Iconoclast at 5.
    \124\ Terra at 7.
---------------------------------------------------------------------------

    As discussed above, a number of commenters on the Proposed Guidance 
stated that a crediting program's measures with respect to social and 
environmental safeguards may have a bearing on how participants in the 
voluntary carbon markets evaluate the quality--and by extension the 
price--of the VCCs that are issued by the crediting program.\125\ Also 
as discussed above, addressing in a derivative contract's terms and 
conditions the quality of the underlying commodity that would be 
delivered upon physical settlement, can help to promote accurate 
pricing and reduce the susceptibility of the contract to 
manipulation.\126\
---------------------------------------------------------------------------

    \125\ While certain commenters disagreed that a DCM should 
consider such matters in connection with derivative contract design, 
their comments did not contradict those commenters who stated that 
market participants may recognize such matters as informing VCC 
quality.
    \126\ See section I.A, supra.
---------------------------------------------------------------------------

    After consideration of the comments received, the Commission agrees 
that a crediting program's measures with respect to social and 
environmental safeguards may be relevant to how market participants 
evaluate VCC quality. Accordingly, 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 GHG emissions, technologies or carbon intensive 
practices that are incompatible with the objective of achieving net 
zero GHG emissions by 2050. The Commission has determined to finalize 
its guidance accordingly. The Commission emphasizes, however, that it 
does not expect that a DCM will necessarily be evaluating the specifics 
of the crediting program's measures with respect to social and 
environmental safeguards and net zero alignment, and this guidance does 
not prescribe any such measures. The Commission is simply noting that, 
because such measures may be relevant to how market participants 
evaluate VCC quality, a DCM may decide to consider whether a crediting 
program has implemented such measures when addressing quality standards 
in connection with the design of a VCC derivative contract. The 
Commission believes that, as a general matter, industry-recognized 
standards for high-integrity VCCs, and whether a particular crediting 
program has been approved or certified as adhering to an industry-
recognized standard setting program, can serve as tools for a DCM, in 
connection with its consideration of the crediting program's measures 
with respect to social and environmental safeguards and net zero 
alignment.
iii. Quality
a. Transparency
    Commenters broadly agreed that DCMs should provide, in a VCC 
derivative contract's terms and conditions, information about the VCCs 
that are eligible for delivery under the contract, including 
information that readily specifies the crediting program(s) from which 
VCCs that are eligible for delivery under the contract may be 
issued.\127\ Ceres, ICE, and IETA agreed that the crediting programs 
for eligible VCCs should be identified in the contract's terms and 
conditions.\128\ Better Markets supported the inclusion of 
``comprehensive information about the eligible VCCs for delivery,'' and 
stated that such transparency would ensure that ``contract pricing 
represents the quality of the underlying VCCs.'' \129\
---------------------------------------------------------------------------

    \127\ See, e.g., ANSI National Accreditation Board (``ANAB'') at 
5; Better Markets at 8; CarbonPlan at 6-7; CATF at 8; Ceres at 3; 
CEWG at 11; Climeworks Corporation (``Climeworks'') at 3; Flow 
Carbon Inc. (``Flow Carbon'') at 3; IETA at 2; New York State 
Society of Certified Public Accountants (``NYSSCPA'') at 3; Xpansiv 
at 9.
    \128\ Ceres at 3; ICE at 6; IETA at 2.
    \129\ Better Markets at 8.
---------------------------------------------------------------------------

    Commenters also broadly agreed that DCMs should consider whether a 
crediting program for underlying VCCs is making information regarding 
the crediting program's policies and procedures, and the projects or 
activities that it credits, publicly available.\130\ For example, Anew 
Climate stated that ``a crucial component of high-quality VCCs is that 
the crediting program that issues those VCCs be transparent and make 
sufficient information about its projects and project activities 
publicly available.'' \131\
---------------------------------------------------------------------------

    \130\ See, e.g., Anew Climate at 4; Flow Carbon at 3; Sylvera at 
3-4.
    \131\ Anew Climate at 4.
---------------------------------------------------------------------------

    Certain commenters addressed the specific questions posed by the 
Commission in the Proposed Guidance, regarding whether there are 
criteria, factors or information that a DCM should take into account 
when considering and/or addressing in a VCC derivative contract's terms 
and conditions whether a crediting program is providing sufficient 
access to information about the projects or activities that it credits, 
and whether there is sufficient transparency about credited projects or 
activities.\132\ CarbonPlan stated that DCMs should consider whether 
``data about VCCs are shared under terms that support both public 
access and reuse.'' \133\ Isometric HQ Limited (``Isometric'') stated 
that crediting programs ``should be required to provide the highest 
degree of transparency possible (only excluding, where relevant, 
confidential information) in relation to all credits that they issue.'' 
\134\ ICE meanwhile, took the position that ``market participants, and 
not DCMs, are best placed to assess whether the information made 
available by a crediting program is sufficient and detailed in respect 
of the crediting program's policies and procedures and the projects or 
activities that it credits.'' \135\
---------------------------------------------------------------------------

    \132\ See, e.g., Anew Climate at 4; CarbonPlan at 6-7; CATF at 
8; Ceres at 3; Isometric at 3; Xpansiv at 9.
    \133\ CarbonPlan at 6-7.
    \134\ Isometric at 3.
    \135\ ICE at 6.
---------------------------------------------------------------------------

    Some commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives, 
when considering a crediting program's transparency measures.\136\ For 
example, C2ES and ICVCM referenced ICVCM's standards with respect to 
transparency, particularly the requirement under the ICVCM Core Carbon 
Principle Assessment Framework that a crediting program ``make all 
information about the projects and its project rules public.'' \137\ 
Berkeley and Sylvera, meanwhile, referred to California Assembly Bill 
1305, the ``Voluntary Market Disclosures Business Regulation Act,'' 
which requires a business entity that is marketing or selling VCCs 
within the state to publicly disclose, among other things, specific 
details regarding the mitigation project in respect of which the VCCs 
are generated, as well as ``[t]he pertinent data and calculation 
methods needed to independently reproduce and verify the number of 
emissions reduction or removal credits issued'' for the project.\138\ 
Flow Carbon similarly suggested that publicly available project 
information should be sufficient to allow a buyer or third party to 
verify the accuracy of the claimed emission reductions.\139\
---------------------------------------------------------------------------

    \136\ See, e.g., ANAB at 5; Berkeley Carbon Trading Project 
(``Berkeley'') at 5; C2ES at 5; EDF at 6; ICVCM at 7; Sylvera at 3-
4.
    \137\ C2ES at 5; ICVCM at 7.
    \138\ Berkeley at 5; Sylvera at 3-4.
    \139\ Flow Carbon at 3.

---------------------------------------------------------------------------

[[Page 83389]]

    Some commenters recommended that DCMs should provide project- or 
activity-level information in the terms and conditions of a VCC 
derivative contract.\140\ For example, CATF stated that access to 
information at the level of the individual project or activity is 
necessary because of the flexibility that is given to project 
developers regarding the quantification of credits. CATF thus 
recommended that the terms and conditions for a VCC derivative contract 
provide buyers with access to specific information about how a 
crediting program's protocols are implemented for a given project or 
activity, including ``baseline scenario assumptions and quantification 
metrics. . . , verification reports, annual reports, risk rating and 
justification, and the location of projects.'' \141\ ICE, meanwhile, 
stated that while a VCC derivative contract ``will have to identify 
clearly what is and is not deliverable under it . . . details as to the 
specific types of projects or activities for which [a crediting 
program] issues credits are made publicly available by the crediting 
programs on their websites and through their registries,'' where they 
can be reviewed and assessed by market participants.\142\
---------------------------------------------------------------------------

    \140\ See, e.g., CATF at 8; Ceres at 3; Isometric at 3; Terra at 
4.
    \141\ CATF at 8.
    \142\ ICE at 6.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to transparency as 
proposed, with certain revisions. The Commission continues to believe 
that a DCM should provide, in the terms and conditions of a VCC 
derivative contract, information about the VCCs that are eligible for 
delivery under the contract.\143\ While the information that is 
provided about eligible VCCs need not be ``comprehensive''--for 
example, the terms and conditions would not necessarily have to 
identify each specific mitigation project or activity in respect of 
which VCCs that are eligible for delivery under the contract may be 
issued--the Commission agrees that the terms and conditions should make 
clear to market participants what is, and what is not, deliverable 
under the contract, including by providing information that readily 
specifies the crediting program, or programs, from which eligible VCCs 
may be issued.\144\ To the extent that eligible VCCs are associated 
with a specific category of mitigation project or activity--such as 
nature-based projects or activities--this also should be readily 
evident from the contract terms and conditions.\145\
---------------------------------------------------------------------------

    \143\ See 88 FR 89410 at 89417. See also 17 CFR 40.1(j)(1)(i) 
(defining the ``terms and conditions'' of, inter alia, a futures 
contract to include quality and other standards that define the 
commodity or instrument underlying the contract).
    \144\ Id.
    \145\ Id.
---------------------------------------------------------------------------

    Additionally, and after consideration of the comments received, the 
Commission continues to believe that, as part of the contract design 
process, a DCM should consider whether the crediting program for VCCs 
that are eligible for delivery under a derivative contract is making 
detailed information about the crediting program's policies and 
procedures, and the projects or activities that it credits, publicly 
available in a searchable and comparable manner.\146\ Where such 
information is made available by a crediting program, it can assist 
market participants in making informed evaluations, and comparisons, of 
the quality of the VCCs that underlie derivative contracts, which can 
help to support accurate pricing.
---------------------------------------------------------------------------

    \146\ 88 FR 89410 at 89417.
---------------------------------------------------------------------------

    With respect to comments recommending that the terms and conditions 
of a VCC derivative contract should provide project- or activity-
specific information, the Commission reiterates that this guidance 
focuses on considerations for a DCM at the crediting program level. As 
detailed more fully herein, the Commission believes that the policies 
and procedures that a crediting program has in place, along with its 
governance framework, inform the quality and other attributes of the 
VCCs that the crediting program issues. The Commission does not expect 
that a DCM will necessarily be considering the specific mitigation 
projects or activities for which eligible VCCs may be issued; the 
Commission expects that the DCM's focus will be on its consideration of 
the crediting program itself. Nor, as discussed above, does the 
Commission expect that information regarding the specific mitigation 
projects or activities for which eligible VCCs may be issued would 
necessarily be included in the terms and conditions of a VCC derivative 
contract. The Commission's view in this regard is predicated, however, 
on its view that the contract's terms and conditions should include 
information that readily specifies the crediting program or programs 
from which eligible VCCs may be issued, so that market participants can 
evaluate the substance and sufficiency of project- and activity-level 
information that such crediting programs make publicly available.
    Likewise, while the Commission continues to believe that a DCM 
should consider a crediting program's policies and procedures for 
making program information (including mitigation project and activity 
information) publicly available, the Commission is persuaded by 
comments stating that information regarding such policies and 
procedures is not the type of information that typically would be 
included in a derivative contract's terms and conditions and has 
determined to revise its guidance accordingly.
    Finally, after taking into account comments received on the 
Proposed Guidance, the Commission clarifies its view that, as a general 
matter, industry-recognized standards for high-integrity VCCs, and 
whether a particular crediting program has been approved or certified 
as adhering to an industry-recognized standards setting program, can 
serve as tools for a DCM, in connection with its consideration of the 
crediting program's transparency measures.
b. Additionality
    In the Proposed Guidance, the Commission noted that additionality 
is viewed by many as a necessary element of a high quality VCC, and 
stated that it preliminarily believed that, as part of its contract 
design market research, a DCM should consider whether a crediting 
program can demonstrate that it has procedures in place to assess or 
test for additionality.\147\ The Commission preliminarily recognized 
VCCs as additional where they are credited for projects or activities 
that would not have been developed and implemented in the absence of 
the added monetary incentive created by the revenue from carbon 
credits. The Commission specifically requested comment on whether this 
was the appropriate way to characterize additionality for purposes of 
its guidance, and also specifically requested comment on whether there 
were particular criteria or factors that a DCM should take into account 
when considering whether the procedures that a crediting program has in 
place provide a reasonable assurance that GHG emission reductions or 
removals will be credited only if they are additional.\148\
---------------------------------------------------------------------------

    \147\ Id.
    \148\ Id.
---------------------------------------------------------------------------

    Commenters on the Proposed Guidance generally supported a DCM's 
consideration, as part of the contract design process, of whether a 
crediting program for underlying VCCs can demonstrate that it has in 
place

[[Page 83390]]

procedures to assess or test for additionality.\149\ Better Markets and 
Carbon Direct characterized additionality as a ``cornerstone'' of 
quality mitigation projects and their resulting carbon credits.\150\
---------------------------------------------------------------------------

    \149\ See, e.g., Scientists affiliated with: Wilkes Center for 
Climate Science & Policy, University of Utah; University of 
California, Santa Barbara; University of California, Irvine 
(``Affiliated Scientists'') at 1-2; American Forest Foundation 
(``AFF'') at 3; Anew Climate at 4; BASCS at 3; Berkeley at 5; Better 
Markets at 9; C2ES at 5-6; Carbon Direct at 3; Carbonplace UK Ltd. 
(``Carbonplace'') at 3; CEPI at 5; Ceres at 3-4; EcoBalance Global 
LLC (``Ecobalance'') at 2; Flow Carbon at 3-4; ICVCM at 7; Isometric 
at 3; Kita at 3; Nodal at 5; Sky Harvest at 10; Sylvera at 4; Terra 
at 5; Xpansiv at 9-10.
    \150\ Better Markets at 9; Carbon Direct at 3.
---------------------------------------------------------------------------

    However, some commenters raised concerns about recognizing 
additionality as a characteristic of a high-integrity VCC, due to 
challenges in evaluating and/or verifying this characteristic.\151\ The 
Center for International Environmental Law (``CIEL'') stated that 
``[t]he evaluation of whether or not a project is additional, or of 
whether a marginal ton of removed carbon dioxide is additional, will 
rarely be straightforward.'' \152\ Public Citizen similarly took the 
position that additionality ``is simply not possible to guarantee, 
ensure, or measure.'' \153\
---------------------------------------------------------------------------

    \151\ See, e.g., BCarbon at 2; CIEL at 17; Context Labs at 2; 
Harvard Business School, University of Oxford Blavatnik School of 
Government, Law School, Stanford Doerr School of Sustainability, and 
the E-liability Institute (``Harvard et al'') at 14; Iconoclast at 
4-6; Nori at 8; Public Citizen at 14; Simon Counsell at 3.
    \152\ CIEL at 17.
    \153\ Public Citizen at 14.
---------------------------------------------------------------------------

    With respect to whether there are particular criteria or factors 
that a DCM should take into account when considering a crediting 
program's procedures to assess or test for additionality, some 
commenters suggested that DCMs look to standards for high-integrity 
VCCs developed by private sector or multilateral initiatives.\154\ For 
example, Carbonplace suggested that DCMs should consider CORSIA 
standards, or third-party assessments of crediting programs by carbon 
credit ratings providers or under standards such as the ICVCM's Core 
Carbon Principles.\155\
---------------------------------------------------------------------------

    \154\ See, e.g., AFF at 3; Anew Climate at 4; BASCS at 3; 
Carbonplace at 3; CarbonPlan at 8; CEPI at 5; ICVCM at 7; Terra at 
5; Sylvera at 4.
    \155\ Carbonplace at 3.
---------------------------------------------------------------------------

    Meanwhile, ICE stated that, although it was reasonable for a DCM to 
consider whether a crediting program can demonstrate that it has 
procedures in place to assesses or test for additionality, ICE 
disagreed that DCMs should be required to assess whether those 
procedures are of sufficient rigor to provide a reasonable assurance 
that GHG emission reductions or removals are credited only if they are 
additional: ``This responsibility should be borne by the crediting 
program operators.'' \156\ CME likewise asserted that, while as a 
factual matter a DCM could confirm that procedures are in place to 
assess for additionality, ``it should not be expected to opine on the 
accuracy, robustness, or appropriateness of such procedures.'' \157\ 
Similarly, Nodal recommended that, if the Commission chose to finalize 
the Proposed Guidance, then the Commission should omit the reference to 
a DCM's consideration of whether a crediting program's procedures are 
``sufficiently rigorous and reliable'' to provide a reasonable 
assurance that GHG emission reductions or removals are credited only if 
they are additional.'' \158\
---------------------------------------------------------------------------

