Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
Congressional research reportJun 13, 2024
Ask Donna
What actually matters in this document.
Text
Voluntary Carbon Credit Markets and the
Commodity Futures Trading Commission
June 13, 2024
Congressional Research Service
https://crsreports.congress.gov
R48095
SUMMARY
Voluntary Carbon Markets and the
Commodity Futures Trading Commission
A carbon market generally refers to an economic framework that supports the buying and selling
of carbon “credits” or “offsets” representing a measurable reduction, avoidance, or sequestration
of greenhouse gas (GHG) emission. Carbon credits have monetary value, are tradeable, and are—
in important economic and legal senses—commodities. Governments and private entities
typically create carbon markets to support climate change mitigation objectives. Voluntary
carbon markets (VCMs) involve voluntary buying and selling of carbon credits outside of a
regulatory framework. By contrast, compliance carbon markets involve a regulatory authority
that requires GHG emission reductions from particular emission sources. Since 2004, renewable
energy and forestry and land use projects have accounted for over 70% of total carbon credits
generated.
R48095
June 13, 2024
Rena S. Miller
Specialist in Financial
Economics
Jonathan L. Ramseur
Acting Section Research
Manager
The veracity of the offsets as accurate representations of GHG reduction in the VCM varies because there is no recognized
central authority and no universally accepted standards for generating offsets. Nevertheless, the size of the global VCM has
grown, albeit unevenly, in recent years. The volume of transactions in the VCM increased from 208 metric tons of CO2equivalent (MTCO2e) in 2020 to 516 million MTCO2e in 2021, then decreased by about 50% in 2022 (to 254 million
MTCO2e). In recent months, some have observed increased skepticism toward the VCM from investors and the media. The
International Organization of Securities Commissions (IOSCO) has noted that “the projects underlying carbon credits appear
to exhibit a wide variance in quality related to whether the project has actually avoided or removed the GHG emissions as
claimed.”
In December 2023, the Commodity Futures Trading Commission (CFTC) issued a proposed guidance on Voluntary Carbon
Credit (VCC) derivative contracts (hereinafter, “CFTC proposed guidance”). The guidance has marked the most
comprehensive attempt at a regulatory framework for the VCMs, even though it most directly addresses the market for
derivatives related to VCMs. The CFTC lacks authority under the Commodity Exchange Act (CEA; P.L.74-675) to more
generally govern or regulate spot commodity markets, as opposed to derivatives markets. (Spot markets refer to outright
exchanges of a commodity for payment, by contrast to a derivative trade, such as a future, option, or swap, related to the
underlying commodity price.) The CFTC proposed guidance essentially would put certain requirements on CFTC-regulated
derivatives exchanges that list VCM derivatives, requiring those exchanges to conduct certain due diligence to ensure the
underlying quality of the VCCs upon which the derivatives are based.
While the CFTC’s December 2023 proposed guidance notes that standardization and accountability mechanisms for VCCs
are “still developing,” it identifies three characteristics that designated contract markets (DCMs)—better known as futures
exchanges—should address in the terms and conditions of a VCC derivative contract. These are (1) quality standards, (2)
delivery points and facilities, and (3) inspection provisions. The CFTC guidance further identifies four commodity
characteristics that DCMs should consider in addressing quality standards regarding VCC derivatives. These include (1)
transparency—that VCC derivative contracts should include information that “readily specifies” the crediting program(s) and
types of projects from which eligible VCCs may be issued; (2) additionality—that DCMs should consider whether the VCCs
underlying a derivative contract represent GHG emission reductions or removals that are “additional,” or credited only for
projects that result in emission removals that would not have occurred in the absence of the VCC; (3) permanence and risk of
reversal—whether the crediting program for VCCs underlying a derivative contract has measures to address the risk that
VCCs may have to be recalled or cancelled because the carbon removed is released back into the atmosphere; and (4) robust
quantification—whether the methodology used by a crediting program to calculate GHG emission reductions or removals are
robust, conservative, and transparent.
Various other governmental authorities and trade groups have proposed or adopted other rules and reduction programs that
broadly align to the principles and characteristics of the CFTC proposed guidance. The CFTC proposed guidance largely
tracks the IOSCO’s December 2023 Voluntary Carbon Markets Consultation Report, which made a number of similar
recommendations to improve and standardize the quality of VCCs. These included reducing double counting and promoting
additionality, among other measures. Another trade group, the Integrity Council for the Voluntary Carbon Market, published
10 broad principles in July 2023 that are similar to the CFTC proposed guidance and IOSCO report.
