Setting Standards for Carbon Markets

Can CFTC Provide Guardrails for Carbon Credits as They Take Off?

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
Connect with Chris:
The Commodity Futures Trading Commission (CFTC) is taking a deeper look at some of the issues around carbon markets, which are in their infancy compared to other markets. At least one market report, however, cites that carbon markets could top $100 billion in value by 2030. (Logo courtesy of the CFTC)

OMAHA (DTN) -- As companies try to meet net-zero pledges while farmers and other landowners are offered money to sequester carbon and reduce emissions, the oversight of just how carbon is traded, measured, and verified continues to be sorted out.

This past week, the Commodity Futures Trading Commission held a marathon session looking at voluntary carbon markets.

Right now, the voluntary carbon market is estimated at about $2 billion in value, which has doubled in just over a year. The CFTC cites a Morgan Stanley research paper forecasting that carbon markets could top $100 billion in value by 2030.

CFTC Chairman Rostin Benham noted the commission has heard from more than 80 stakeholders on carbon markets over the past year. The main takeaways are the commission should protect against fraud and market manipulation and should back the development of standards to help the market for carbon offsets grow.

Benham noted there is more money funneling into "private climate finance and capital allocation," and there is a growing need to hedge risk in climate markets.

Benham also stressed CFTC "is not a climate regulator." He noted the agency doesn't have the authority to require market participants to comply with a specific policy. Instead, the commission is focused on transparent and liquid markets for various businesses to manage their risks.

During the past month, CFTC issued an alert on how to report violations of carbon markets. The commission also created a new task force to look at potential misconduct or fraud in claims about environmental benefits.


While the CFTC is in the initial stages of looking at carbon markets, Congress is finally responding to financial crimes in another market -- cryptocurrency. After more than a decade of soaring growth, and some high-profile financial failures and scams such as FTX, the House Financial Services Committee will mark up legislation this week to provide clarity over crypto markets. The House Agriculture Committee is also involved with the bill, which will create roles for both CFTC and the Securities and Exchange Commission (SEC) in oversight.

Comparing crypto markets to carbon, a decade ago, Bitcoin had about $1.3 billion in market value. Now, the entire crypto market is valued globally at more than $2 trillion.


The CFTC's panel discussions included federal departments, including USDA, as well as registries, futures markets and other market participants, including forestry, but did not include anyone representing farmers or the companies signing up farmers for carbon programs.

Vincent McGonagle, head of CFTC division of market oversight, said there are 24 environmental contracts that have "attracted liquidity," meaning they have open interest of more than 10,000 contracts. Three of those contracts are in the top 100 of futures contracts trades, so they have a significant amount of open interest, he said.

Mike Kierstead, head of environmental markets for Intercontinental Exchange, rattled off a plethora of relatively obscure acronyms to note it's difficult for a buyer to understand carbon credits given "a lack of transparency and integrity and difficulty" wading through the markets.

"You make the net-zero pledge, you want to commit to this, and you enter a world which can be very difficult to navigate," Kierstead said.

While there are a few regulated markets in Europe, Asia and in a few U.S. states, most carbon dioxide tons "go unpriced," Kierstead said. "So, it's very hard to get to net zero without having a robust carbon price."

Having a regulated market would provide some differentiation long term for these types of markets, he said. "These markets can be fixed and can be moved forward," Kierstead said.

The CME has seen 377 million offsets trade on three different platforms going back to March 2021. Peter Keavey, managing director of Energy & Environmental Products for CME Group, said CME's average daily volume on voluntary carbon futures averages about 600 contracts while open interest is about 26,500 contracts.

"Essentially, voluntary carbon futures are a new product, just over 2 years old, so they are very small compared to CME's core commodity benchmarks," Keavey said, adding that open interest continues to build so CME is "optimistic about the future trajectory for these important markets."

For comparison, open interest on the CME's December corn contract right now is over 576,000 contracts.