    \156\ ICE at 7.
    \157\ CME at 6.
    \158\ Nodal at 5.
---------------------------------------------------------------------------

    Several commenters supported how the Commission characterized 
additionality in the Proposed Guidance.\159\ CATF stated that ``there 
is broad consensus for defining additionality as demonstrating that the 
project or activity would not have taken place without the monetary 
incentive of a carbon credit, especially for voluntary carbon 
credits.'' \160\ Similarly, Xpansiv stated that the characterization of 
additionality in the Proposed Guidance was ``in line with the market 
consensus.'' \161\
---------------------------------------------------------------------------

    \159\ See, e.g., AFF at 3; Affiliated Scientists at 1-2; 
Berkeley at 5; Carbon Direct at 3-4; CATF at 9; C2ES at 6; ICVCM at 
7; Xpansiv at 10.
    \160\ CATF at 9.
    \161\ Xpansiv at 10.
---------------------------------------------------------------------------

    As noted above, the Commission specifically requested comment in 
the Proposed Guidance on whether another characterization of 
additionality would be more appropriate, such as characterizing 
additionality as the reduction or removal of GHG emissions resulting 
from projects or activities that are not already required by law, 
regulation, or any other legally binding mandate applicable in the 
project's or activity's jurisdiction.\162\ Some commenters supported 
characterizing additionality with reference to this ``regulatory test'' 
for ``legal'' additionality, as well as with reference to ``financial'' 
additionality.\163\ For example, AFREF stated that ``the Commission 
should add this regulatory test to its characterization of 
additionality.'' \164\ Meanwhile, Charm stated its view that legal 
additionality was implicit in the Commission's proposed 
characterization of additionality, but should be explicitly stated ``to 
ensure all projects meet both thresholds.'' \165\
---------------------------------------------------------------------------

    \162\ 88 FR 89410 at 89421.
    \163\ See, e.g., AFF at 3; AFREF at 10; Berkeley at 5; Carbon 
Direct at 4; CarbonPlan at 8; Charm at 3; CRA at 3-4; Natural 
Resources Defense Council at 8; NYSSCPA at 4; NYU Policy Integrity 
at 1, 5-6; Public Citizen at 14; Sky Harvest at 10; WWF at 1.
    \164\ AFREF at 10.
    \165\ Charm at 3.
---------------------------------------------------------------------------

    Several commenters did not support recognizing additionality based 
on the ``regulatory test.'' \166\ Affiliated Scientists stated that the 
regulatory test ``is a necessary, but wholly insufficient element of a 
robust definition of additionality.'' \167\ CATF stated that ``even 
where regulatory requirements focus on the legal minimum to determine 
additionality . . . demonstration of additionality requires a 
comparison to a conservative business-as usual scenario'' to provide a 
``comparison to a counterfactual without the revenue provided from the 
credit.'' \168\
---------------------------------------------------------------------------

    \166\ See, e.g., Affiliated Scientists at 1-2; CATF at 10; 
Institute for Agriculture and Trade Policy (``IATP'') at 21.
    \167\ Affiliated Scientists at 1-2.
    \168\ CATF at 10.
---------------------------------------------------------------------------

    Meanwhile, Ecosystem Services Market Consortium (``ESMC'') stated 
that projects with additionality features ``should be characterized as 
implemented in response to market incentives, and the definition should 
not extend beyond this market-incentives framework to incorporate 
emission reductions resulting from projects or activities that go 
above-and-beyond the letter of the law.'' \169\
---------------------------------------------------------------------------

    \169\ ESMC at 8.
---------------------------------------------------------------------------

    Some commenters suggested other alternatives to the Commission's 
proposed characterization of additionality.\170\ Ceres suggested that 
DCMs should consider a range of approaches for testing additionality 
and did not believe that the ``financial'' additionality described in 
the Proposed Guidance should be the only measure of additionality.\171\ 
Among other approaches, Ceres cited performance standards and barrier 
analysis.\172\ BeZero similarly believed that ``the additionality of a 
carbon project cannot and should not be assessed through a single 
lens--e.g., carbon accounting, financial or legal. Rather, a holistic 
analysis considering a range of factors is necessary.'' \173\ BCarbon 
expressed concern that ``[w]e see the continued conservation of 
thriving ecosystems as

[[Page 83391]]

essential to mitigation of climate change, yet the current form of 
additionality provides no mechanism for these activities to be 
financially valued.'' \174\ CATF, meanwhile, emphasized the need to 
take into account that the accepted meaning of the term additionality 
is likely to evolve.\175\ Similarly, Xpansiv stated that the 
characterization of additionality in the Commission's guidance should 
not be ``overly prescriptive to ensure DCMs are able to follow evolving 
VCC market developments, including revised or broadened definitions of 
key criteria.'' \176\ In that regard, CME noted that while there may be 
broad consensus that additionality is an important element of a high 
quality VCC, ``the question of how additionality is defined and 
calculated is a complex and nuanced issue and does not appear to have 
reached industry consensus.'' \177\ According to CME, neither the 
Commission nor DCMs should dictate the definition.\178\
---------------------------------------------------------------------------

    \170\ See, e.g., BCarbon at 2; BeZero at 6; CATF at 10; Ceres at 
3-4; Climeworks at 4; IATP at 21; Kita at 3; Sylvera at 4; TNC at 2.
    \171\ Ceres at 3-4.
    \172\ Ceres at 4.
    \173\ BeZero at 6.
    \174\ BCarbon at 2.
    \175\ CATF at 10.
    \176\ Xpansiv at 10.
    \177\ CME at 6.
    \178\ Id.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to additionality as 
proposed, with certain revisions. While the Commission appreciates that 
there may be some complexity involved in characterizing, and measuring, 
additionality, the comments on the Proposed Guidance support the 
Commission's observation that additionality is broadly understood to be 
a ``cornerstone'' characteristic of a high quality VCC. If holders of 
positions in a VCC derivative contract understand and intend for VCCs 
that are eligible for delivery under the contract to be additional, but 
in fact they may not be, then the pricing of the derivative contract 
may not accurately reflect the quality of the VCCs that may be 
delivered under the contract. Thus, the Commission continues to believe 
that, as part of the contract design process, a DCM should consider 
whether a crediting program has procedures to assess or test for 
additionality--and whether those procedures provide a reasonable 
assurance that GHG emission reductions or removals are credited only if 
they are additional.
    The comments on the Proposed Guidance indicate, however, that there 
is variation across the voluntary carbon markets in how, precisely, 
additionality is characterized. For example, while some commenters on 
the Proposed Guidance supported the Commission's preliminary discussion 
of financial additionality, a number of commenters recommended other 
approaches, including performance standards, and approaches that 
addressed both financial additionality and legal additionality. The 
Commission further recognizes that as the voluntary carbon markets 
continue to develop, industry consensus on how to characterize 
additionality may evolve.
    Accordingly, the Commission has determined not to provide in its 
guidance a definition of additionality. Taking into account comments 
received on the Proposed Guidance, the Commission is clarifying its 
view that, as a general matter, industry-recognized standards for high-
integrity VCCs can serve as tools for a DCM, both in connection with 
its consideration of a particular crediting program's characterization 
of additionality, and in connection with the DCM's consideration of 
whether the crediting program's procedures to assess or test for 
additionality provide reasonable assurance that GHG emission reductions 
or removals will be credited only if they are additional, as so 
characterized.
    Further, the Commission is persuaded by comments stating that 
specific information regarding a crediting program's procedures for 
assessing or testing for additionality is not the type of information 
that typically would be included in a derivative contract's terms and 
conditions, and has determined to revise its guidance accordingly.
c. Permanence and Accounting for the Risk of Reversal
    A number of commenters on the Proposed Guidance supported a DCM's 
consideration, as part of the contract design process, of whether a 
crediting program for VCCs that are eligible for delivery under the 
contract has measures in place to address and account for the risk of 
reversal.\179\ However, certain commenters expressed concern about a 
DCM's capacity and responsibility to assess the sufficiency of the 
crediting program's measures in this regard. For example, Nodal 
recommended that, if the Commission finalized its guidance, the 
Commission should omit reference to a DCM's consideration of whether 
the crediting program's measures provide reasonable assurance that, in 
the event of a reversal, an underlying VCC will be replaced by a VCC of 
comparably high quality that meets the contemplated specifications of 
the contract,\180\ arguing that the Commission would otherwise be 
asking DCMs ``to evaluate the sufficiency of VCC quality standards, 
which are normally addressed by the underlying markets.'' \181\ 
BCarbon, meanwhile, stated that it would be helpful for the Commission 
to elaborate on what constitutes a ``similar'' VCC for purposes of 
replacement.\182\
---------------------------------------------------------------------------

    \179\ See, e.g., aDryada at 1; Anew Climate at 6; Better Markets 
at 9; BCarbon at 2-3; Carbonplace at 4; Carbon Market Watch at 5; 
Ceres at 4-5; CEPI at 5; Emergent at 2; ESMC at 5; Isometric at 5; 
Kita at 3; NYSSCPA at 5; NYU Policy Integrity at 1; Sylvera at 5; 
Terra at 6; TNC at 2; WWF at 1; Xpansiv at 11.
    \180\ Nodal at 5.
    \181\ Id.
    \182\ BCarbon at 2.
---------------------------------------------------------------------------

    The Commission specifically requested comment on whether there were 
criteria or factors that a DCM should take into account when 
considering a crediting program's measures to address reversal risk, 
particularly where the underlying VCCs are sourced from nature-based 
products or activities such as agriculture, forestry or other land use 
initiatives.\183\ Some commenters suggested that a DCM consider a 
crediting program's definition of ``permanence,'' as applied to 
mitigation projects or activities for which the crediting program 
issues VCCs, and the crediting program's transparency regarding that 
definition.\184\
---------------------------------------------------------------------------

    \183\ 88 FR 89410 at 89421.
    \184\ See, e.g., aDryada at 1; Anew Climate at 5; Carbon Market 
Watch at 5; CRA at 4; C2ES at 6; NYSSCPA at 5; Sylvera at 5; TNC at 
2.
---------------------------------------------------------------------------

    A number of commenters explicitly supported consideration of 
whether a crediting program has a buffer ``pool'' or ``reserve'' in 
place to address the risk of reversal.\185\ Some commenters recommended 
that DCMs should consider the quality of the VCCs in a crediting 
program's buffer reserve.\186\ For example, Isometric suggested, one 
possibility would be to ensure that credits in the buffer reserve are 
derived from high-durability projects which themselves have a low risk 
of reversal, ``in order to partially mitigate cascading risk events 
that could overwhelm the buffer [reserves'] ability to compensate for 
reversals.'' \187\ Other commenters similarly suggested that DCMs 
consider whether a crediting program has mechanisms in place to account 
for the continuing sufficiency of the buffer

[[Page 83392]]

reserve.\188\ For example, Affiliated Scientists stated that ``DCMs 
should only accept carbon credits from crediting programs that have 
updated (and will continue to update as the science evolves) their 
buffer pools to reflect the latest science on disturbance risk to make 
such buffer pools sufficiently capitalized.'' \189\ Meanwhile, BCarbon 
stated that it was worth noting that buffer pools are not the only 
measure that exists for mitigation of reversal risk.\190\
---------------------------------------------------------------------------

    \185\ See, e.g., Ceres at 4; WWF at 1; Xpansiv at 10.
    \186\ See, e.g., Affiliated Scientists at 2; BCarbon at 2; CEPI 
at 5; Emergent at 2; Isometric at 4; Kita at 3.
    \187\ Isometric at 4.
    \188\ See, e.g., Affiliated Scientists at 2; Carbonplace at 4; 
CarbonPlan at 9; Charm at 4; Terra at 5; Sky Harvest at 11.
    \189\ Affiliated Scientists at 2.
    \190\ BCarbon at 2.
---------------------------------------------------------------------------

    Some commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives, 
and adherence by a crediting program to such standards, when 
considering the crediting program's measures to address and account for 
the risk of reversal.\191\ For example, Sylvera noted that ``industry 
initiatives such as IC-VCM have already developed quality frameworks 
that consider factors such as reversal risk,'' and encouraged 
Commission alignment with these frameworks.\192\
---------------------------------------------------------------------------

    \191\ See, e.g., Anew Climate at 5; CATF at 11; Carbonplace at 
4; CEPI at 6; Charm at 4; C2ES at 6; Ducks Unlimited, Inc. 
(``Ducks'') at 3; Emergent at 2; Flow Carbon at 4; Sylvera at 5; 
Terra at 6.
    \192\ Sylvera at 5.
---------------------------------------------------------------------------

    Some commenters noted specific issues or factors for consideration 
when VCCs underlying a derivative contract are sourced from nature-
based mitigation projects or activities, with many highlighting the 
heightened risk of reversal associated with such projects or 
activities.\193\ To provide more transparency regarding this risk, CATF 
recommended providing location-specific data that adjusts with risk 
assessments over time.\194\ Public Citizen stated that ``[d]ue to 
significant risk of reversal in the case of nature-based projects or 
activities, the DCM should either prohibit the listing of derivative 
contracts based on the same, or only list those whose underlying 
projects maintain a buffer pool equal to 100% of the carbon credit 
value.'' \195\
---------------------------------------------------------------------------

    \193\ See, e.g., CATF at 11; ESMC at 5; Public Citizen at 15; 
Simon Counsell at 4.
    \194\ CATF at 11. The CATF recommends adaptive risk ratings 
because climate change has the potential to impact carbon credits in 
certain localities.
    \195\ Public Citizen at 15.
---------------------------------------------------------------------------

    The Commission also specifically requested comment on how a DCM 
should account for a reversal, should one occur with respect to a VCC 
that is eligible for delivery under a derivative contract, and whether 
there are specific terms and conditions, or other rules that a DCM 
should consider including in a VCC derivative contract to account for 
reversal risk.\196\ Generally, commenters supported DCMs looking to the 
crediting program's measures for addressing a reversal.\197\ For 
example, Anew Climate stated that DCMs should rely on the requirements 
and procedures of the respective crediting program: ``The DCM should 
consider how the crediting program addresses avoidable and unavoidable 
reversals when they do occur and requirements related to buffer pool 
contributions.'' \198\
---------------------------------------------------------------------------

    \196\ 88 FR 89410 at 89421.
    \197\ See, e.g., aDryada at 1; Anew Climate at 6; BCarbon at 2-
3; Better Markets at 9; Carbonplace at 4; Carbon Market Watch at 5; 
CEPI at 5; Ceres at 4-5; ESMC at 5; Emergent at 2; Isometric at 5; 
Kita at 3; NYSSCPA at 5; NYU Policy Integrity at 1; Sylvera at 5; 
Terra at 6; TNC at 2; WWF at 1; Xpansiv at 11.
    \198\ Anew Climate at 5.
---------------------------------------------------------------------------

    Some commenters suggested that DCMs should design contracts in a 
manner that differentiates VCCs based on assessments of reversal 
risk.\199\ For example, Isometric stated that VCCs based on projects 
with higher risk of reversal should be identifiable and distinct from 
those VCCs based on projects with low or negligible risks of reversals: 
``This will enable more effective price discovery and better 
functioning markets.'' \200\ Meanwhile, IATP stated that ``[i]f we 
assume that reversals will become more frequent and severe'' due to an 
increase in extreme weather events, then ``DCMs should begin to account 
for the impact of reversals on VCC estimated deliverable supply and on 
the possibility of market disruption if uncompensated reversals become 
widespread.'' \201\
---------------------------------------------------------------------------

    \199\ See, e.g., BCarbon at 2; IATP at 22; Isometric at 4; Terra 
at 6.
    \200\ Isometric at 4.
    \201\ IATP at 22.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to permanence and 
accounting for reversal risk as proposed, with certain revisions. After 
considering the comments, the Commission continues to believe that, in 
connection with the design of a VCC derivative contract, a DCM should 
consider whether the crediting program for underlying VCCs has measures 
in place to address and account for the risk of reversal.\202\ Market 
participants that are utilizing physically-settled VCC derivative 
contracts to help meet their carbon mitigation goals have an interest 
in ensuring that, upon physical settlement, the underlying VCCs will 
actually reduce or remove the amount of emissions that they were 
intended to reduce or remove. Accordingly, the Commission believes that 
the risk of reversal--and the manner in which it is accounted for by a 
crediting program--is tied to the quality of the underlying VCCs and, 
by extension, to the pricing of the derivative contract.
---------------------------------------------------------------------------