Congressional Research Service
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), developed by the United Nations’
International Civil Aviation Organization, seeks to lower GHG emissions from international aviation, and CORSIA has
published similar VCC principles. Participation in CORSIA is voluntary through 2026, after which it is slated to become
mandatory for members, and the U.S. aviation industry agreed to participate. It is unclear whether the CORSIA market for
carbon credits will more closely resemble the VCM or a compliance market, once participation becomes mandatory in 2026.
After 2026, mandatory CORSIA participation could further impact demand for VCCs. The CFTC proposed guidance
regarding the underlying quality and integrity of VCCs appears to broadly align with CORSIA principles.
Congressional Research Service
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
Contents
Background on Carbon Markets ...................................................................................................... 1
Carbon Credits .......................................................................................................................... 2
Compliance Markets ................................................................................................................. 2
Voluntary Carbon Markets ........................................................................................................ 3
Carbon Credit Concerns ............................................................................................................ 5
CFTC and Federal Actions on VCMs.............................................................................................. 6
CFTC Guidance and Biden Administration VCM Principles ................................................... 6
Prior CFTC Actions ............................................................................................................ 8
The CFTC’s December 2023 Proposed Guidance Regarding VCC Derivative Contracts .............. 9
A DCM Shall Only List Derivative Contracts That Are Not Readily Susceptible to
Manipulation ........................................................................................................................ 10
Quality Standards .............................................................................................................. 10
Delivery Points and Facilities ............................................................................................ 11
Inspection Provisions ........................................................................................................ 12
A DCM Shall Monitor a Derivative Contract’s Terms and Conditions as They Relate
to the Underlying Commodity Market ................................................................................. 12
A DCM Must Satisfy the Product Submission Requirements Under Part 40 of the
CFTC’s Regulations and CEA Section 5c(c) ....................................................................... 12
Other Guidance Regarding VCCs and VCC Derivatives .............................................................. 13
International Organization of Securities Commissions (IOSCO) ........................................... 13
The Integrity Council for the Voluntary Carbon Market ......................................................... 14
Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) .................. 15
California Voluntary Carbon Market Disclosures ................................................................... 18
Figures
Figure 1. Global Voluntary Carbon Credits Issued by Type of Activity .......................................... 4
Figure 2. Voluntary Carbon Credits Issued by Year ........................................................................ 5
Contacts
Author Information........................................................................................................................ 18
Congressional Research Service
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
Background on Carbon Markets
A carbon market generally refers to an economic framework that supports the buying and selling
of environmental commodities that signify greenhouse gas (GHG) emission reductions or
sequestration.1 Governments and private entities typically create carbon markets to support
climate change mitigation objectives. These objectives often include the reduction, avoidance, or
sequestration of GHG emissions, such as carbon dioxide (CO2), methane, and nitrous oxide.
Carbon markets can include both carbon-based GHG emissions, such as CO2 and methane, and
noncarbon-based emissions, such as nitrous oxide or certain fluorinated gases. Carbon markets
can also support other objectives, such as conservation of forests or soils or biodiversity.
A carbon market can take several different forms depending on its specific structure and context.
For example, a carbon market may support a compliance regime, such as a GHG cap-and-trade
program, or voluntary activities (discussed below).
The operations of a carbon market may involve a number of entities. Some key terms include the
following:
•
•
•
Carbon credits or carbon offsets represent a measurable reduction, avoidance,
or sequestration of GHG emissions.2 Carbon credits have monetary value and
may be tradeable in both compliance and voluntary carbon markets. As such
projects can involve different GHGs, they are typically quantified in terms of
metric tons of CO2-equivalent (MTCO2e).3
Compliance carbon markets involve a regulatory authority that requires GHG
emission reductions from particular emission sources—for example, a GHG
emission cap-and-trade system, which caps GHG emissions for covered entities
while providing flexibility in how these entities comply. In a cap-and-trade
program, an emissions cap is partitioned into emission allowances (or permits).
Typically, an emission allowance represents the authority to emit one MTCO2e—
the same measure used for carbon credits.
Voluntary carbon markets involve voluntary buying and selling of carbon
credits outside of a regulatory framework. Multiple voluntary carbon markets
exist in the United States and in other countries. Carbon credit transactions can
occur directly between participants and buyers, or they can be mediated by other
parties or programs.
1 GHGs in the atmosphere trap radiant energy, warming the earth’s surface and oceans. The primary GHGs emitted by
humans include carbon dioxide (CO2), methane, nitrous oxide, sulfur hexafluoride, chlorofluorocarbons,
hydrofluorocarbons, and perfluorocarbons. CO2 emissions account for 80% of total GHG emissions in the United
States. See U.S. Environmental Protection Agency (EPA), Draft Inventory of U.S. Greenhouse Gas Emissions and
Sinks: 1990-2022, February 2024, https://www.epa.gov/ghgemissions/draft-inventory-us-greenhouse-gas-emissionsand-sinks-1990-2022.