Keavey said there have been about 130 different entities trading carbon futures with customers in the U.S., Europe, and Asia. A typical trader might be a bank working with a project developer that is locking in a price for a portion of its future offsets to cover development costs. Others are companies with net-zero pledges by a certain date looking to lock in some offset prices.


D. Wilson Ervin, a counselor for domestic finance in the U.S. Treasury Department, called carbon contracts in over-the-counter (OTC) and futures contracts "a tough forest to navigate." Ervin wanted to know where a new corporate player would begin to look at price and quality for carbon credits.

Keavey said there is a tremendous amount of data out there, but it's fragmented. "It's not a question of if it's out there, it is a question of where you access it."

Kierstead and Keavey each said there are challenges with carbon markets because of a lack of a benchmark that commodities have in other markets.


Lorenzo Bernasconi, head of climate and environmental solutions for Lombard Odier Asset Management Corp., said carbon markets will be fundamental to avoiding catastrophic risks associated with climate change.

"Carbon credits are crucial; indeed, they are vital in our fight against climate change," Bernasconi said.

The right standards for carbon credits have the potential to unlock significant investment in the fight against climate change. Still, Bernasconi said carbon markets right now don't have "top-tier standards" that are in line with commitments made in the Paris climate agreement. The low prices for carbon credit futures contracts reflect that the credits are not set to the highest standards, he said. Contracts need to evolve with quality standards.

Dirk Forrister, with the International Emissions Trading Association, said carbon markets right now are trying to mimic a federally regulated compliance market. He said CFTC has a chance to set standards that would "make the pathway to a legislated solution a little easier when the time comes."

Forrister cited there is a great deal of potential for carbon mitigation with credit offsets, but right now, "it doesn't have money." Carbon markets have the potential both domestically and globally to steer investments, but right now, the mechanisms aren't there for the markets. "That's what these voluntary markets have the potential to do," Forrister said.

"This is critical for the integrity of the market, but also to allow investors to take convictions on future market developments and avoid market participants being stuck holding stranded assets in the form of delivered carbon credits that correspond to outdated standards," Bernasconi said.

David Tenny, president and CEO of the National Alliance of Forest Owners, represents forest owners with about 86 million acres of private forest land. He noted private forests account for about 47% of carbon storage in the U.S.

"We can provide what the marketplace wants, but the marketplace needs to give us very, very clear signals, which brings us to integrity," he said.


Tenny said "data is king," and he pointed to the measurement, monitoring, reporting, and verification initiative dubbed by USDA as its MMRV strategy. Forest owners are among those working with USDA on providing data about the forestry sector.

"Think of how difficult it would be for the CFTC to regulate No. 2 yellow corn if it didn't know what it was," Tenny said. "We need USDA to tell CFTC what No. 2 corn is so it can be regulated in a proper way. Same thing for carbon. We've got to have consistency across government. Confusion is death."

Tenny also credited USDA for its market incentives for climate-smart commodities and the funding received in the Inflation Reduction Act.

On Friday, USDA held a webinar about its MMRV plan following its initial announcement on how the department will invest $300 million in the project. USDA officials stressed the initiative will continue USDA's "voluntary, incentive-based approach to drive reductions and carbon sequestration."

Bill Hohenstein, director of the Office of Energy and Environmental Policy at the Office of the Chief Economist, said the MMRV strategy is about building confidence in the numbers about carbon emissions and sequestration. Added to that, the measurement and verification will provide a story to tell about the practices that are "moving the dial" on carbon and other benefits. They will help producers in commodity markets, carbon markets and clean fuels, he said.

"All three of these opportunities require confidence in order to function, just like any market," Hohenstein said. He added the MMRV plan also will "bring the public along and convince them that the work has benefits."

Also see "USDA Unveils $300M Greenhouse Gas Measurement, Monitoring Plan" here:….

And see "Carbon Credits Add Income Stream for Family Ranch" here:….

Chris Clayton can be reached at

Chris Clayton