    \202\ See 88 FR 89410 at 89417.
---------------------------------------------------------------------------

    The Commission believes that comments on the Proposed Guidance 
support the Commission's view that a DCM should consider whether a 
crediting program for underlying VCCs has a buffer reserve or other 
measures in place to address reversal risk \203\--as well as the 
Commission's view that relevant considerations with respect to a 
crediting program's buffer reserve could include whether the crediting 
program regularly reviews the methodology by which the size of its 
buffer reserve is calculated, and whether there is a mechanism in place 
to audit the continuing sufficiency of the buffer reserve. In response 
to comments received, the Commission clarifies that a crediting program 
may, now or in the future, have measures other than, or in addition to, 
a buffer reserve to address the risk of credited emissions reductions 
or removals being reversed; this guidance contemplates that a DCM 
should consider whether a crediting program has a buffer reserve and/or 
other measures in place to address such risk.\204\
---------------------------------------------------------------------------

    \203\ See id. at 89418.
    \204\ The Commission understands that each crediting program, 
and the registry that it operates or uses, may handle reversals in 
its own way. Measures to address reversals that do not involve the 
cancellation of credits in a buffer reserve may include limiting 
future sales of credits, cancelling unsold credits, or having 
affected projects procure credits from other projects to offset the 
reversal, among other measures.
---------------------------------------------------------------------------

    The Commission is also clarifying the statement, in the Proposed 
Guidance, that a DCM should consider whether a crediting program's 
buffer reserve or other measures provide reasonable assurance that, in 
the event of a reversal, the VCCs intended to underlie a derivative 
contract will be replaced by VCCs of comparably high quality that meet 
the contemplated specifications of the contract. The Commission 
understands that VCCs in a buffer reserve are generally drawn down and 
cancelled to compensate for reversals associated with a project or 
activity, rather than being drawn upon to replace VCCs issued for such 
project or activity, and has determined to clarify its guidance 
accordingly.
    Furthermore, in response to comments received, the Commission is

[[Page 83393]]

clarifying its view that, as a general matter, industry-recognized 
standards for high-integrity VCCs, and whether a particular crediting 
program has been approved or certified as adhering to an industry-
recognized standards setting program, can serve as tools for a DCM, in 
connection with its consideration of a crediting program's measures to 
address and account for the risk of reversal.
    While the Commission acknowledges comments stating that there is a 
heightened risk of reversal associated with nature-based mitigation 
projects and activities--including comments suggesting that VCCs issued 
for such projects or activities should not be permitted to underlie a 
derivative contract, or that derivative contracts should be designed in 
a manner that differentiates VCCs based on assessments of reversal 
risk--the Commission emphasizes that the purpose of this guidance is 
not for the Commission to make recommendations, or proscriptions, 
regarding the specific types of VCC derivative contracts that a DCM 
should list for trading. Rather, the guidance is intended to outline 
factors for the DCM, itself, to consider in connection with its 
contract design and listing activities, in order to help ensure that 
the DCM is complying with its statutory and regulatory obligations. The 
comments with respect to nature-based mitigation projects and 
activities do, however, underscore the Commission's view that a VCC 
derivative contract's terms and conditions should clearly identify what 
is deliverable under the contract--including by making it clear if 
eligible VCCs are associated with a specific category of mitigation 
projects or activities, such as nature-based products or activities. 
Transparency in this regard will help to make sure that market 
participants understand what VCCs can be expected to deliver under the 
contract, and to make an assessment of the VCCs' quality, which will 
help to support accurate pricing.
    The Commission is persuaded by comments stating that specific 
information regarding a crediting program's measures for estimating, 
monitoring, and addressing the risk of reversal is not the type of 
information that typically would be included in a derivative contract's 
terms and conditions, and has determined to revise its guidance 
accordingly.
d. Robust Quantification
    Commenters on the Proposed Guidance broadly agreed that the 
quantification methodologies or protocols used by a crediting program 
for calculating GHG reduction or removal levels help to inform the 
quality of VCCs issued by the crediting program.\205\ In the Proposed 
Guidance, the Commission stated that it preliminarily believed that, as 
part of its contract design market research, a DCM should consider the 
methodology or protocol used by a crediting program to calculate 
emission reduction or removals for VCCs underlying a derivative 
contract, and whether the crediting program can demonstrate that such 
methodology or protocol is robust, conservative, and transparent.\206\ 
The Commission specifically requested comment on whether there were 
particular criteria or factors that a DCM should take into account when 
considering, and/or addressing in a VCC derivative contract's terms or 
conditions, whether a crediting program applies a robust, conservative 
and transparent methodology or protocol.\207\ A number of commenters 
suggested criteria or factors.\208\
---------------------------------------------------------------------------

    \205\ See, e.g., Anew Climate at 6; BCarbon at 2-3; Carbon 
Market Watch at 1; Carbonplace at 4; CEPI at 6; Ceres at 4-5; CIEL 
at 11; Context Labs at 2; Iconoclast at 5; Isometric at 5; NYSSCPA 
at 5; NYU Policy Integrity at 1; Puro at 7-8; Terra at 6; Sylvera at 
5; Xpansiv at 11.
    \206\ 88 FR 89410 at 89418.
    \207\ Id. at 89421.
    \208\ See, e.g., Centre for Competition Policy at 4; CEPI at 6; 
Ceres at 3; Charm at 4; CIEL at 11; Context Labs at 2; Ducks at 4; 
Flow Carbon at 4; NYU Policy Integrity at 6; Sylvera at 3-4; TNC at 
3.
---------------------------------------------------------------------------

    CEPI and Ducks recommended that DCMs consider whether there are 
independent review procedures for a crediting program's quantification 
methodologies, such as a public consultation or peer review 
process.\209\ CEPI additionally recommended that DCMs consider whether 
a crediting program relies on scientific evidence to develop its 
quantification methodologies, and whether there are ``mechanisms for 
the periodic review and/or revision of the methodologies.'' \210\ 
Similarly, TNC stated that any quantification methodology should use 
baselines that are periodically reviewed.\211\ CIEL stated that, in 
order to enable transparency, a crediting program ``must make its 
methodology, and how it has been applied to individual projects, 
available to public scrutiny.'' \212\ Sylvera noted that robust 
quantification is only verifiable by third parties if there are 
sufficient disclosures by the project developers to allow third parties 
to check the accounting.\213\ NYU Policy Integrity and TNC believed 
that DCMs should consider ``leakage risk'' in quantification 
methodologies.\214\ Ceres cautioned against overly focusing on 
conservative accounting, which might lead to an underestimation of 
emission reductions or removals, and recommended balancing 
conservativeness with the ultimate goal of accuracy.\215\
---------------------------------------------------------------------------

    \209\ See CEPI at 6; Ducks at 4.
    \210\ CEPI at 6.
    \211\ TNC at 3.
    \212\ CIEL at 11.
    \213\ Sylvera at 3-4.
    \214\ See NYU Policy Integrity at 6; TNC at 3.
    \215\ Ceres at 3.
---------------------------------------------------------------------------

    Other commenters, meanwhile, raised concerns similar to those noted 
in Section I.B.2, regarding the lack of standardization across the 
voluntary carbon markets with respect to quantification methodologies 
and protocols, and how this may create issues with over-crediting and 
reliability.\216\ CEPI recommended that a crediting program have 
procedures in place to suspend or withdraw the use of a quantification 
methodology where there is sufficient evidence that the emission 
removals or reductions have been overstated.\217\
---------------------------------------------------------------------------

    \216\ See, e.g., CATF at 13; Center for American Progress at 4; 
Public Citizen at 13.
    \217\ CEPI at 6.
---------------------------------------------------------------------------

    Some commenters did recommend quantification standards,\218\ such 
as the International Organization for Standardization (``ISO'') 14060 
standards for quantifying, monitoring, reporting and validating GHG 
emissions,\219\ or the GHG Protocol.\220\ Certain commenters 
recommended that DCMs look to standards for high-integrity VCCs 
developed by private sector or multilateral initiatives, such as the 
robust quantification standards under the ICVCM's Core Carbon 
Principles (``CCP'') and CCP Assessment Framework, and adherence by a 
crediting program to such standards.\221\
---------------------------------------------------------------------------

    \218\ See, e.g., Carbonplace at 4; NYSSCPA at 5; Sylvera at 5; 
Terra at 6.
    \219\ See, e.g., Carbonplace at 4. Carbonplace suggested that at 
a minimum, DCMs focus on standards which are supported by ISO 
certification.
    \220\ See NYSSCPA at 5.
    \221\ See, e.g., BASCS at 4; Ceres at 4-5; C2ES at 6; Ducks at 
4; ICVCM at 8; Sylvera at 5.
---------------------------------------------------------------------------

    Other commenters expressed concern with the view that a DCM should 
consider whether a crediting program's quantification methodology or 
protocol is robust, conservative and transparent.\222\ ICE stated that 
expecting a DCM to engage in such an assessment would lead to 
unnecessary duplication of extensive, public consultation processes to 
which crediting program methodologies already are subject.\223\

[[Page 83394]]

Verra expressed concern that carrying out such an assessment would 
require a DCM to obtain specialized technical expertise about topics 
that are beyond its core competency in overseeing derivatives 
markets.\224\ Likewise, CME stated that it would be impractical for 
DCMs to develop the expertise to make such an assessment of a crediting 
program's quantification methodology or protocol, and stated that it 
was also possible, ``if not likely,'' that various DCMs and market 
participants could have different views as to what level of robustness, 
conservatism and transparency is sufficient.\225\ CME believed that 
``it is preferable for the crediting program to publish its methodology 
. . . and for market participants to render their own judgment.'' \226\ 
Ceres similarly stated that DCMs should not conduct additional due 
diligence and should rely on crediting programs to demonstrate they 
have processes/procedures to achieve high quality credits.\227\ Nodal 
recommended that, if the Commission finalized its guidance, the 
Commission omit reference to a DCM's consideration of whether the 
crediting program's quantification methodology or protocol is ``robust, 
conservative and transparent'', arguing that the Commission would 
otherwise be asking DCMs ``to evaluate the sufficiency of VCC quality 
standards, which are normally addressed by the underlying markets.'' 
\228\
---------------------------------------------------------------------------

    \222\ See, e.g., Center for American Progress at 4; Ceres at 2-
3; CME at 7; ICE at 7; Nodal at 5; Public Citizen at 13; Verra at 6.
    \223\ ICE at 7.
    \224\ Verra at 6.
    \225\ CME at 7.
    \226\ Id.
    \227\ Ceres at 2-3.
    \228\ Nodal at 5.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to robust 
quantification as proposed, with certain revisions. As recognized in 
the Proposed Guidance, and highlighted by some commenters, there are 
not currently standardized methodologies or protocols that are used 
across the voluntary carbon markets to quantify emission reduction or 
removal levels. Given the current absence of such standardized 
methodologies or protocols, the Commission continues to believe that 
robustness, conservativeness and transparency are factors that inform 
the extent to which a quantification methodology or protocol applied by 
a crediting program helps to ensure that the number of VCCs that are 
issued for a mitigation project or activity accurately reflects the 
emission reduction or removal levels associated with that project or 
activity.\229\ Market participants that are utilizing physically-
settled VCC derivative contracts to help meet their carbon mitigation 
goals have an interest in ensuring that, upon physical settlement, the 
underlying VCCs will actually reduce or remove the amount of emissions 
that they were intended to reduce or remove. Accordingly, the 
Commission believes that the robustness, conservativeness and 
transparency of the quantification methodology or protocol that is 
applied with respect to the underlying VCCs can inform their quality--
and, by extension, the pricing of the derivative contract.
---------------------------------------------------------------------------

    \229\ See 88 FR 89410 at 89418. The Commission agrees that, 
ultimately, the accuracy of estimations is a key objective--one that 
informs confidence that the voluntary carbon markets can serve as a 
tool to assist in emissions reduction efforts, as well as accurate 
pricing by market participants.
---------------------------------------------------------------------------

    Furthermore, the Commission continues to believe that where the 
quantification methodology or protocol used to calculate the amount of 
VCCs for a particular project is robust, conservative, and transparent, 
the DCM should have a more reliable basis from which to form a 
deliverable supply estimate for exchange-set position limits 
purposes.\230\
---------------------------------------------------------------------------

    \230\ Id.
---------------------------------------------------------------------------

    Given the relevance with respect to VCC quality, as well as 
deliverable supply estimates, although the Commission acknowledges that 
a DCM may not have the specialized, technical expertise to determine 
whether a crediting program has demonstrated that the quantification 
methodology or protocol that it uses to calculate GHG emission 
reduction or removal levels for VCCs underlying a derivative contract 
is robust, conservative, and transparent, the Commission does believe 
that the DCM should consider whether there is reasonable assurance that 
the methodology or protocol used by the crediting program is robust, 
conservative and transparent.\231\ In this regard, the Commission 
acknowledges and supports commenters' suggestions that factors that may 
inform the robustness, conservativeness, and transparency of a 
quantification methodology or protocol could include whether the 
methodology or protocol has been developed with reference to scientific 
evidence, whether the methodology or protocol has been subject to 
independent review procedures, and whether there are mechanisms for the 
periodic review and/or revision of the methodology or protocol. In 
response to ICE's comment suggesting that all crediting program 
methodologies are subject to extensive, public consultation procedures, 
the Commission notes that review and consultation procedures may be 
crediting-program specific and the implementation by any particular 
crediting program of extensive public consultation procedures should 
not be taken as a given.
---------------------------------------------------------------------------

    \231\ In the Proposed Guidance, the Commission generally 
referred to a crediting program's methodology or protocol used for 
calculating the level of GHG reductions or removals associated with 
a mitigation project or activity. The Commission recognizes that 
crediting programs typically have multiple quantification 
methodologies or protocols, and has made certain revisions to its 
guidance to account for this.
---------------------------------------------------------------------------

    Furthermore, and particularly in light of the comments received 
that highlighted the technical and specialized nature of a crediting 
program's quantification methodologies or protocols, the Commission is 
clarifying its view that, as a general matter, industry-recognized 
standards for high-integrity VCCs, and whether a particular crediting 
program has been approved or certified as adhering to an industry-
recognized standard setting program, can serve as tools for a DCM, in 
connection with its consideration of a crediting program's 
quantification methodologies or protocols, including consideration of 
whether there is reasonable assurance that the methodology or protocol 
used to calculate emission reductions or removals for VCCs underlying a 
derivative contract is robust, conservative and transparent.
    The Commission is persuaded by comments stating that specific 
information about the quantification methodology or protocol used by a 
crediting program to calculate GHG emissions reductions or removals is 
not the type of information that typically would be included in a 
derivative contract's terms and conditions, and has determined to 
revise its guidance accordingly.
iv. Delivery Points and Facilities
a. Governance
    Generally, commenters agreed that, as part of the contract design 
process for a VCC derivative contract, a DCM should consider whether 
the crediting program for underlying VCCs has a governance framework 
that supports the program's independence, transparency and 
accountability.\232\ Better Markets, for example, stated that ``DCMs 
should rigorously evaluate the governance

[[Page 83395]]

frameworks . . . employed by the crediting programs of the underlying 
VCCs.'' \233\
---------------------------------------------------------------------------

    \232\ See, e.g., AFREF at 6; ANAB at 5; Anew Climate at 6; BASCS 
at 4; Better Markets at 11; CATF at 13-14; C2ES at 7; Forest Peoples 
at 5; ICVCM at 8; Isometric at 5; NYSSCPA at 5; Simon Counsell at 4-
5; Sylvera at 6; Terra at 6; WWF at 1; Xpansiv at 11.
    \233\ Better Markets at 11.
---------------------------------------------------------------------------