2 The terms carbon credit and carbon offset are generally interchangeable. This report generally uses the term carbon
credit, because this is the term used in the CFTC’s proposed guidance.
3 CO equivalents are used because GHGs vary by global warming potential (GWP). GWP is an index developed by the
2
Intergovernmental Panel on Climate Change (IPCC) that allows comparisons of the heat-trapping ability of different
gases over a period of time, typically 100 years. Consistent with international GHG reporting requirements, the
Environmental Protection Agency’s (EPA) most recent GHG inventory (with data from 2022) uses the GWP values
presented in the IPCC’s 2013 Fifth Assessment Report. For example, based on these GWP values, a ton of methane is
28 times more potent than a ton of CO2 when averaged over a 100-year time frame. See EPA, Inventory of U.S.
Greenhouse Gas Emissions and Sinks: 1990-2022, Draft, March 2024, https://www.epa.gov/ghgemissions/draftinventory-us-greenhouse-gas-emissions-and-sinks-1990-2022.
Congressional Research Service
1
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
•
•
•
Carbon registries track the ownership of carbon credit projects and issue credits
for emission reductions or removal. Carbon registries may establish general rules
and requirements for certifying projects, accredit third-party verifiers of carbon
credit projects, and develop and approve specific carbon credit project protocols.
Carbon credit protocols are specific to individual project types (e.g.,
afforestation or soil conservation) and they standardize the measuring, reporting,
and verification (MRV) requirements for generating carbon credits.
Third-party verifiers confirm that participants correctly implement carbon
credit protocols.
Carbon Credits
A carbon credit is a measurable reduction, avoidance, or sequestration of GHG emissions used to
compensate for emissions elsewhere. Carbon credit projects can involve a range of activities,
from land-based projects to energy deployment. For example, forest landowners can generate
credits through afforestation (i.e., establishing tree cover on previously unforested lands) and
reforestation projects (i.e., restoring tree cover to previously forested land), among others.
Examples of other carbon credit projects may include support for renewable energy, destruction
of ozone depleting substances, or reduction of methane emissions in coal mines.
Carbon credits are key instruments in both compliance and voluntary carbon markets. Many
compliance market frameworks, such as cap-and-trade programs, allow covered entities to use a
limited number of carbon offsets to help achieve compliance. In voluntary markets, companies
and other entities may purchase unlimited credits to pursue voluntary GHG emissions reduction
goals.
Carbon credits obtained in both compliance and voluntary markets can serve as the underlying
assets for derivatives contracts, such as futures, options, and swaps.4 The Commodity Exchange
Act (CEA) gives the Commodity Futures Trading Commission (CFTC) broad regulatory
authority over derivatives trading platforms, such as designated contract markets (DCMs) – more
commonly known as futures exchanges.5 The CFTC also has authority to enforce prohibitions of
fraud and manipulation in commodity spot markets, though not to otherwise broadly regulate
commodity spot markets.6
Compliance Markets
Compliance carbon markets typically require GHG emission reductions.7 An example is a GHG
emission cap-and-trade system, which caps GHG emissions for covered entities (e.g., fossil-fuelfired power plants or industrial facilities) while providing flexibility—such as on-site reduction or
emissions allowance trading—when complying with the emissions cap. Several compliance
4 See, e.g., International Swaps and Derivatives Association, Role of Derivatives in Carbon Markets, 2021,
https://www.isda.org/a/soigE/Role-of-Derivatives-in-Carbon-Markets.pdf.
5 7 U.S.C. § 7.
6 Id. § 9(1); 17 C.F.R. § 180.1 (2024). The CFTC Glossary defines a spot market as a market of immediate delivery of
and payment for a commodity or product. See https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/
CFTCGlossary/index.htm#S.
7 Compliance carbon markets may also be described as regulatory or mandatory carbon markets.
Congressional Research Service
2
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
markets are in the United States,8 including California’s cap-and-trade program and the Regional
Greenhouse Gas Initiative (RGGI) that operates in a number of states.9
In a cap-and-trade program, an emissions cap is partitioned into emission allowances (or permits).
