Carbon Credit Exchanges Securities

As carbon credits continue to gain in popularity, it’s important to understand what they are and how they work. In a nutshell, carbon credit exchanges are trading systems that match buyers and sellers of environmental commodities. Each tradable carbon credit represents one ton of carbon dioxide or a comparable amount of another greenhouse gas reduced, sequestered or avoided.

The current voluntary market for carbon credit exchange is highly heterogeneous, with different attributes for each credit that influence its price. For example, a carbon credit may be differentiated by the type of project where it was generated or by the region from which it comes. Matching an individual buyer with a suitable supplier is currently a time-consuming and inefficient process that’s typically transacted over the counter.

While carbon markets are not yet widely used, they have significant potential to become an important tool for businesses seeking to reduce their emissions and support climate-friendly projects. For companies that need to comply with regulatory caps or are required to purchase carbon credits, these markets are a great way to meet those objectives. However, many companies are years away from being able to tangibly reduce their own carbon footprints. Until then, these markets are an effective tool to help them stay below their emission caps.

Carbon Credit Exchanges Securities

The CFTC is committed to ensuring that these markets are safe, transparent and efficient for all participants, including investors. This is evident in our recent announcement of a new Climate Risk Unit and a Voluntary Carbon Market Convening, as well as our ongoing efforts to gather information about the carbon credit market.

We also want to ensure that CFTC oversight extends to the physical transaction marketplaces that underpin the futures markets we oversee. This is why we have proposed extending the scope of our regulation to cover these marketplaces and, to the extent appropriate, the underlying carbon transactions they facilitate.

Persistent problems with quality assurance place offsets markets at particular risk of fraud and manipulation. This is why we have been pushing for the development of a robust and internationally recognized standard to validate the quality of carbon credits, such as the Verified Emission Reduction (VER) and Certified Emission Reduction (CER).

Once established, these standards would make it easier for buyers and sellers to identify and match. Liquid reference contracts, based on core carbon principles and a standard taxonomy of additional attributes, could also help to foster more liquidity and encourage the growth of supplier financing. And, with a daily price signal, they can provide an important input to establishing a reliable benchmark for pricing over-the-counter trades.