    In the Proposed Guidance, the Commission stated that, with respect 
to a crediting program's governance framework, it preliminarily 
believed that a DCM should consider, among other things, a crediting 
program's decision-making procedures, reporting and disclosure 
procedures, public and stakeholder engagement processes, and risk 
management policies, as well as whether information regarding those 
procedures and policies is made publicly available.\234\ The Commission 
specifically requested comment on whether there were other criteria or 
factors that a DCM should take into account when considering, and/or 
addressing in a VCC derivative contract's terms or conditions, whether 
a crediting program's governance framework effectively supports 
transparency and accountability.\235\
---------------------------------------------------------------------------

    \234\ 88 FR 89410 at 89419.
    \235\ Id. at 89421.
---------------------------------------------------------------------------

    Several commenters responded to highlight conflicts of interest 
considerations.\236\ For example, Anew Climate recommended that DCMs 
consider whether a crediting program has policies in place to identify 
and mitigate potential conflicts of interest between various 
stakeholders.\237\ ICVCM and C2ES similarly recommended that 
consideration of a crediting program's governance framework include 
consideration of the program's conflict of interest policy.\238\ 
Likewise, Simon Counsell believed that a crediting program's governance 
framework should address conflicts of interest, and also should include 
independent review processes and an appeal process.\239\ Anew Climate 
similarly stated that DCMs should consider ``whether a grievance 
process and procedures by which to address those grievances are in 
place.'' \240\ With respect to transparency, Xpansiv recommended that 
DCMs specifically consider a crediting program's transparency and 
responsiveness in connection with significant changes to project or 
credit status.\241\
---------------------------------------------------------------------------

    \236\ See, e.g., Anew Climate at 6; C2ES at 7; ICVCM at 8; 
Isometric at 5; Simon Counsell at 4-5; Sky Harvest at 13.
    \237\ Anew Climate at 6.
    \238\ See C2ES at 7; ICVCM at 8.
    \239\ Simon Counsell at 4-5.
    \240\ Anew Climate at 6.
    \241\ Xpansiv at 11.
---------------------------------------------------------------------------

    Some commenters suggested that DCMs look to standards for high-
integrity VCCs developed by private sector or multilateral initiatives, 
such as the governance standards under CORSIA, the International Carbon 
Reduction and Offset Alliance (``ICROA'') and the ICVCM's Core Carbon 
Principles, and adherence by a crediting program to such 
standards.\242\
---------------------------------------------------------------------------

    \242\ See e.g., Sylvera at 6; Terra at 6.
---------------------------------------------------------------------------

    ICE believed that a DCM should not be responsible for determining 
the adequacy of a crediting program's governance, and that a DCM should 
instead be permitted to rely on recognized standard setting bodies, 
``to establish threshold standards for high-quality carbon credits 
which the crediting programs should adhere to and be audited against.'' 
\243\ CME was similarly of the view that a DCM should not determine the 
effectiveness of a crediting program's independence, transparency, and 
accountability, because ``DCMs are not experts in registry governance 
structures, and it is impractical to expect DCMs to develop such 
expertise.'' \244\
---------------------------------------------------------------------------

    \243\ ICE at 7.
    \244\ CME at 7.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to governance as 
proposed, with certain revisions. Given the importance of a crediting 
program's governance framework in ensuring the overall quality of the 
VCCs issued by the program, as well as the potential importance of a 
crediting program's registry in facilitating delivery under a 
physically-settled VCC derivative contract, the Commission continues to 
believe that, as part of the contract design process, a DCM should 
consider the governance framework of the crediting program for 
underlying VCCs.\245\ More specifically, and after considering the 
comments received, the Commission believes that a DCM should consider 
whether the crediting program's governance framework supports the 
crediting program's independence, transparency, and accountability. 
With respect to particular criteria or factors that may inform such 
independence, transparency, and accountability, and in acknowledgment 
that a number of commenters highlighted these points, the Commission is 
revising its guidance to expressly recognize conflict of interest 
measures as a factor which may inform a crediting program's 
independence, and appeals mechanisms as a factor which may inform a 
crediting program's accountability.
---------------------------------------------------------------------------

    \245\ 88 FR 89410 at 89419.
---------------------------------------------------------------------------

    Furthermore, in response to comments received, the Commission is 
clarifying its view that, as a general matter, industry-recognized 
standards for high-integrity VCCs, and whether a particular crediting 
program has been approved or certified as adhering to an industry-
recognized standards setting program, can serve as tools for a DCM, in 
connection with its consideration of a crediting program's governance 
framework, including whether the governance framework supports the 
crediting program's independence, transparency, and accountability.
    Finally, the Commission is persuaded by comments stating that 
specific information regarding a crediting program's governance 
framework is not the type of information that typically would be 
included in a derivative contract's terms and conditions,\246\ and has 
determined to revise its guidance accordingly.
---------------------------------------------------------------------------

    \246\ See e.g., CME at 7; ICE at 7.
---------------------------------------------------------------------------

b. Tracking
    In the Proposed Guidance, the Commission stated that it 
preliminarily believed that a DCM should consider whether a crediting 
program for underlying VCCs can demonstrate that it has processes and 
procedures in place to help ensure clarity and certainty with respect 
to the issuance, transfer, and retirement of VCCs.\247\ The Commission 
stated that the DCM should consider whether the crediting program 
operates or makes use of a registry that has measures in place to 
effectively track issuance, transfer, and retirement; to identify who 
owns or retires a VCC; and to make sure that each VCC is uniquely and 
securely identified and associated with a single emission reduction or 
removal of one metric ton of carbon dioxide equivalent.\248\ The 
Commission stated that, where the registry will serve as the delivery 
point for a physically-settled VCC derivative contract, it may be 
appropriate for the DCM to include as a condition of the contract that 
the registry have such measures to address tracking in place.\249\
---------------------------------------------------------------------------

    \247\ 88 FR 89410 at 89419.
    \248\ Id.
    \249\ Id.
---------------------------------------------------------------------------

    In its comments on the Proposed Guidance, ISDA highlighted that, 
because registries currently serve as delivery points for futures 
contracts, ``[i]t is important to ensure registries have consistent and 
transparent rules on how VCCs are verified, counted and transferred. 
Failure to correctly track and safeguard carbon credits, or a gap in 
standards in the creation of a carbon credit itself, could lead to 
fraudulent

[[Page 83396]]

practices, such as greenwashing and double counting.'' \250\ ISDA went 
on to say that it believes the ``CFTC has a regulatory interest in 
ensuring that VCC registries (that act as delivery points for carbon 
futures contracts) adopt appropriate procedures for tracking the buying 
and selling of credits in the context of VCC futures and other 
bilateral markets.'' \251\
---------------------------------------------------------------------------

    \250\ ISDA at 3.
    \251\ Id.
---------------------------------------------------------------------------

    ICE stated that ``[i]t is important to distinguish between the role 
of carbon crediting programs and registries,'' noting that the two 
roles are often ``conflated.'' \252\ ICE stated that ``the physical 
delivery of VCCs is effectuated by transferring the VCC from the seller 
to the buyer in the registry operated by the crediting program.'' \253\ 
ICE stated that, because ``market participants value the delivery 
mechanism as an important risk management function offered by DCMs and 
DCOs,'' it believed that a ``DCM should seek confirmation from a 
crediting program utilizing a registry that it has appropriate measures 
in place to effectively track the issuance, transfer and retirement of 
VCCs.'' \254\
---------------------------------------------------------------------------

    \252\ ICE at 8.
    \253\ Id.
    \254\ Id.
---------------------------------------------------------------------------

    The Commission received several responses to its request for 
comment regarding whether there were other factors, in addition to 
those identified in the Proposed Guidance, that a DCM should take into 
account when considering, and/or addressing in a VCC derivative 
contract's terms and conditions, whether a crediting program's registry 
has processes and procedures in place to help ensure clarity and 
certainty with respect to the issuance, transfer and retirement of 
VCCs.\255\
---------------------------------------------------------------------------

    \255\ See, e.g., Anew Climate at 7; BASCS at 4; C2ES at 7; 
Carbon Direct at 7; Carbonplace at 5; CEPI at 6; Differentiated Gas 
Coordinating Council (``DGCC'') at 6; Ecobalance at 2; Flow Carbon 
at 5; Harvard et al at 18; Iconoclast at 5; ICVCM at 10; ISDA at 3; 
Nodal at 6; Nori at 5; NYSSCPA at 10; Public Citizen at 16; Sky 
Harvest at 14; Sylvera at 6; Terra at 6; Xpansiv at 12.
---------------------------------------------------------------------------

    Like ISDA, some commenters highlighted the importance of 
transparent registry rules regarding VCC tracking and retirement.\256\ 
For example, Anew Climate responded that ``DCMs should assess whether 
the crediting program has published transparent operating procedures 
for its registry activities, explaining how these processes work, as 
well as terms of use that govern participation in the program.'' \257\ 
Other commenters supported specific accounting frameworks for tracking 
to help ensure accuracy.\258\
---------------------------------------------------------------------------

    \256\ See, e.g., Anew Climate at 7; Carbon Direct at 7; DGCC at 
6; Flow Carbon at 5; Harvard et al at 18; ISDA at 3; Nori at 5; Sky 
Harvest at 14.
    \257\ Anew Climate at 7.
    \258\ See, e.g., Carbon Direct at 7; Harvard et al at 18; 
Stanford Doerr School of Sustainability Stanford Law School 
(``Stanford Doerr'') at 1.
---------------------------------------------------------------------------

    NYSSCPA supported tracking VCCs by assigning them a ``unique serial 
number'' and having the crediting program, or registry, track the VCC 
throughout its life cycle, including changes in ownership following 
delivery and the VCC's retirement.\259\ ICVCM similarly stated that 
unique identifiers ``can dramatically improve transparency and reduce 
risk of double counting.'' \260\
---------------------------------------------------------------------------

    \259\ NYSSCPA at 10.
    \260\ ICVCM at 10.
---------------------------------------------------------------------------

    Sylvera, BASCS, ICVCM, and C2ES responded in support of ICVCM's 
standards with respect to tracking and double counting.\261\ The ICVCM 
CCP Assessment Framework requires crediting programs to have registry 
provisions that prevent double registration of mitigation activities, 
double use of a carbon credit after it has been cancelled or retired 
for a specific use, and measures to prevent double claiming with 
mandatory domestic mitigation programs or incentivization schemes 
(e.g., Renewable Energy Certificates).\262\
---------------------------------------------------------------------------

    \261\ See, e.g., BASCS at 4; C2ES at 7; ICVCM at 10; Sylvera at 
6.
    \262\ ICVCM at 10.
---------------------------------------------------------------------------

    A few commenters expressed concern with the view that a DCM should 
consider the effectiveness of a crediting program's tracking 
measures.\263\ Terra stated that this should be handled by the 
crediting program.\264\ Nodal recommended that, if the Commission 
finalized the Proposed Guidance, the Commission should omit reference 
to a DCM's consideration of whether a crediting program operates or 
makes use of a registry that has measures in place to ``effectively'' 
track VCCs, arguing that the Commission would otherwise be asking DCMs 
``to evaluate the sufficiency of VCC quality standards, which are 
normally addressed by the underlying markets.'' \265\
---------------------------------------------------------------------------

    \263\ See e.g., ICE at 8; Nodal at 5-6; Terra at 6.
    \264\ Terra at 6.
    \265\ Nodal at 5-6.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to tracking as 
proposed, with certain revisions. As discussed in the Proposed 
Guidance, market participants that are utilizing physically-settled VCC 
derivative contracts to help meet carbon mitigation goals have an 
interest in ensuring that, upon physical settlement, the underlying 
VCCs will actually reduce or remove the emissions that they were 
intended to reduce or remove. It is therefore important for each 
credited VCC to be uniquely associated with a single emission reduction 
or removal of one metric ton of carbon dioxide. Processes and 
procedures to help ensure clarity and certainty with respect to the 
issuance, transfer and retirement of VCCs can help support this. 
Conversely, if there is not a reasonable assurance that the VCCs 
underlying a derivative contract are each unique, then, among other 
things, this could distort or obscure the accuracy of the derivative 
contract's pricing. The fact that the current voluntary carbon market 
structure typically relies on the registries used or operated by 
crediting programs to effectuate the physical delivery of VCCs 
underlying a derivative contract further supports the Commission's view 
that a DCM should consider whether there is reasonable assurance of the 
effectiveness of the tracking measures that a crediting program has in 
place.
    In response to comments received, the Commission is clarifying its 
view that, as a general matter, industry-recognized standards for high-
integrity VCCs, and whether a particular crediting program has been 
approved or certified as adhering to an industry-recognized standard 
setting program, can serve as tools for a DCM, in connection with its 
consideration of the crediting program's tracking measures.
    Finally, the Commission notes that the Proposed Guidance indicated 
that it may be appropriate, in certain circumstances, to include in a 
physically-settled VCC derivative contract certain conditions relating 
to the tracking measures that the registry used or operated by the 
crediting program for underlying VCCs has in place. While, based on the 
specific facts and circumstances in issue, a DCM may determine that 
inclusion of such conditions in a particular contract is appropriate, 
the Commission is persuaded by the broader comments that it received 
regarding the type of information that typically would, and would not, 
be included in a derivative contract's terms and conditions,\266\ and 
has determined to revise its guidance accordingly.
---------------------------------------------------------------------------

    \266\ See, e.g., CME at 7; ICE at 7.
---------------------------------------------------------------------------

c. No Double-Counting
    In the Proposed Guidance, the Commission stated that it 
preliminarily

[[Page 83397]]

believed that a DCM should consider whether the crediting program for 
underlying VCCs can demonstrate that it has effective measures in place 
that provide reasonable assurance that credited emission reductions or 
removals are not double-counted: ``That is, that the VCCs representing 
the credited emission reductions or removals are issued to only one 
registry and cannot be used after retirement or cancellation.'' \267\ 
Carbon Market Watch highlighted that the risk of double counting can 
manifest itself in many ways. For example, a given emission reduction 
may be claimed by multiple actors, such as various financers of the 
mitigation project or activity (e.g., a bank that issues a loan to the 
project or activity, as well as a company that purchases VCCs from the 
project or activity). \268\
---------------------------------------------------------------------------

    \267\ 88 FR 89410 at 89419.
    \268\ Carbon Market Watch at 4.
---------------------------------------------------------------------------

    aDryada stated that it believes there is confusion in the voluntary 
carbon markets regarding the understanding of the term ``double 
counting'' (i.e., whether the term refers to double issuance, double 
use, or double claim).\269\ The AFF suggested a clarification to the 
Commission's ``no double-counting'' characterization, to recognize that 
there is no double counting where emission reductions or removals from 
a mitigation project or activity are counted only once toward achieving 
mitigation targets or goals.\270\
---------------------------------------------------------------------------

    \269\ aDryada at 1.
    \270\ AFF at 4.
---------------------------------------------------------------------------

    The Commission specifically requested comment on whether there are 
particular criteria or factors that a DCM should take into account when 
considering, and/or addressing in a VCC derivative contract's terms and 
conditions, whether it can be demonstrated that the registry operated 
or utilized by a crediting program has in place measures that provide 
reasonable assurance that credited emission reductions or removals are 
not double counted.\271\ CarbonPlan suggested that a DCM should 
consider whether a crediting program discloses ``the precise location 
and boundaries of projects that generate VCCs.'' \272\ Bloomberg 
Philanthropies, ICVCM, and C2ES highlighted that the use of unique 
identifiers can reduce the risk of double counting.\273\ Other 
commenters supported specific accounting frameworks for tracking to 
help ensure accuracy.\274\ Some commenters provided information 
regarding blockchain technology or digital assets. In general, these 
commenters supported the use of blockchain or similar technology for 
VCC-related recordkeeping to help avoid double counting.\275\
---------------------------------------------------------------------------

    \271\ 88 FR 89410 at 89421.
    \272\ CarbonPlan at 9-10.
    \273\ See Bloomberg Philanthropies at 3; C2ES at 7; ICVCM at 9.
    \274\ See, e.g., Carbon Direct at 7; Harvard et al at 18.
    \275\ See, e.g., BCarbon at 3; Context Labs at 1; DGCC at 6; 
Ecobalance at 2; Flow Carbon at 5; Harvard et al at 7; Iconoclast at 
5; Nori at 6; NYSSCPA at 6; Stanford Doerr at 1.
---------------------------------------------------------------------------