Typically, an emission allowance represents the authority to emit one MTCO2e—the same
measure used for carbon credits. At the end of each established compliance period (typically a
calendar year or multiple years), covered entities submit emission allowances to an implementing
agency to cover the number of tons of GHGs emitted during the period. Generally, if an entity did
not provide enough allowances to cover its emissions, it would be subject to penalties.10
Depending on the program design, an entity may acquire sufficient allowances by buying them
from the implementing agency, from another covered entity that may have excess, or in a
commodities market.
Under an emissions cap, covered entities generally have a financial incentive to reduce emissions
as much as possible. A cap-and-trade system creates a new commodities market, allowing entities
to buy and sell emission allowances. This is why cap-and-trade is often called a “market-based
mechanism.”
If allowed as a compliance option, carbon credits may provide additional emission reduction or
sequestration opportunities beyond those available at covered entities. Instead of making direct,
onsite reductions—such as installing new equipment or improving operational efficiency—
covered entities could purchase carbon credits from non-covered sources, such as agriculture and
forestry operations. Generally, the carbon credits would present a lower-cost alternative to onsite
emission reductions.
The ability to generate and sell such credits could provide a financial incentive for non-covered
sources to reduce, avoid, or sequester emissions. Non-covered sources in compliance frameworks
often include agricultural operations and forestry activities. Sequestration from land use activities,
particularly in the forestry sector, offers the potential for further reductions in net GHG emissions.
Voluntary Carbon Markets
In the United States and around the world, a number of organizations (e.g., private companies),
and individuals are voluntarily purchasing carbon credits in voluntary carbon markets (VCMs).
The motivating factors for these purchases may vary. For example, some businesses and
individuals may value their contribution to mitigating climate change or be seeking to enhance
their public image by claiming, for example, that all or part of their GHG-emitting activities (e.g.,
8 In addition, the European Union has had a cap-and-trade system in place for almost 20 years. For more information,
see CRS Report R47167, Border Carbon Adjustments: Background and Developments in the European Union, by
Jonathan L. Ramseur, Brandon J. Murrill, and Christopher A. Casey.
9 For more information on California’s cap-and-trade program, see California Air Resources Board (CARB), “FAQ
Cap-and-Trade Program,” https://ww2.arb.ca.gov/resources/documents/faq-cap-and-trade-program. The Regional
Greenhouse Gas Initiative (RGGI) lists participating states as Connecticut, Delaware, Maine, Maryland, Massachusetts,
New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. See RGGI, “Elements of RGGI,”
https://www.rggi.org/program-overview-and-design/elements. Pennsylvania’s state regulators are not currently
enforcing RGGI participation because of a court injunction. More information on Pennsylvania’s RGGI participation is
available at https://www.dep.pa.gov/Business/Air/BAQ/Pages/RGGI-Allowance-Information.aspx. For more
background information on RGGI, see CRS Report R41836, The Regional Greenhouse Gas Initiative: Background,
Impacts, and Selected Issues, by Jonathan L. Ramseur.
10 For additional details, see CRS Report R45625, Attaching a Price to Greenhouse Gas Emissions with a Carbon Tax
or Emissions Fee: Considerations and Potential Impacts, by Jonathan L. Ramseur and Jane A. Leggett.
Congressional Research Service
3
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
travel or specific events) are “carbon neutral.” Others may see experience in a carbon market as
an advantage in any potential future compliance market.
A range of different entities buy and sell carbon offsets in VCMs. The credibility of GHG
reduction claims associated with these offsets may vary, as the voluntary markets do not have a
recognized central authority or universally accepted standards or guidelines for generating credits.
Some sellers offer offsets that comply with relatively rigorous, independently verified standards.
Other sellers offer offsets that meet the seller’s self-established guidelines.
Figure 1 provides a breakdown by type of activity for global carbon credits that were issued
between 2004 and 2023 from four major voluntary offset project registries: American Carbon
Registry, Climate Action Reserve, Gold Standard, and Verra. The figure indicates that credits
derived from renewable energy and forestry and land use projects have accounted for over 70% of
the total carbon credits.
Figure 1. Global Voluntary Carbon Credits Issued by Type of Activity
Based on Data from 2004 to 2023
Source: Prepared by CRS; data from Barbara K. Haya at al., Voluntary Registry Offsets Database v10, Berkeley
Carbon Trading Project, University of California, Berkeley, December 2023, https://gspp.berkeley.edu/researchand-impact/centers/cepp/projects/berkeley-carbon-trading-project/offsets-database.
Notes: The carbon credits in this figure include projects from American Carbon Registry, Climate Action
Reserve, Gold Standard, and Verra. According to background information from the Berkeley Carbon Trading
Project database, these four registries “generate almost all of the world’s voluntary market offsets.”
The number of credits issued in VCMs has generally increased over the last two decades,
although year-to-year growth has been uneven. Figure 2 illustrates the number of voluntary
credits issued from the four voluntary registries (listed above) between 2004 and 2023. As Figure
2 indicates, the number of issued credits increased from 49 million MTCO2e in 2014 to 260
million MTCO2e in 2023.
Congressional Research Service
4
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
Figure 2.Voluntary Carbon Credits Issued by Year
2004-2023
Source: Prepared by CRS; data from Barbara K. Haya at al., Voluntary Registry Offsets Database v10, Berkeley
Carbon Trading Project, University of California, Berkeley, December 2023, https://gspp.berkeley.edu/researchand-impact/centers/cepp/projects/berkeley-carbon-trading-project/offsets-database.
Notes: The carbon credits in this figure include projects from American Carbon Registry, Climate Action
Reserve, Gold Standard, and Verra. According to background information from the Berkeley Carbon Trading
Project database, these four registries “generate almost all of the world’s voluntary market offsets.” Carbon
credits in the figure include renewable energy; forestry and land use; waste management; household and
community projects; industrial and commercial projects; chemical processes; carbon capture and storage;
agriculture; and transportation.
Carbon Credit Concerns
A primary concern with carbon credits, particularly in voluntary markets, is their quality and
credibility. The availability of credits that do not reduce GHG concentrations in the atmosphere
could undermine climate change policy goals. Problems with quality and credibility can raise
questions about the effectiveness of both compliance and voluntary markets.
In recent months, some commenters have observed increased skepticism toward the VCM from
some investors and the media.11 The International Organization of Securities Commissions
(IOSCO)12 has noted that “the projects underlying carbon credits appear to exhibit a wide
variance in quality related to whether the project has actually avoided or removed the GHG
emissions as claimed.”13 IOSCO has also observed significant differences in quantifying the
emissions that a given project has reduced or avoided.14 Though many of these methodologies are
publicly available, non-experts often have difficulty understanding them.15
11 “Long-Term Carbon Offsets Outlook 2023,” Bloomberg, July 18, 2023, at https://www.bloomberg.com/professional/
blog/long-term-carbon-offsets-outlook-2023/.
12 IOSCO is an international body of securities regulators from most of the world’s countries and a global standard
setter for the securities sector. The chairs of the U.S. Securities and Exchange Commission and CFTC are on IOSCO’s
Board. See IOSCO, “Ordinary Members of IOSCO,” at https://www.iosco.org/about/?subsection=membership&
memid=1.
13 The Board of The International Organization of Securities Commissions (IOSCO), Voluntary Carbon Markets
Consultation Report (Dec. 2023), p. 33, at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD749.pdf.
14 Id.
15 Id.
Congressional Research Service
5
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
IOSCO also flagged concerns in secondary markets for trading carbon credits, including conflicts
of interest when traders have a proprietary interest in carbon credits or generate carbon credits by
sponsoring carbon-offset projects. IOSCO cautioned that such conflicts of interest “could
incentivize traders to manipulate carbon credits prices by, for example, issuing buy/sell
recommendations to their customers, while doing the opposite with their own carbon credits.”16
In addition, the use of carbon credits may raise concerns at facilities, such as fossil-fuel-fired
electric power plants or petroleum refineries, that produce both GHG emissions and traditional air
pollutants. The more traditional air pollutants (e.g., lead, particulate matter, and sulfur dioxide)
may present risks to human health on a local or regional scale, while GHG emissions present
risks on a global scale. The ability of industrial facilities to use carbon credits in lieu of directly
reducing their onsite GHG emissions has sometimes raised concerns17 that some stakeholders
categorize as an “environmental justice” issue.18 This issue is beyond the scope of this report.
CFTC and Federal Actions on VCMs
As noted above, the CEA gives the CFTC broad regulatory authority over derivatives trading
platforms, such as DCMs.19 The CFTC also has authority to enforce prohibitions of fraud and
manipulation in commodity spot markets.20 Spot markets refer to outright exchanges of a
commodity for payment, by contrast to a derivative trade, such as a future, option or swap, related
to the underlying commodity price.21 However, the CFTC lacks authority under the CEA to more
generally govern or regulate spot commodity markets, as opposed to derivatives markets.