    A few commenters expressed concern with the view that a DCM should 
consider the effectiveness of a crediting program's measures with 
respect to double counting.\276\ Terra stated that this should be 
handled by the crediting program.\277\ Nodal recommended that, if the 
Commission finalized the Proposed Guidance, the Commission should omit 
reference to a DCM's consideration of whether the crediting program can 
demonstrate that it has ``effective measures'' in place with respect to 
double counting,\278\ arguing that the Commission would otherwise be 
asking DCMs ``to evaluate the sufficiency of VCC quality standards, 
which are normally addressed by the underlying markets.'' \279\
---------------------------------------------------------------------------

    \276\ See, e.g., Nodal at 6; Terra at 6.
    \277\ Terra at 6.
    \278\ Nodal at 6.
    \279\ Id. at 5.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to double counting as 
proposed, with certain revisions. The Commission understands that the 
term ``double counting'' may be interpreted differently within the 
voluntary carbon markets, depending, for example, on the context. The 
Commission clarifies that, since this guidance is focused on 
considerations for DCMs in connection with the listing for trading of 
physically-settled VCC derivative contracts, the Commission is 
primarily concerned with double issuance--i.e., the issuance of the 
same VCC more than once.
    After considering the comments received, the Commission believes 
that a DCM should consider whether a crediting program for underlying 
VCCs has measures in place that provide reasonable assurance that 
credited emission reductions or removals are not double counted. As 
discussed above in connection with tracking, it is important for each 
credited VCC to be uniquely associated with a single emission reduction 
or removal of one metric ton of carbon dioxide equivalent to help 
ensure that VCCs effectively further carbon mitigation goals, and, 
relatedly, to help avoid the distortion or opaqueness of a VCC 
derivative contract's pricing. The Commission therefore believes that 
it is important for a DCM to consider whether a crediting program has 
measures in place, including measures with respect to double counting, 
that provide reasonable assurance that the VCCs issued by the crediting 
program are unique.
    In response to comments received, the Commission is clarifying 
that, as a general matter, industry-recognized standards for high-
integrity VCCs, and whether a particular crediting program has been 
approved or certified as adhering to an industry-recognized standard 
setting program, can serve as tools for a DCM, in connection with its 
consideration of the crediting program's measures to prevent double 
counting.
v. Inspection Provisions--Third-Party Validation and Verification
    Certain commenters on the Proposed Guidance highlighted the role 
that effective crediting program validation and verification procedures 
play in supporting VCC quality, and supported the Commission's 
recognition of the benefits of validation and verification by a 
reputable, disinterested party or body. Better Markets stated that the 
validation and verification processes ``are vital for confirming that 
credited mitigation projects or activities adhere to the [crediting] 
program's rules and standards, ensuring that the emission reductions or 
removals claimed are genuine and verifiable.'' \280\ Better Markets 
further stated that ``the involvement of reputable, independent third-
parties in the validation and verification of projects or activities is 
crucial. Such independent oversight provides assurance that the GHG 
emissions reductions or removals are accurately achieved, thereby 
enhancing the quality of the underlying VCCs.'' \281\ WWF, meanwhile, 
stated that a third-party verification process ``should be a 
requirement to improve the integrity of the credit and ultimately the 
integrity of the voluntary carbon market.'' \282\ Better Markets stated 
that ``best practices in third-party validation and verification should 
ensure diverse and impartial review by preventing exclusive reliance on 
a single validator for all projects or activities, and should include 
mechanisms for addressing performance issues, conducting periodic 
reviews of

[[Page 83398]]

validators, and ensuring that ongoing validation and verification are 
carried out by different parties from those who performed the initial 
assessments.'' \283\
---------------------------------------------------------------------------

    \280\ Better Markets at 12.
    \281\ Id.
    \282\ WWF at 1.
    \283\ Better Markets at 12.
---------------------------------------------------------------------------

    Most commenters responding to a specific request for comment on 
this point agreed that the delivery procedures for a physically-settled 
VCC derivative contract should describe the responsibilities of 
registries, crediting programs, or other third parties required to 
carry out the delivery process.\284\ Xpansiv stated that such a 
description enables buyers and sellers to trade VCC-linked contracts 
``with a clear understanding of the delivery mechanism, the 
responsibilities of all parties involved in the delivery process and 
the chain of custody of VCCs being transferred in the delivery 
process.'' \285\ Flow Carbon stated that, ``[f]or market participants, 
transparency around the settlement process, coupled with credible 
third-party review and independent verification, is critical to 
ensuring that firms have the confidence to deploy capital into these 
markets and products.'' \286\ Terra stated that delivery procedures 
should clearly outline the ``responsibilities of all parties involved 
to ensure the integrity and authenticity of the VCCs upon delivery.'' 
\287\
---------------------------------------------------------------------------

    \284\ See, e.g., AFF at 4; Carbonplace at 5; CEPI at 7; EDF at 
8; IATP at 23; Kita at 5; Public Citizen at 17; Terra at 5; Xpansiv 
at 12.
    \285\ Xpansiv at 12.
    \286\ Flow Carbon at 5.
    \287\ Terra at 7.
---------------------------------------------------------------------------

    ICVCM stated that contracts ``should not have to describe the 
responsibilities of third parties if the roles of the third party are 
known to both parties, and the performance of those responsibilities by 
third parties can be managed through usual risk management in contracts 
by allocating that risk between the contract parties or providing for 
default/force majeure etc. type risks.'' \288\
---------------------------------------------------------------------------

    \288\ ICVCM at 9.
---------------------------------------------------------------------------

    ICE highlighted the role of the DCO in the delivery process.\289\ 
EDF noted that the ``responsibilities of registries, crediting programs 
and other third-parties required to carry out the delivery process are 
generally articulated in Terms of Use contracts available on registry 
websites and mandatory for registry account activation.'' \290\ EDF 
stated that ``DCMs should specify which registry or registries will be 
used, and also how the respective Terms of Use satisfy governance, 
tracking mechanisms and double-counting prevention measures.'' \291\
---------------------------------------------------------------------------

    \289\ ICE at 9-10, stating that the ``delivery procedures used 
by the relevant DCO for the [VCC derivative contract] should take 
account of the functions provided by the relevant registries, 
specify the responsibilities of parties in the delivery process, and 
address the risks to the DCO and market participants for delivery 
failures, consistent with the DCO core principles.'' The Commission 
reiterates that this guidance focuses considerations for DCMs in 
connection with the design, and listing, of VCC derivative 
contracts.
    \290\ EDF at 8.
    \291\ Id.
---------------------------------------------------------------------------

    A few commenters expressed concern that, under the Proposed 
Guidance, DCMs would be expected to assess the sufficiency of a 
crediting program's procedures for validating and verifying that 
credited mitigation projects or activities meet the program's rules and 
standards. CME stated that serving as arbiter of such procedures is not 
the appropriate role of a DCM.\292\ Nodal similarly recommended that, 
if the Commission finalized the Proposed Guidance, the Commission omit 
reference to a DCM's consideration of whether a crediting program's 
procedures contemplated validation and verification by a ``reputable, 
disinterested'' party or body, as well as reference to a DCM's 
consideration of whether the crediting program is employing ``best 
practices'' with respect to third-party validation and 
verification.\293\
---------------------------------------------------------------------------

    \292\ CME at 8.
    \293\ Nodal at 6.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance with respect to inspection 
provisions as proposed, with certain revisions. Consistent with the 
Appendix C Guidance, the Commission continues to believe that 
inspection or certification procedures for verifying compliance with 
quality requirements or any other related delivery requirements for a 
physically-settled VCC derivative contract should be specified in the 
contract's terms and conditions. With respect to comments on whether 
the delivery procedures for a physically-settled VCC derivative 
contract should describe the responsibilities of registries, crediting 
programs or any other third parties required to carry out the delivery 
process, the Commission reminds exchanges and market participants that 
the Appendix C Guidance states that physically-settled derivative 
contracts should, among other things, specify appropriately detailed 
delivery procedures ``that describe the responsibilities of deliverers, 
receivers, and any required third parties in carrying out the delivery 
process.'' \294\ The Commission clarifies that, in the specific context 
of physically-settled VCC derivative contracts, a registry or crediting 
program may be considered a deliverer, receiver or required third party 
as contemplated in the Appendix C Guidance.
---------------------------------------------------------------------------

    \294\ Appendix C Guidance, paragraph (b)(2)(i)(B).
---------------------------------------------------------------------------

    The Commission acknowledges comments asserting that a DCM may not 
have the specialized, technical expertise to make an independent 
determination regarding the conservativeness, robustness, and 
transparency of a crediting program's validation and verification 
procedures. However, given the role played by a crediting program's 
validation and verification procedures in informing the quality of VCCs 
issued by the crediting program, the Commission does believe that there 
should be reasonable assurance that the program's validation and 
verification procedures are up-to-date, robust and transparent. The 
Commission believes that comments also support a DCM's consideration of 
whether there is reasonable assurance that those procedures reflect 
best practices with respect to third-party validation and verification. 
The Commission clarifies that, while such best practices with respect 
to third-party validation and verification may include conducting 
reviews of the performance of validators, procedures for remediating 
performance issues, not using the same third-party validator to verify 
every project type or project category, and using a separate third 
party to conduct ongoing validation and verification from the third 
party that completed the initial validation and verification process, 
the Commission does not expect the DCM itself to conduct such reviews 
or implement such procedures. The Commission further clarifies that it 
does not expect a DCM to specify, in a VCC derivative contract's terms 
and conditions, or rules, how a registry's Terms of Use address the 
discussion in this guidance of governance, tracking and double 
counting.
    Taking into account comments received, the Commission is clarifying 
its view that, as a general matter, industry-recognized standards for 
high-integrity VCCs, and whether a particular crediting program has 
been approved or certified as adhering to an industry-recognized 
standard setting program, can serve as tools for a DCM, in connection 
with its consideration of the crediting program's validation and 
verification procedures, including whether there is reasonable 
assurance that those procedures reflect best practices with respect to 
third-party validation and verification.

[[Page 83399]]

3. A DCM Shall Monitor a Derivative Contract's Terms and Conditions as 
They Relate to the Underlying Commodity Market
    The Commission received a few comments regarding the Commission's 
discussion in the Proposed Guidance of considerations for a DCM under 
DCM Core Principle 4. Better Markets supported the Commission's 
proposal.\295\ Iconoclast stated that continual monitoring by the DCM 
of the appropriateness of a VCC derivative contract's terms and 
conditions should include price.\296\
---------------------------------------------------------------------------

    \295\ See Better Markets at 13.
    \296\ Iconoclast at 4.
---------------------------------------------------------------------------

    BPC noted that, given that DCMs ``are at their root financial 
services companies,'' they may not currently have ``the in-house 
scientific or technical expertise needed to comprehensively evaluate 
and continuously monitor for changes in carbon crediting programs that 
may affect the terms and conditions of VCC derivative contracts.'' 
\297\ BPC suggested that the ``Commission could consider facilitating a 
community of practice among DCMs to encourage sharing of best practices 
and developing common evaluation frameworks.'' \298\
---------------------------------------------------------------------------

    \297\ BPC at 3.
    \298\ Id.
---------------------------------------------------------------------------

    The Commission appreciates the comments that it received on this 
subject and, after considering the comments, has determined to finalize 
its guidance with respect to DCM Core Principle 4 as proposed, with one 
revision. The Commission notes that implementing Commission regulations 
under DCM Core Principle 4 already require a DCM, among other things, 
to monitor a physically-settled derivative contract's terms and 
conditions as they relate to the underlying commodity market and to the 
convergence of the contract price and the price of the underlying 
commodity.\299\ Given that VCC derivatives are a comparatively new and 
evolving class of products, and given that standardization and 
accountability mechanisms for VCCs are still being developed, the 
Commission does believe that it is appropriate for a DCM's monitoring 
of a VCC derivative contract to include monitoring of the continued 
appropriateness of the contract's terms and conditions that includes, 
among other things, monitoring to ensure that the underlying VCC 
conforms, or, where appropriate, updates to reflect the latest 
certification standard(s) applicable for that VCC. However, for 
enhanced clarity, the Commission is replacing its reference in the 
guidance to ``continual'' monitoring of a contract's appropriateness, 
with a reference to ``ongoing'' monitoring of such appropriateness. For 
example, where there are changes to either the crediting program or the 
types of projects or activities associated with the underlying VCC, due 
for example to new standards or certifications, then the DCM should 
amend the contract's terms and conditions to reflect this update.
---------------------------------------------------------------------------

    \299\ See 17 CFR 38.252(a).
---------------------------------------------------------------------------

    The Commission further notes that it is supportive of exchanges 
sharing best practices for statutory and regulatory compliance.
4. A DCM Must Satisfy the Product Submission Requirements Under Part 40 
of the CFTC's Regulations and CEA Section 5c(c)
    Some commenters on the Proposed Guidance responded to the 
Commission's discussion of requirements in connection with the 
submission of a VCC derivative contract to the Commission under CEA 
section 5c(c)(5)(C) and part 40 of the Commission's regulations. WWF 
believed the Commission should disallow self-certification of VCC 
derivative contracts ``[d]ue to the limited number of voluntary carbon 
credit derivative contracts and the newness of this function for the 
CFTC.'' \300\ Similarly, AFREF and EDF supported the development by the 
Commission of a ``heightened review framework for any self-certified 
climate-related products.'' \301\ The Commission notes that, with 
specific limited exceptions, the CEA contemplates that a DCM may list a 
new derivative contract for trading, or amend an existing derivative 
contract, by way of self-certification, provided that the DCM complies 
with the substantive and procedural requirements set forth in the 
statute and the Commission's implementing regulations, including the 
requirement that the DCM submit certain prescribed information to the 
Commission, including but not limited to the contract's terms and 
conditions.\302\ The Commission notes that the CEA also sets forth the 
standard that must be met by the DCM in order to list or amend a 
derivative contract--which would include a VCC derivative contract--
namely, that the contract comply with the CEA and the regulations 
thereunder.\303\
---------------------------------------------------------------------------

    \300\ WWF at 1.
    \301\ AFREF at 7; EDF at 2.
    \302\ CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1); 17 CFR 40.2.
    \303\ CEA sections 5c(c)(1) and (5), 7 U.S.C. 7a-2(c)(1) and 
(5).
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    The Commission also received a comment regarding the requirement 
that a contract submission to the Commission--including a submission 
with respect to a VCC derivative contract--include an ``explanation and 
analysis of the contract and its compliance with applicable provisions 
of the [CEA], including core principles and the Commission's 
regulations thereunder.'' \304\ BPC urged the Commission to ``encourage 
consistency across DCMs in their development of the required 
`explanation and analysis' of how their VCC derivative contract meets . 
. . this proposed guidance.'' \305\
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    \304\ 17 CFR 40.2(a)(3)(v) (for self-certification) and 
40.3(a)(4) (for Commission approval).
    \305\ BPC at 3.
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    The Commission notes that each DCM has an obligation to ensure, 
through its own review and analysis, that the derivative contracts that 
it seeks to list for trading--including any VCC derivative contracts--
comply with the CEA and the regulations thereunder, and the DCM's 
contract submissions to the Commission should reflect this review and 
analysis. That said, by outlining certain relevant considerations for a 
DCM in connection with the design and listing of a VCC derivative 
contract, the Commission is hopeful that this guidance will help to 
support the standardization of such contracts in a manner that not only 
facilitates informed evaluations and comparisons by market 
participants, but also fosters greater consistency in VCC derivative 
product submissions to the Commission.
    The Commission appreciates all of the comments that it received on 
this subject. After considering the comments, the Commission has 
determined to finalize its guidance regarding the product submission 
requirements under part 40 of the CFTC's regulations and CEA section 
5c(c)(5)(C) as proposed.
5. Foreign Boards of Trade
    The Commission requested comment on whether the VCC commodity 
characteristics identified in the Proposed Guidance should be 
recognized as being relevant to submissions with respect to VCC 
derivative contracts made by a registered foreign board of trade 
(``FBOT'') under CFTC regulation Sec.  48.10.\306\ Most commenters who