CFTC Guidance and Biden Administration VCM Principles
In December 2023, the CFTC issued its proposed guidance, “Commission Guidance Regarding
the Listing of Voluntary Carbon Credit Derivative Contracts” (hereafter, “CFTC proposed
guidance”). The CFTC proposed guidance would put certain requirements on CFTC-regulated
derivatives exchanges that list such VCM derivatives, requiring these exchanges to conduct
certain due diligence aimed at ensuring the underlying quality of the voluntary carbon credits
upon which the derivatives are based. The CFTC proposed guidance represents the most
16 Id. at 38.
17 For example, environmental justice concerns regarding offsets have generated considerable interest in the context of
California’s cap-and-trade program, which allows offsets as a compliance alternative. For more information, see
CARB, “Cap-and-Trade FAQ,” https://ww2.arb.ca.gov/resources/documents/faq-cap-and-trade-program. See, for
example, Danae Hernandez-Cortes and Kyle C. Meng, Do Environmental Markets Cause Environmental Injustice?
Evidence from California’s Carbon Market, National Bureau of Economic Research, 2020; and Lara J. Cushing et al.,
A Preliminary Environmental Equity Assessment of California’s Cap-and-Trade Program, University of Southern
California Dornsife Equity Research Institute, 2016.
18
There is no definition of environmental justice in federal law. Some have interpreted the terms “environmental
justice (or injustice)” and “environmental equity (or inequity)” broadly to describe the perceived disproportionate
impacts of pollution across populations that possess different demographic characteristics (e.g., age, gender, race,
national origin, occupation, income, or language). See CRS Report R47920, U.S. Environmental Protection Agency
(EPA) Environmental Justice Activities and Programs, by Angela C. Jones.
19 7 U.S.C. § 7. Designated contract markets are more colloquially known as futures exchanges.
20 Id. § 9(1); 17 C.F.R. § 180.1 (2024). The CFTC Glossary defines a spot market as a market of immediate delivery of
and payment for a commodity or product. See https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/
CFTCGlossary/index.htm#S.
21 For further background on derivatives, see CRS In Focus IF10117, Introduction to Financial Services: Derivatives,
by Rena S. Miller.
Congressional Research Service
6
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
comprehensive attempt to date at a federal regulatory framework for the VCM’s, even though it
most directly addresses the market for derivatives related to VCMs.
Other federal initiatives could also directly affect the underlying VCM market. On May 28, 2024,
the Biden Administration released a set of voluntary principles for the VCMs.22 These seven
broad principles are in line with those set out in the CFTC proposed guidance. They include the
following:
•
•
•
•
•
•
Carbon credits should be unique and additional, and represent real, quantifiable
decarbonization that would not otherwise have occurred;
Activities that generate carbon credits should avoid inadvertent negative impacts
on local communities or the environment;
Corporate buyers of carbon credits should first prioritize reducing emissions
within their own corporate supply chains;
Detailed public disclosure by credit users of the nature of purchased and retired
credits should be made at least annually;
Public claims by credit users should accurately reflect the climate impact of
retired credits and only rely on credits meeting high integrity standards; and
Market participants should use their best efforts to improve market integrity and
market participation, and to lower transaction costs.23
Media reports in April 2024 had anticipated that the release of these Biden Administration
voluntary best practices would be aimed at bolstering confidence in that system.24 Indeed, the
White House VCM joint policy statement asserted that VCMs “can and should play a meaningful
role in facilitating global greenhouse gas emissions reductions and removals.”25 But it also noted
that concerns had been raised about the genuineness of decarbonization claims, and that, “Put
simply, stakeholders must be certain that one credit truly represents one tonne of carbon dioxide
(or its equivalent) reduced or removed from the atmosphere, beyond what would have otherwise
occurred.”26 Promulgation of the principles for VCM best practices was intended to foster market
integrity and confidence in these carbon credits, the White House noted.27 Critics cited by the
press, however, observed that the principles were broad and voluntary, still leaving lower-quality
credits available in the market for purchase, possibly cheaper, which could limit the effectiveness
of the principles.28
In terms of other federal actions impacting VCMs, observers noted that the Securities and
Exchange Commission’s (SEC’s) final rule on climate disclosures, which would require publicly
listed companies to report carbon emissions deemed material to investors, and any significant use
22 White House, Department of the Treasury, Department of Energy, and Department of Agriculture, Voluntary Carbon
Markets Joint Statement and Principles, May 2024, at https://www.whitehouse.gov/wp-content/uploads/2024/05/VCMJoint-Policy-Statement-and-Principles.pdf.
23 White House et al, Voluntary Carbon Markets Joint Statement and Principles, May 2024, at pp. 6-11.
24 Zack Coleman, “Biden Administration to Issue Carbon Market ‘Guardrails,’” POLITICOPRO, April 19, 2024.
25 White House et al, Voluntary Carbon Markets Joint Statement and Principles, May 2024, p. 1.
26 White House et al, Voluntary Carbon Markets Joint Statement and Principles, May 2024, p. 2.
27 White House et al, Voluntary Carbon Markets Joint Statement and Principles, May 2024, p. 4.
28 See, e.g., Brad Plumer, “Carbon Offsets, a Much-Criticized Climate Tool, Get Federal Guidelines,” New York Times,
May 28, 2024 at https://www.nytimes.com/2024/05/28/climate/yellen-carbon-offset-market.html.
Congressional Research Service
7
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
of carbon offsets to attain pledged climate goals, could, once implemented, create further
standardization and enhance regulatory requirements.29
Prior CFTC Actions
Prior to issuing its December 2023 proposed guidance on voluntary carbon credit (VCC)
derivative contracts, the CFTC had taken several actions, discussed below, related to VCMs.
In June 2022, the CFTC held “the first-ever Voluntary Carbon Markets Convening.”30 At this
meeting, participants discussed issues related to the supply and demand for high-quality carbon
offsets, including product standardization and the integrity of emissions avoidance and reduction
claims.31 Panelists also addressed the market structure for trading carbon offsets and related
derivatives.32
In June 2023, the CFTC’s Whistleblower Office issued an alert with information about how to
identify and report possible violations of the CEA involving fraud or manipulation in carbon
markets.33 The alert indicated that the public should be “on the lookout for” manipulative trading
and “wash” trading in carbon-market futures contracts;34 fraud in underlying spot markets,
including illusory “ghost” credits listed on carbon market registries; double counting or other
fraud related to carbon credits; and fraudulent statements related to the material terms of carbon
credits.35
Also in June 2023, the CFTC’s Division of Enforcement unveiled an Environmental Fraud Task
Force to address fraud and other misconduct in derivatives and spot markets related to “purported
efforts to address climate change and other environmental risks.”36 Among other things, the task
force is to examine fraud involving “the purported environmental benefits of purchased carbon
credits.”37
In July 2023, the CFTC held its second Voluntary Carbon Markets Convening.38 Participants
discussed recent private sector initiatives for high-quality carbon credits; trends and
29 See, e.g., Luis Garcia, “Carbon Credits Draw Fresh Attention Under SEC’s New Climate Rules; Developers of
Credit-Generating Projects Increasingly Attract Private-Equity Backers Who See Unmet Demand,” WSJ Private
Equity, March 27, 2024. The SEC’s final rule, however, has been challenged in court; and uncertainties exist regarding
its final outcome and scope.
30 CFTC Announces Voluntary Carbon Markets Convening, COMMODITY FUTURES TRADING COMM’N (June 2, 2022),
https://www.cftc.gov/PressRoom/Events/opaeventcftccarbonmarketconvene060222.
31 Id.
32 Id.
33 CFTC Whistleblower Office Issues Alert Seeking Tips Relating to Carbon Markets Misconduct, COMMODITY
FUTURES TRADING COMM’N (June 20, 2023), https://www.cftc.gov/PressRoom/PressReleases/8723-23.
34 The term “wash trading” refers to entering into, or purporting to enter into, transactions to give the appearance that
purchases and sales have been made, without incurring market risk or changing the trader’s market position. Wash
trading is prohibited under the CEA. See CFTC Glossary, at https://www.cftc.gov/LearnAndProtect/
AdvisoriesAndArticles/CFTCGlossary/index.htm#W.
35 CFTC Whistleblower Alert: Blow the Whistle on Fraud or Market Manipulation in the Carbon Markets, COMMODITY
FUTURES TRADING COMM’N (June 20, 2023).
36 CFTC Division of Enforcement Creates Two New Task Forces, COMMODITY FUTURES TRADING COMM’N (June 20,
2023), https://www.cftc.gov/PressRoom/PressReleases/8736-23.
37 Id.
38 CFTC Announces Second Voluntary Carbon Markets Convening, COMMODITY FUTURES TRADING COMM’N (June 20,
2023).
Congressional Research Service
8
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
developments in the cash and derivatives markets for carbon credits; and how the CFTC can
promote integrity for high-quality carbon credit derivatives.39
Figure 3 below provides a timeline of these actions.
Figure 3. History of Select CFTC Actions Regarding Voluntary Carbon Credits
Source: CRS based on CFTC data.