[[Page 83400]]

responded were supportive of the VCC commodity characteristics being 
recognized as relevant to such FBOT submissions.\307\ For example, 
after noting that both DCMs and registered FBOTs are held to a ``not 
readily susceptible to manipulation'' standard,\308\ CME stated that if 
the Commission's guidance was intended to guard against the listing of 
contracts readily susceptible to manipulation, then the scope of the 
guidance should extend to FBOTs.\309\ Conversely, one commenter stated 
that it did not support the application of the Commission's guidance to 
contract submissions by registered FBOTs. ICE stated that under the 
Commission's framework for registered FBOTs, the exchange's home 
country regulator is generally tasked with the primary oversight of the 
FBOT's contract terms.\310\
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    \306\ 88 FR 89410 at 89421. CEA section 4(b)(1)(A), 7 U.S.C. 
6(b)(1)(A), provides that the Commission may adopt rules and 
regulations requiring registration with the Commission for an FBOT 
that provides the members or other participants located in the 
United States with direct access to the electronic trading and order 
matching system of the FBOT, including rules and regulations 
prescribing the procedures and requirements applicable to the 
registration of such FBOTs. CEA section 4(b)(1)(A)(i) provides that, 
in adopting such rules and regulations, the Commission shall 
consider, inter alia, whether any such FBOT is subject to 
comparable, comprehensive supervision and regulation by the 
appropriate governmental authorities in the FBOT's home country. The 
Commission has adopted rules requiring the registration of FBOTs 
that seek to provide such direct access to members or other 
participants located in the United States, which among other things 
prescribe the procedures and requirements applicable to 
registration. These rules are set forth at part 48 of the 
Commission's regulations. Commission regulation Sec.  48.10(a), 17 
CFR 48.10(a), provides that a registered FBOT that wishes to make an 
additional derivative contract available for trading via direct 
access to members or other participants located in the United States 
must submit a written request ``prior to offering the contracts 
within the United States,'' which must include specified 
information, including the contract's terms and conditions. In 
general, the registered FBOT can make the contract available for 
trading by direct access 10 business days after the date of the 
Commission's receipt of the written request, unless the Commission 
notifies the FBOT that additional time is needed to complete its 
review of policy or other issues pertinent to the contract.
    \307\ See, e.g., AFREF at 9; Carbonplace at 3; CEPI at 4; Charm 
at 3; CME at 8; C2ES at 5; IATP at 20; ICVCM at 7; NYSSCPA at 3; 
Public Citizen at 13; Xpansiv at 9.
    \308\ Commission regulation Sec.  48.7(c)(1), 17 CFR 48.7(c)(1), 
provides, among other things, that that derivative contracts to be 
made available by a registered FBOT via direct access to members or 
other participants located in the United States must not be readily 
susceptible to manipulation. As discussed herein, DCM Core Principle 
3, CEA section 5(d)(3), 7 U.S.C. 7(d)(3), provides that a DCM must 
only list derivative contracts that are not readily susceptible to 
manipulation. See also 17 CFR 38.200 and 38.201.
    \309\ CME at 2.
    \310\ ICE at 2. The Commission has adopted specific requirements 
for two types of derivative contracts offered by registered FBOTs 
for trading via direct access to members and other participants 
located in the United States: linked contracts and certain 
securities-related contracts. Commission regulation Sec.  48.8(c), 
17 CFR 48.8(c), imposes notification and reporting requirements on 
registered FBOTs related to their offering for trading via direct 
access of contracts that settle to the price of a futures contract 
listed on a DCM (``linked contracts''). Commission regulation Sec.  
48.7(c)(2), 17 CFR 48.7(c)(2), provides that registered FBOTs may 
only offer via direct access non-narrow-based security index futures 
and option contracts that have been certified by the Commission 
pursuant to Commission regulation Sec.  30.13, 17 CFR 30.13, in 
accordance with criteria set forth in Commission regulation Sec.  
40.11, 17 CFR 40.11.
---------------------------------------------------------------------------

    The Commission appreciates all of the comments that it received on 
this subject. The Commission acknowledges efforts that have been made 
across jurisdictions--by governmental bodies, private sector and 
multilateral initiatives, and derivative exchanges themselves--to 
support transparent markets for high-integrity VCCs. The Commission 
recognizes that its counterparts in other jurisdictions have similar 
regulatory interests in the manner in which VCC derivatives, as a 
product class, evolve--as well as in ensuring, more generally, that the 
financial markets that they oversee are liquid, fair, and stable, and 
free from manipulation and other abusive trading practices. The 
Commission further recognizes that, given the global nature of 
financial markets--including voluntary carbon markets--international 
coordination is critical to support market integrity. The Commission 
looks forward to continuing to coordinate with its regulatory 
counterparts on efforts to promote the integrity and orderly 
functioning of voluntary carbon markets, including markets for VCC 
derivative contracts.

III. Guidance Regarding the Listing of VCC Derivative Contracts

    The Commission is issuing guidance that outlines factors for 
consideration by DCMs when addressing certain requirements under the 
CEA, and CFTC regulations, that are relevant to the listing for trading 
of VCC derivative contracts. The Commission recognizes that VCC 
derivatives are a comparatively new and evolving class of products, and 
believes that guidance that outlines factors for a DCM to consider in 
connection with the contract design and listing process may help to 
advance the standardization of such products in a manner that promotes 
transparency and liquidity.
    This guidance does not establish new obligations for DCMs. Unlike a 
binding rule adopted by the Commission, which would state with 
precision when particular requirements do and do not apply to 
particular situations, this guidance is a statement of the Commission's 
views regarding factors that may be relevant in its evaluation of DCM 
compliance, and allows for flexibility in application to various 
situations, including consideration of all relevant facts and 
circumstances, whether or not explicitly discussed in the guidance. The 
Commission intends for this guidance to be an efficient and flexible 
vehicle to communicate the agency's current views, in order to give 
DCMs the benefit of the Commission's thinking as they address their 
Core Principle and regulatory compliance obligations.\311\
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    \311\ For a number of the statutory Core Principles for DCMs, 
the Commission has adopted rules that establish the manner in which 
a DCM must comply with the Core Principle. Unless otherwise 
determined by the Commission by rule or regulation, a DCM has 
reasonable discretion in establishing the manner in which it 
complies with a Core Principle. CEA section 5(d)(1)(B), 7 U.S.C. 
7(d)(1)(B).
---------------------------------------------------------------------------

    This guidance is not intended to modify or supersede existing 
Commission guidance that addresses the listing of derivative contracts 
by CFTC-regulated exchanges, including the Appendix C Guidance. Rather, 
taking into account certain unique attributes of VCC derivatives and 
voluntary carbon markets, this guidance outlines particular matters for 
consideration by a DCM when designing and listing a VCC derivative 
contract. Among other things, this guidance addresses how certain 
aspects of the Appendix C Guidance may be considered in the specific 
context of VCC derivative contracts.
    This guidance focuses primarily on the listing by DCMs of 
physically-settled VCC derivative contracts. In part, this focus 
reflects the fact that all VCC derivative contracts that are currently 
listed for trading on DCMs are physically-settled contracts. To date, 
no DCM has listed for trading a cash-settled VCC derivative contract. 
In addition, the Commission believes that at this juncture in the 
evolution of VCC derivatives as a product class, it may be of 
particular benefit to outline considerations for a DCM that can help to 
ensure that, upon delivery, the quality and other attributes of VCCs 
underlying a derivative contract will be as expected by position 
holders. This will support accurate pricing, help reduce the 
susceptibility of the contract to manipulation, and foster confidence 
in the contract that can enhance liquidity.
    While this guidance focuses primarily on physically-settled VCC 
derivative contracts, the Commission continues to believe that, with 
respect to cash-settled derivative contracts, an acceptable 
specification of the cash settlement price would include rules that 
fully describe the essential economic

[[Page 83401]]

characteristics of the underlying commodity.\312\ Accordingly, the 
Commission believes that discussions in this guidance of VCC commodity 
characteristics for consideration by a DCM in connection with the 
design and listing of a physically-settled VCC derivative contract, 
would also be relevant for cash-settled derivative contracts that 
settle to the price of a VCC, unless otherwise noted.\313\
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    \312\ Appendix C Guidance, paragraph (c)(1).
    \313\ As noted herein, and for the avoidance of doubt, this 
guidance is not intended to modify or supersede the Appendix C 
Guidance, which outlines considerations for both cash-settled and 
physically-settled derivative contracts--including considerations 
that are not touched on in this guidance. DCMs are reminded to 
consult and consider the Appendix C Guidance when developing rules, 
terms and conditions, and contract submissions to the Commission, 
for all derivative product types--including VCC derivative products.
---------------------------------------------------------------------------

    Further, while this guidance focuses on the listing of VCC 
derivative contracts by DCMs, the Commission believes that the factors 
outlined for consideration also would be relevant for consideration by 
any SEF that may seek to permit trading in swap contracts that settle 
to the price of a VCC, or in physically-settled VCC swap 
contracts.\314\
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    \314\ As noted above, the Appendix C Guidance is also relevant 
for SEFs, which, like DCMs, are obligated by statute only to permit 
trading in contracts that are not readily susceptible to 
manipulation. CEA section 5h(f)(3), 7 U.S.C 7b-3(f)(3). Like DCMs, 
SEFs also are subject to a statutory obligation to monitor trading 
in swaps to prevent manipulation, price distortion, and disruptions 
of the delivery or cash settlement process through surveillance, 
compliance, and disciplinary practices and procedures. CEA section 
5h(f)(4) 7, U.S.C 7b-3(f)(4). See also 17 CFR 37.400 through 37.408.
---------------------------------------------------------------------------

    In developing this guidance, the Commission has considered those 
public comments on the RFI on Climate-Related Financial Risk that 
addressed product innovation and voluntary carbon markets, as well as 
comments received in response to the Proposed Guidance. Taking into 
account these comments, the Commission believes that this guidance 
furthers the agency's mission and may help to advance the 
standardization of VCC derivative contracts in a manner that fosters 
transparency and liquidity.\315\
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    \315\ See also, e.g., International Emissions Trading 
Association comment in response to the Second Voluntary Carbon 
Markets Convening at 5-6 (stating that the CFTC is in a fortunate 
position to leverage the evolving work of existing initiatives to 
support the drive for quality and integrity in the voluntary carbon 
markets), and BP America, Inc. comment in response to the Second 
Voluntary Carbon Markets Convening at 3 (supporting guidance for 
CFTC-regulated exchanges).
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    The Commission recognizes that VCC derivative products and 
voluntary carbon markets are evolving and that it may therefore be 
appropriate for the Commission to revisit this guidance or to issue 
additional guidance in the future,\316\ as VCC derivative products and 
voluntary carbon markets continue to develop and mature.\317\
---------------------------------------------------------------------------

    \316\ For example, the Commission may in the future revisit this 
guidance, or issue additional guidance, to further address the 
listing of cash-settled VCC derivative contracts, including index-
based contracts, or to further address the listing of VCC derivative 
contracts by SEFs.
    \317\ For the avoidance of doubt, this guidance does not address 
the regulatory treatment of any underlying VCC or associated offset 
project or activity, including whether any such product, project or 
activity may qualify as a swap or be eligible for the forward 
contract exclusion under Commission's ``swaps'' definition. See 
Further Definition of ``Swap,'' ``Security-Based Swap,'' and 
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping; Final Rule, 77 FR 48208 (August 13, 2012).
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A. A DCM Shall Only List Derivative Contracts That Are Not Readily 
Susceptible to Manipulation

    DCM Core Principle 3 provides that a DCM shall only list for 
trading derivative contracts that are not readily susceptible to 
manipulation.\318\ With respect to DCM Core Principle 3, the Appendix C 
Guidance (``Demonstration of Compliance That a Contract is Not Readily 
Susceptible to Manipulation'') \319\ outlines certain relevant 
considerations for a DCM when developing contract terms and conditions, 
and providing supporting documentation and data in connection with the 
submission of a contract to the Commission.\320\
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    \318\ CEA section 5(d)(3), 7 U.S.C. 7(d)(3).
    \319\ 17 CFR part 38, appendix C.
    \320\ See also section I.A., supra. As noted above, the Appendix 
C Guidance is also relevant to SEFs, which are similarly obligated 
by statute only to permit trading in derivative contracts that are 
not readily susceptible to manipulation. CEA section 5h(f)(3); 7 
U.S.C 7b-3(f)(3).
---------------------------------------------------------------------------

    With respect to a physically-settled derivative contract, the 
Appendix C Guidance states that the terms and conditions of the 
contract should describe or define all of the economically significant 
characteristics or attributes of the commodity underlying the 
contract.\321\ Among other things, failure to specify the economically 
significant attributes of the underlying commodity may cause confusion 
among market participants, who may expect a commodity of different 
quality, or with other features, to underlie the contract. This may 
render the precise nature of the commodity that the contract is pricing 
ambiguous, and make the contract susceptible to manipulation or price 
distortion.
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    \321\ Appendix C Guidance, paragraph (b)(2)(i)(A).
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    The Appendix C Guidance states that, for any particular contract, 
the specific attributes of the underlying commodity that should be 
described or defined in the contract's terms and conditions ``depend 
upon the individual characteristics of the commodity.'' \322\ Where the 
underlying commodity is a VCC, the Commission recognizes that 
standardization and accountability mechanisms for VCCs are currently 
still developing. The Commission believes that the fact that 
standardization and accountability mechanisms for VCCs are currently 
still developing is, itself, an ``individual characteristic of the 
commodity'' that should be taken into account by a DCM when designing a 
VCC derivative contract and addressing the underlying commodity in the 
contract's terms and conditions.
---------------------------------------------------------------------------

    \322\ Id.
---------------------------------------------------------------------------

    To that end, the Commission recognizes that, while standardization 
and accountability mechanisms for VCCs are currently still being 
developed, there are certain characteristics that have been identified 
broadly--across both mandatory and voluntary carbon markets--as helping 
to inform the integrity of carbon credits. The Commission believes that 
a DCM should take these characteristics--referred to in this guidance 
as ``VCC commodity characteristics'' and discussed more fully below--
into consideration when designing a VCC derivative contract, and 
addressing in the contract's terms and conditions the underlying VCC.
    As a general matter, the Commission believes that a DCM should 
consider the VCC commodity characteristics when selecting one or more 
crediting programs from which eligible VCCs, meeting the derivative 
contract's specifications, may be delivered at the contract's 
settlement. The Commission believes that consideration of these 
characteristics will assist the DCM in understanding key attributes of 
the commodity--the VCC--that underlies the derivative contract.
    More specifically, the Commission believes that, at a minimum, a 
DCM should consider the VCC commodity characteristics when addressing 
the following criteria in the design of a VCC derivative contract:

 Quality standards,
 Delivery points and facilities, and
 Inspection provisions.

    These are among the criteria identified in the Appendix C Guidance 
as criteria for a DCM to consider addressing in the terms and 
conditions of a physically-settled derivative contract. As discussed 
above, addressing these three criteria clearly in

[[Page 83402]]

the contract's terms and conditions helps to ensure that trading in the 
contract is based on accurate information about the underlying 
commodity. This, in turn, helps to promote accurate pricing and helps 
to reduce the susceptibility of the contract to manipulation.
    The Commission believes that, as a general matter, industry-
recognized standards for high-integrity VCCs can serve as tools for 
DCMs, in connection with their consideration, with respect to a 
particular crediting program, of the VCC commodity characteristics 
outlined in this guidance. Where a crediting program for VCCs that are 
eligible for delivery under a derivative contract has been approved or 
certified by an industry-recognized standards program for high-
integrity VCCs, the DCM should consider clearly identifying the 
standards program in the contract terms and conditions, along with the 
crediting program itself.
1. Quality Standards
    The Commission believes that a DCM should consider the following 
VCC commodity characteristics when addressing quality standards in 
connection with the design of a VCC derivative contract: (i) 
transparency, (ii) additionality, (iii) permanence and risk of 
reversal, and (iv) robust quantification.\323\
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    \323\ As is the case for physically-settled VCC derivative 
contracts, the Commission believes that for cash-settled derivative 
contracts that settle to the price of a VCC, it is important to 
clearly specify the VCC quality standards in the contract's terms 
and conditions to help ensure that the pricing of the contract 
reflects the quality of the VCC underlying the contract.
---------------------------------------------------------------------------

    The Commission also understands that the measures that a crediting 
program has in place with respect to social and environmental 
safeguards, and net zero alignment, may have a bearing on how market 
participants evaluate the quality of the VCCs that are issued by the 
crediting program. In light of this, a DCM may determine that it is 
appropriate to consider, when addressing quality standards in 
connection with derivative contract design, 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 GHG emissions, technologies or carbon 
intensive practices that are incompatible with the objective of 
achieving net zero GHG emissions by 2050.
i. Transparency--Publicly Available Data To Promote Transparency
    As a threshold matter, the Commission believes that a DCM should 
provide, in the terms and conditions of a physically-settled VCC 
derivative contract, information about the VCCs that are eligible for 
delivery under the contract. The contract terms and conditions should 
clearly identify what is deliverable under the contract, including by 
providing information that readily specifies the crediting program or 
programs from which underlying VCCs may be issued. To the extent that 
underlying VCCs are associated with a specific category of mitigation 
project or activity--such as nature-based projects or activities--this 
also should be readily evident from the contract's terms and 
conditions.
    Specifying which crediting programs and, as applicable, which types 
of projects or activities are eligible for purposes of delivery will 
help to provide clarity to market participants regarding the VCCs that 
can be expected to deliver under the contract, and will thereby help to 
ensure that the pricing of the contract accurately reflects the 
intended quality of the underlying VCCs. Where there is ambiguity or 
confusion about the quality of the VCCs that may be delivered under the 
contract, this may render the contract susceptible to manipulation or 
price distortion.
    The Commission believes that, when designing a VCC derivative 
contract, DCMs should also consider whether the crediting program for 
underlying VCCs is making detailed information about its policies and 
procedures, and the projects or activities that it credits--such as 
relevant project documentation--publicly available in a searchable and 
comparable manner. Making such information publicly available would 
assist market participants in understanding how GHG emission reductions 
or removals are calculated by the crediting program--including how 
additionality, which is discussed further below, is assessed--and how 
GHG emission reductions or removals are quantified. This would assist 
market participants in making informed evaluations and comparisons of 
the quality of the VCCs that underlie derivative contracts, which would 
help to support accurate pricing.
ii. Additionality
    The Commission believes that, in connection with the design of a 
VCC derivative contract, a DCM should consider whether the crediting 
program for underlying VCCs has procedures in place to assess or test 
for additionality. Additionality is recognized by many as an important 
element of a high-quality VCC. If holders of positions in a VCC 
derivative contract understand and intend for VCCs that are eligible 
for delivery under the contract to be additional, but in fact they may 
not be, then the pricing of the derivative contract may not accurately 
reflect the quality of the VCCs that may be delivered under the 
contract. The cheapest-to-deliver VCC,\324\ that otherwise meets the 
contract's specifications, may not have additionality. Accordingly, the 
Commission believes the DCM should consider whether the procedures that 
a crediting program has in place to assess or test for additionality 
provide reasonable assurance that GHG emission reductions or removals 
will be credited only if they are additional.
---------------------------------------------------------------------------

    \324\ The term ``cheapest-to-deliver'' refers to the least 
expensive commodity that can be delivered under the derivative 
contract that otherwise meets the contract's specifications.
---------------------------------------------------------------------------

    While additionality is recognized by many as an important element 
of a high-quality VCC, the Commission understands that there currently 
is variation across the voluntary carbon markets in how, precisely, 
additionality is characterized. For example, an assessment of 
additionality may focus on whether 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. Alternatively or additionally, an assessment of additionality 
may focus on whether the project or activity is already required by 
law, regulation, or any other legally binding mandate applicable in the 
project's or activity's jurisdiction, or on other approaches such as 
performance standard approaches.\325\ The Commission understands that 
the factors that inform an assessment of additionality also may vary 
depending on the type of mitigation project or activity in issue, and 
that, as the voluntary carbon markets continue to develop, industry 
consensus on how to characterize and assess additionality may evolve.
---------------------------------------------------------------------------

    \325\ See Joint Policy Statement on Voluntary Carbon Markets, 
U.S. Department of the Treasury, May 2024, available at: https://home.treasury.gov/system/files/136/VCM-Joint-Policy-Statement-and-Principles.pdf.
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    In recognition of the foregoing, the Commission is not providing in 
this guidance a definition of additionality. The Commission believes 
that, as a general matter, industry-recognized

[[Page 83403]]

standards for high-integrity VCCs can serve as tools for a DCM, in 
connection with its consideration of a particular crediting program's 
characterization of additionality, as well as the DCM's consideration 
of whether the crediting program's procedures to assess or test for 
additionality provide reasonable assurance that GHG emission reductions 
or removals will be credited only if they are additional, as so 
characterized.
iii. Permanence and Accounting for the Risk of Reversal
    The Commission believes that, in connection with the design of a 
VCC derivative contract, a DCM should consider whether the crediting 
program for underlying VCCs has 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).
    The risk of reversal may impact the risk management needs of VCC 
derivative market participants. Market participants that are utilizing 
physically-settled VCC derivative contracts to help meet their carbon 
mitigation goals have an interest in ensuring that, upon physical 
settlement, the underlying VCCs will actually reduce or remove the 
amount of emissions that they were intended to reduce or remove. 
Accordingly, the risk of reversal--and the manner in which it is 
accounted for by a crediting program--is tied to the quality of the 
underlying VCCs and, by extension, to the pricing of the derivative 
contract. The crediting program's measures to address and account for 
the risk of reversal may be particularly important where underlying 
VCCs are issued for project or activity types with a higher reversal 
risk.
    Most crediting programs have established VCC ``buffer reserves'' to 
help address the risk of credited GHG emission reductions or removals 
being reversed. Under this approach, VCCs are set aside into a common 
buffer reserve (or ``pool''). Reserved VCCs can be drawn upon and 
cancelled, proportional to the magnitude of the reversal. A DCM should 
consider whether a crediting program has a buffer reserve in place to 
help address the risk of reversal. Relevant considerations with respect 
to a crediting program's buffer reserve could include whether the 
crediting program regularly reviews the methodology by which the size 
of its buffer pool is calculated in order to address evolving 
developments that may heighten reversal risk, and whether there is a 
mechanism in place to audit the continuing sufficiency of the buffer 
reserve. The Commission recognizes, however, that a crediting program 
may, now or in the future, have measures other than, or in addition to, 
a buffer reserve to address the risk of reversal. This guidance 
contemplates that a DCM should consider whether a crediting program has 
a buffer reserve and/or other measures in place to address such risk.
iv. Robust Quantification--GHG Emission Reductions or Removals Should 
Be Conservatively Quantified
    Given the current absence of a standardized methodology or protocol 
to quantify GHG emission reduction or removal levels \326\--not only 
across crediting programs, but even by a particular crediting program, 
with respect to different types of projects or activities--the 
Commission believes that, in connection with the design of a VCC 
derivative contract, a DCM should consider whether there is reasonable 
assurance that the quantification methodology(ies) or protocol(s) used 
by the crediting program for calculating emission reductions or 
removals for 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.
---------------------------------------------------------------------------

    \326\ Related specifically to the agriculture and forest sector, 
the Office of Management and Budget, the White House Office of 
Science and Technology Policy, and White House Office of Domestic 
Climate Policy announced the release of the National Strategy to 
Advance an Integrated U.S. Greenhouse Gas Measurement, Monitoring, 
and Information System, a Strategy developed by the Greenhouse Gas 
Monitoring and Measurement Interagency Working Group (``GHG IWG'') 
to enhance coordination and integration of greenhouse gas 
measurement, monitoring, and information efforts across the Federal 
government. The GHG IWG issued this Federal Strategy on November 29, 
2023, available at: https://www.whitehouse.gov/ostp/news-updates/2023/11/29/national-strategy-to-advance-an-integrated-u-s-greenhouse-gas-measurement-monitoring-and-information-system/.
---------------------------------------------------------------------------

    Moreover, the Commission notes that for the derivative contracts 
that they list, DCMs are required to adopt, as is necessary and 
appropriate, exchange-set position limits for speculators.\327\ To 
establish exchange-set position limits, a DCM should derive a 
quantitative estimate of the deliverable supplies of the underlying 
commodity for the delivery period specified in the contract.\328\ A 
DCM's estimate of a VCC's deliverable supplies is likely to be informed 
by understanding how the relevant crediting program determines the 
amount of VCCs that are issued for credited projects or activities. 
Where the quantification methodology or protocol used to calculate the 
amount of VCCs is robust, conservative, and transparent, the DCM should 
have a more reliable basis from which to form its deliverable supply 
estimate. That deliverable supply estimate, in turn, can be used as the 
basis for effectively setting the DCM's exchange-set speculative 
position limits to help reduce the possibility of corners or squeezes 
that may distort or manipulate the price of the derivative 
contract.\329\
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    \327\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5). See also 17 CFR 
38.300 and 38.301.
    \328\ Guidance on estimating deliverable supply can be found in 
the Appendix C Guidance.
    \329\ For a cash-settled VCC derivative contract, a DCM may 
similarly consider the deliverable supply of the underlying VCCs 
when setting exchange-set speculative position limits or historical 
open interest when establishing non-spot month position 
accountability levels. See 17 CFR 150.5 and appendix F to part 150, 
title 17.
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2. Delivery Points and Facilities
    The Appendix C Guidance states that the delivery procedures for a 
physically-settled derivative contract should, among other things, seek 
to minimize or eliminate any impediments to making or taking delivery 
by both deliverers and takers of delivery, to help ensure convergence 
of cash and derivative contract prices at the expiration of the 
derivative contract.\330\ When addressing delivery procedures in 
connection with the design of a physically-settled VCC derivative 
contract, the Commission believes that a DCM should consider the 
governance framework and tracking mechanisms of the crediting program 
for underlying VCCs, as well as the crediting program's measures to 
prevent double counting.\331\
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    \330\ Appendix C Guidance, paragraph (b)(2)(i)(B).
    \331\ While cash-settled VCC derivative contracts do not result 
in the delivery of a VCC, the Commission believes that considering 
the VCC commodity characteristics of governance, tracking and no 
double counting when developing the terms and conditions of a cash-
settled VCC derivative contract will help to ensure that the 
contract terms and conditions address essential economic 
characteristics of the underlying VCC in a manner that promotes 
accurate pricing and helps to reduce the susceptibility of the 
contract to manipulation.
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i. Governance
    The Commission believes that a DCM should consider whether the 
crediting program for underlying VCCs has in place a governance 
framework that supports the crediting program's independence, 
transparency and accountability. As a threshold matter, a governance 
framework that supports independence, transparency and

[[Page 83404]]

accountability helps to ensure the overall quality of the VCCs issued 
by a crediting program. Furthermore, it is the Commission's 
understanding that a crediting program's registry may be used as a 
delivery point to facilitate physical settlement for a VCC derivative 
contract. A registry is a repository for tracking mitigation projects 
or activities and associated VCCs. An effective crediting program 
governance framework can help to ensure that the crediting program 
operates or makes use of a registry that has appropriate measures in 
place to facilitate the physical settlement of a VCC derivative 
contract.
    Relevant factors when considering a crediting program's governance 
framework could include, among other things, the program's decision-
making procedures, including who is responsible for administration of 
the program and conflict of interest measures such as how the 
independence of key functions is ensured; reporting and disclosure 
procedures; public and stakeholder engagement processes, including 
whether there are appeals mechanisms; and risk management policies, 
such as financial resources/reserves, cyber-security, and anti-money 
laundering policies. A DCM should consider whether detailed information 
regarding a crediting program's governance framework, such as 
information regarding the above-described procedures and policies, is 
made publicly available.
ii. Tracking
    The Commission believes that a DCM should consider whether the 
crediting program for the underlying VCCs has processes and procedures 
in place to help ensure clarity and certainty with respect to the 
issuance, transfer, and retirement of VCCs. The DCM should consider 
whether the crediting program operates or makes use of a registry, and 
whether there is reasonable assurance that the registry has effective 
measures in place to track the issuance, transfer, and retirement of 
VCCs; to identify who owns or retires a VCC; and to make sure that each 
VCC is uniquely and securely identified and associated with a single 
emission reduction or removal of one metric ton of carbon dioxide 
equivalent.
iii. No Double-Counting
    The Commission believes that a DCM should consider whether the 
crediting program for the underlying VCCs has measures in place that 
provide reasonable assurance that credited emission reductions or 
removals are not double counted. That is, that the VCCs representing 
the credited emission reductions or removals are issued to only one 
registry and cannot be used after retirement or cancelation. As 
discussed above in connection with the VCC commodity characteristics of 
additionality and permanence, market participants that are utilizing 
physically-settled VCC derivative contracts to help meet carbon 
mitigation goals have an interest in ensuring that, upon physical 
settlement, the underlying VCCs will actually reduce or remove the 
emissions that they were intended to reduce or remove. In order for 
VCCs to effectively further carbon mitigation goals, it is important 
for each credited VCC to be uniquely associated with a single emission 
reduction or removal of one metric ton of carbon dioxide equivalent; a 
crediting program should have measures in place that provide reasonable 
assurance of this. If there is not a reasonable assurance that the VCCs 
underlying a derivative contract are each unique, then, among other 
things, this could distort or obscure the accuracy of the derivative 
contract's pricing.
    In the context of evolving national and international carbon 
markets and emissions trading frameworks, effective measures to ensure 
that emission reductions or removals are not double counted may 
include, among other things, procedures for conducting cross-checks 
across multiple carbon credit registries.
3. Inspection Provisions--Third-Party Validation and Verification
    Consistent with the Appendix C Guidance, the Commission believes 
that any inspection or certification procedures for verifying 
compliance with quality requirements or any other related delivery 
requirements for physically-settled VCC derivative contracts should be 
specified in the contract's terms and conditions.\332\ The Commission 
believes that these inspection or certification procedures should be 
consistent with the latest procedures in the voluntary carbon markets.
---------------------------------------------------------------------------

    \332\ Appendix C Guidance, paragraph (b)(2)(i)(G) (noting that 
to the extent that formal inspection procedures are not used in the 
cash market, an acceptable specification would contain provisions 
that assure accuracy in assessing the commodity, that are available 
at a low cost, that do not pose an obstacle to delivery on the 
contract and that are performed by reputable, disinterested third 
party or by qualified designated contract market employees).
---------------------------------------------------------------------------

    Additionally, the Commission believes that, when designing a VCC 
derivative contract, a DCM should consider whether there is reasonable 
assurance that the crediting program for underlying VCCs has up-to-
date, robust and transparent procedures for validating and verifying 
that credited mitigation projects or activities meet the crediting 
program's rules and standards.
    By providing independent confirmation that mitigation projects or 
activities are achieving the claimed GHG emission reductions or 
removals, third-party validation and verification can help to ensure 
that the underlying VCC accurately reflects the quality intended by the 
DCM and supports voluntary carbon market integrity.\333\ Accordingly, a 
DCM should consider whether there is reasonable assurance that the 
crediting program's procedures reflect best practices with respect to 
third party validation and verification. Such best practices may 
include: crediting program reviews of the performance of its 
validators; procedures for remediating performance issues; not using 
the same third-party validator to verify every project type or project 
category; and using a separate third-party to conduct ongoing 
validation and verification from the third-party that completed the 
initial validation and verification process.
---------------------------------------------------------------------------

    \333\ Id.
---------------------------------------------------------------------------

B. A DCM Shall Monitor a Derivative Contract's Terms and Conditions as 
They Relate to the Underlying Commodity Market

    DCM Core Principle 4 requires a DCM to prevent manipulation, price 
distortion, and disruptions of the physical delivery or cash-settlement 
process through market surveillance, compliance, and enforcement 
practices and procedures.\334\ For physically-settled derivative 
contracts, implementing Commission regulations under DCM Core Principle 
4 require a DCM, among other things, to monitor the contract's terms 
and conditions as they relate to the underlying commodity market, and 
to the convergence between the contract price and the price of the 
underlying commodity, and to monitor the supply of the underlying 
commodity in light of the contract's delivery requirements.\335\ Such 
monitoring will help a DCM identify circumstances that may cause the 
contract to become susceptible to price manipulation or distortions, 
and to assess whether the terms and conditions of the contract continue 
to be appropriate--or whether a change in circumstances should be 
addressed, for example, through changes to the contract's terms and 
conditions.\336\
---------------------------------------------------------------------------

    \334\ CEA section 5(d)(4), 7 U.S.C. 7(d)(4). See also 17 CFR 
38.250 through 38.258.
    \335\ 17 CFR 38.252.
    \336\ The Commission has, similarly, recognized that a DCM has a 
responsibility to monitor the continued appropriateness of the terms 
and conditions of a cash-settled derivative contract. See, e.g., 17 
CFR 38.253(a)(2).

---------------------------------------------------------------------------

[[Page 83405]]

    Given that VCC derivatives are a comparatively new and evolving 
class of products, and given that standardization and accountability 
mechanisms for VCCs are still being developed, the Commission believes 
that the monitoring by a DCM of the terms and conditions of a 
physically-settled VCC derivative contract should include ongoing 
monitoring of the appropriateness of the contract's terms and 
conditions that includes, among other things, monitoring to ensure that 
the delivery instrument--that is, the underlying VCC--conforms or, 
where appropriate, updates to reflect the latest certification 
standard(s) applicable for that VCC. For example, where there are 
changes to either the crediting program or the types of projects or 
activities associated with the underlying VCC, due for example to new 
standards or certifications, then the DCM should amend the contract's 
terms and conditions to reflect this update. In such circumstances, the 
DCM should also ensure that it is monitoring the adequacy of the 
estimated deliverable supply of the underlying VCC to satisfy the 
contract's delivery requirements.
    Finally, the Commission reminds market participants that Commission 
regulations implementing DCM Core Principle 4 require DCMs to have 
rules requiring their market participants to keep records of their 
trading that include records of their activity in the underlying 
commodity and related derivatives markets.\337\ A DCM's rules also must 
require market participants to make such records available upon request 
to the DCM.\338\ As such, DCM market participants are required, upon 
request, to make records of their trading in underlying VCC cash 
markets available to the DCM, in order to assist the DCM in fulfilling 
its market monitoring obligations. These records also are subject to 
Commission inspection under applicable Commission recordkeeping rules.
---------------------------------------------------------------------------

    \337\ 17 CFR 38.254(a).
    \338\ Id.
---------------------------------------------------------------------------

C. A DCM Must Satisfy the Product Submission Requirements Under Part 40 
of the CFTC's Regulations and CEA Section 5c(c)

    There are generally two processes by which a DCM may list a new 
derivative contract for trading.\339\ The DCM may elect to list the 
contract for trading by providing the Commission with a written 
certification--a ``self-certification''--that the contract complies 
with the CEA, including the CFTC's regulations thereunder.\340\ 
Alternatively, the DCM may elect voluntarily to seek prior Commission 
approval of the contract.\341\ In each case, the DCM must submit 
prescribed information to the Commission, including but not limited to 
the contract's terms and conditions.\342\ Amendments to an existing 
derivative contract also must be submitted to the Commission, along 
with prescribed information, either by way of self-certification or for 
prior Commission approval.\343\
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    \339\ SEFs also may generally list new contracts by way of 
either of these two processes. See, generally, CEA section 5c(c), 7 
U.S.C. 7a-2(c).
    \340\ CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1). See also 17 CFR 
40.2. The Commission must receive the DCM's self-certified 
submission at least one business day before the contract's listing. 
17 CFR 40.2(a)(2).
    \341\ CEA sections 5c(c)(4) and (5), 7 U.S.C. 7a-2(c)(4) and 
(5). See also 17 CFR 40.3.
    \342\ 17 CFR 40.2 and 40.3.
    \343\ 17 CFR 40.5 and 40.6.
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    This guidance highlights 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. These requirements generally apply with respect to the 
listing by a DCM of a derivative contract, regardless of the underlying 
asset class. However, the Commission wishes to remind DCMs of the 
importance of fully complying with these requirements in a submission 
for a VCC derivative contract.
    The relevant requirements provide, first, that a contract 
submission to the Commission must include an ``explanation and 
analysis'' of the contract and the contract's compliance with 
applicable provisions of the CEA, including core principles and the 
Commission's regulations thereunder.\344\ Second, the relevant 
requirements provide that the explanation and analysis of the contract 
either be accompanied by the documentation relied upon to establish the 
basis for compliance with applicable law, or incorporate information 
contained in such documentation, with appropriate citations to data 
sources.\345\ Third, the relevant requirements provide that, if 
requested by Commission staff, a DCM must provide any additional 
evidence, information or data that demonstrates that the contract 
meets, initially or on a continuing basis, the requirements of the CEA 
or the Commission's regulations or policies thereunder.\346\
---------------------------------------------------------------------------

    \344\ 17 CFR 40.2(a)(3)(v) (for self-certification) and 
40.3(a)(4) (for Commission approval). The ``explanation and 
analysis'' requirement for self-certified contracts provides for 
such explanation and analysis to be ``concise.'' The ``explanation 
and analysis'' requirement for contracts submitted for prior 
Commission approval does not include the ``concise'' qualifier. The 
Commission requires DCMs to provide a more detailed explanation and 
analysis of contracts that are submitted for affirmative Commission 
approval.
    \345\ 17 CFR 40.2(a)(3)(v) (for self-certification) and 
40.3(a)(4) (for Commission approval).
    \346\ 17 CFR 40.2(b) (for self-certification) and 40.3(a)(10) 
(for Commission approval).
---------------------------------------------------------------------------

    Since VCC derivatives are a comparatively new and evolving class of 
products, and since standardization and accountability mechanisms for 
VCCs are still being developed, the Commission anticipates that in 
connection with the submission for a VCC derivative contract, a DCM may 
provide qualitative explanations and analysis to assist in addressing 
the three above-described requirements. The Commission expects that the 
information--including supporting documentation, evidence and data--
provided by the DCM to describe how the contract complies with the CEA 
and applicable Commission regulations, will be complete and thorough. 
This is especially important given unique and developing aspects of 
VCCs and VCC derivative markets. Including complete and thorough 
information will assist the Commission and its staff in their 
understanding of the contract and their analysis of the contact's 
compliance with applicable statutory and regulatory requirements, 
including whether or not the contract is readily susceptible to 
manipulation.

    Issued in Washington, DC, on October 2, 2024, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Commission Guidance Regarding the Listing of Voluntary 
Carbon Credit Derivative Contracts--Voting Summary and Chairman's and 
Commissioner's Statements

Appendix 1--Voting Summary

    On this matter, Chairman Behnam and Commissioner Goldsmith 
Romero voted in the affirmative. Commissioners Johnson and Pham 
voted to concur. Commissioner Mersinger voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    The Commission's final guidance for designated contract markets 
(DCMs or Contract Markets) that list derivatives on voluntary carbon 
credits (VCCs) as the underlying commodity is a critical step in 
support of the development of high-integrity voluntary carbon 
markets (VCMs). For the first time ever, a U.S. financial regulator 
is

[[Page 83406]]

issuing regulatory guidance for contract markets that list financial 
contracts aimed at providing tools to manage risk, promote price 
discovery, and foster the allocation of capital towards 
decarbonization efforts.
    The publication of this final guidance marks the culmination of 
over five years \1\ of work with a diverse group of market 
participants, including agricultural stakeholders, ranchers, 
foresters, landowners, commercial end users, energy market 
stakeholders, emission-trading focused entities, carbon-credit 
rating agencies, crediting programs, CFTC-registered exchanges and 
clearinghouses, public interest groups, academics, and others. This 
guidance also represents a whole-of-government approach in 
coordination with our partners across the U.S. federal complex.
---------------------------------------------------------------------------

    \1\ See, e.g., CFTC, Event: Advisory Committee Meetings, CFTC's 
Market Risk Advisory Committee to Meet June 12 to Discuss Climate-
related Financial Risk (Jun. 12, 2019), https://www.cftc.gov/PressRoom/Events/opaeventmrac051219.
---------------------------------------------------------------------------

    Each step has been intentional. I sponsored the Market Risk 
Advisory Committee's Climate-Related Market Risk Subcommittee, which 
issued a first-of-its-kind report on Managing Climate Risk in the 
U.S. Financial System in September 2020, that identified pricing 
carbon as a fundamental element for financial markets to efficiently 
allocate capital to reduce greenhouse gas emissions (GHGs).\2\ I 
established the CFTC's Climate Risk Unit in March 2021 to support 
the Commission's building of subject matter expertise through 
external engagement, cooperation, and coordination regarding the 
role that climate-related derivatives play in pricing and managing 
climate-related financial risk.\3\ I hosted two Voluntary Carbon 
Markets Convenings in June 2022 and July 2023 to gather information 
from a wide variety of market participants to better understand the 
potential role of the official sector in these markets, particularly 
as we began to see the emergence of listed futures products that 
reference underlying VCC cash markets.\4\ The CFTC issued a Request 
for Information on Climate-Related Financial Risk in June 2022 that 
received 80 comments on ten priority areas of interest including 
VCMs and product innovation.\5\ The Commission then issued proposed 
guidance with a request for public comment in December 2023, that 
received over 85 comments,\6\ the majority of which generally 
supported the proposal. I have also testified before Congress on 
several occasions specifically on the role of financial markets in 
addressing the climate crisis and my views on the CFTC's role in 
supporting market-based solutions.\7\
---------------------------------------------------------------------------

    \2\ Managing Climate Risk in the U.S. Financial System, Report 
to the CFTC's Market Risk Advisory Committee by the Climate-Related 
Market Risk Subcommittee (Sept. 2020), https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf.
    \3\ See Press Release Number 8368-21, CFTC Acting Chairman 
Behnam Creates New Climate Risk Unit (Mar. 17, 2021), https://www.cftc.gov/PressRoom/PressReleases/8368-21.
    \4\ CFTC, Event: Commission Meetings, CFTC Announces Voluntary 
Carbon Markets Convening (Jun. 2, 2022), https://www.cftc.gov/PressRoom/Events/opaeventcftccarbonmarketconvene060222; and CFTC, 
Event: Commission Meetings, CFTC Announces Second Voluntary Carbon 
Markets Convening, (July 19, 2023), https://www.cftc.gov/PressRoom/Events/opaeventvoluntarycarbonmarkets071923.
    \5\ Request for Information on Climate-Related Financial Risk, 
87 FR 34856 (Jun. 8, 2022), available at https://www.cftc.gov/sites/default/files/2022/06/2022-12302a.pdf.
    \6\ Proposed Commission Guidance Regarding the Listing of 
Voluntary Carbon Credit Derivative Contracts and Request for 
Comment, 88 FR 89410 (Dec. 27, 2023), https://www.cftc.gov/sites/default/files/2023/12/2023-28532a.pdf; See comment file available at 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7463&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50.
    \7\ See, e.g., Rostin Behnam, Chairman, CFTC, Testimony by 
Chairman Rostin Behnam Before the Subcommittee on Agriculture, Rural 
Development, Food and Drug Administration and Related Agencies 
Committee on Appropriations, U.S. House of Representatives (Mar. 28, 
2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam35; 
Rostin Behnam, CFTC, Testimony of Commissioner Rostin Behnam before 
the House Select Committee on the Climate Crisis (Oct. 1, 2020), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam16.
---------------------------------------------------------------------------

    The primary takeaway from this research, public engagement, and 
consultation is clear; the Commission should act, consistent with 
its statutory authority under the Commodity Exchange Act (CEA), to 
strengthen market integrity, transparency, and liquidity for 
derivatives with underlying voluntary carbon credits that are real, 
additional, permanent, verifiable, and each represent a unique 
metric ton of GHG emissions reduced or removed from the atmosphere.
    While VCC derivatives are a comparatively new and evolving class 
of products, Contract Markets must ensure that any listed 
derivatives comply with the CEA and Commission regulations. The 
guidance outlines factors that Contract Markets may consider in 
connection with the VCC derivative contract design and listing 
process including: Core Principle 3, which requires Contract Markets 
to list only contracts that are not readily susceptible to 
manipulation; Core Principle 4, which requires Contract Markets to 
have the capacity and responsibility to prevent manipulation, price 
distortion, and other market disruptions through market 
surveillance, compliance, and enforcement practices and procedures; 
the Commission's regulations promulgated for these Core Principles; 
and the product submission provisions set forth in CEA section 5c(c) 
and part 40 of the Commission regulations.
    The guidance is not intended to modify or supersede existing 
statutory or regulatory requirements, or existing Commission 
guidance that addresses a Contract Market's listing of derivative 
contracts, such as appendix C to part 38 of the Commission's 
regulations. Instead, the guidance outlines VCC characteristics for 
a Contract Market to consider in connection with the contract design 
and listing process for VCC derivatives to address certain 
requirements under the CEA and the Commission's rules.
    These voluntary carbon credit characteristics are: (i) 
transparency, additionality, permanence and accounting for the risk 
of reversal, and robust quantification of emissions reductions or 
removals, for consideration when addressing quality standards; (ii) 
governance, tracking mechanisms, and measures to prevent double 
counting, for consideration when addressing delivery procedures; and 
(iii) third-party validation and verification, for consideration 
when addressing inspection or certification procedures. A Contract 
Market's consideration of these characteristics in connection with 
the design of the contract and the listing process should promote 
accurate pricing, reduce susceptibility of the contract to 
manipulation, help prevent price distortions, and foster confidence 
in the voluntary carbon credit contracts. Consistent with the 
current statutory and regulatory requirements, Contract Markets 
would retain reasonable discretion to comply with the DCM Core 
Principles and the Commission's regulations.
    This guidance is the product of a strong public-private 
partnership that I have strived to achieve with both the CFTC's 
traditional stakeholders, as well as a variety of new stakeholders, 
including carbon market participants to support transparency, 
liquidity, market integrity, and ultimately scale in these markets. 
Today's guidance outlines well-researched VCC commodity 
characteristics that build on several mature private sector and 
multilateral initiatives that have made great strides to strengthen 
VCC credit integrity standards through technical analysis, 
expertise, and broad coalition building. With the benefit of public 
comment, the CFTC's final guidance specifically recognizes that 
private sector recognized standards for high-integrity VCCs can 
serve as tools for CFTC Contract Markets in connection with their 
consideration of the VCC commodity characteristics.
    Recognizing the global nature of derivatives markets, the VCC 
guidance complements the important work underway by the 
International Organization of Securities Commissions (IOSCO) through 
its Sustainable Finance Task Force's Carbon Market Workstream, which 
I am leading with Verena Ross, the Chair of the European Securities 
and Market Authority. While this Commission guidance focuses on what 
Contract Markets may consider in designing and monitoring their 
proprietary listed VCC derivative contracts, IOSCO's work over 
nearly three years has been focused on how regulators can promote 
sound market structure and enhance financial integrity in the VCMs 
so that high-quality carbon credits can be traded in an orderly and 
transparent way. IOSCO is hard at work reviewing the many helpful 
comments received in response to the December 2023 VCM Consultation 
Report. I am looking forward to the next deliverable of that 
workstream, which is expected later this year.\8\
---------------------------------------------------------------------------

    \8\ International Organization of Securities Commissions 
(IOSCO), CR06/2023 Voluntary Carbon Markets, Consultation Report 
(Dec. 2023), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD749.pdf.
---------------------------------------------------------------------------

    The CFTC's unique mission focused on risk mitigation and price 
discovery puts us on the front lines of the now global nexus

[[Page 83407]]

between financial markets and decarbonization efforts. Leveraging 
the CFTC's personnel and expertise demonstrates our commitment to 
taking a thoughtful and deliberate step toward building a financial 
system that provides effective tools in achieving emission 
reductions.
    I thank my fellow commissioners for enabling the Commission to 
issue this final guidance. I greatly appreciate the expertise and 
the tremendous work done by staff in the Division of Market 
Oversight, the Office of the General Counsel, and in my office on 
this final guidance.

Appendix 3--Dissenting Statement of Commissioner Summer K. Mersinger

    Today's non-binding VCC 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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \5\ VCC Guidance at page 27.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \6\ VCC Guidance at page 39.
---------------------------------------------------------------------------

    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.

[FR Doc. 2024-23105 Filed 10-11-24; 8:45 am]
BILLING CODE 6351-01-P

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