The CFTC’s December 2023 Proposed Guidance
Regarding VCC Derivative Contracts
In December 2023, the CFTC issued proposed guidance outlining factors that DCMs should
consider when addressing certain provisions of the CEA that are relevant to the listing and trading
of VCC derivative contracts.40 The proposed guidance focuses on two of the CEA’s “Core
Principles” applicable to DCMs:
1. DCM Core Principle 3, which requires that contracts listed on DCMs not be
readily susceptible to manipulation;41 and
2. DCM Core Principle 4, which requires DCMs to prevent manipulation, price
distortion, and disruptions of the physical delivery or cash settlement process
39 Id.
40 Commission Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts, Request for
Comment, 88 Fed. Reg. 89,410 (Dec. 27, 2023) [hereinafter “CFTC Proposed VCC Guidance”].
41 7 U.S.C. § 7(d)(3).
Congressional Research Service
9
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
through market surveillance, compliance, and enforcement practices and
procedures.42
The proposed guidance also discusses the product submission requirements under Part 40 of the
CFTC’s regulations43 and Section 5c(c) of the CEA44 and their application to new VCC derivative
contracts.
The CFTC’s proposed guidance is principally focused on DCMs, consistent with the agency’s
primary role as a derivatives regulator.45 As discussed, however, the CFTC also has authority to
enforce prohibitions of fraud and manipulation in commodity spot markets.46 Because derivatives
regulation can indirectly influence behavior in spot markets, the proposed guidance and any
associated CFTC efforts to regulate VCC derivatives may affect spot VCC markets.47
The subsections below review the three substantive sections of the proposed guidance.
A DCM Shall Only List Derivative Contracts That Are Not Readily
Susceptible to Manipulation
Appendix C to Part 38 of the CFTC’s regulations outlines certain considerations that are relevant
to DCM Core Principle 3’s requirement that listed contracts not be readily susceptible to
manipulation.48 Among other things, Appendix C provides that the terms and conditions of a
physically settled derivative contract “should describe or define all of the economically
significant characteristics or attributes of the commodity underlying the contract.”49
While the CFTC’s December 2023 proposed guidance notes that standardization and
accountability mechanisms for VCCs are “still developing,” it identifies three characteristics that
DCMs should address in the terms and conditions of a VCC derivative contract: (1) quality
standards, (2) delivery points and facilities, and (3) inspection provisions.50
Quality Standards
The CFTC’s proposed guidance identifies four commodity characteristics that DCMs should
consider in addressing quality standards regarding VCC derivatives:
42 Id. § 7(d)(4).
43 17 C.F.R. pt. 40.
44 7 U.S.C. § 7a-2(c).
45 While the proposed guidance focuses on DCMs, it indicates that swap execution facilities seeking to permit trading
in VCC swap contracts should also consider the guidance before approving such contracts. CFTC Proposed VCC
Guidance, supra note 40, at 89,416.
46 7 U.S.C. § 9(1); 17 C.F.R. § 180.1.
47 See CFTC Issues Proposed Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts,
GIBSON, DUNN & CRUTCHER LLP (Dec. 21, 2023), https://www.gibsondunn.com/cftc-issues-proposed-guidanceregarding-the-listing-of-voluntary-carbon-credit-derivative-contracts/.
48 17 C.F.R. pt. 38 app. C.
49 Id. pt. 38 app. C(b)(2)(i)(A). The CFTC’s proposed guidance primarily addresses physically settled contracts because
all of the VCC derivatives currently listed on DCMs are physically settled. CFTC Proposed VCC Guidance, supra note
40, at 89,415. The proposed guidance indicates, however, that cash-settled VCC derivatives should also include rules
that fully describe the essential economic characteristics of the underlying commodity, consistent with the existing
Appendix C guidance regarding cash-settled derivatives. Id. at 89,416.
50 CFTC Proposed VCC Guidance, supra note 40, at 89,416.
Congressional Research Service
10
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
1. Transparency. The proposed guidance explains that VCC derivative contracts
should include information that “readily specifies” the crediting program(s) and
types of projects or activities from which eligible VCCs may be issued.51
2. Additionality. The proposed guidance indicates that DCMs should consider
whether the VCCs underlying a derivative contract represent GHG emission
reductions or removals that are “additional,” meaning the VCCs are credited only
for projects that result in emission reductions or removals that would not have
occurred in the absence of the monetary incentive created by the sale of the
VCC.52 Because additionality is considered a key element of high-quality VCCs,
information regarding a crediting program’s procedures for assessing
additionality may constitute an “economically significant attribute” of a VCC
that should be described in its derivative contract.53
3. Permanence and Risk of Reversal. The proposed guidance explains that DCMs
should consider whether the crediting program for VCCs underlying a derivative
contract has measures to address the risk of reversal—that is, the risk that VCCs
may have to be recalled or cancelled because the carbon removed by a project is
released back into the atmosphere.54 In evaluating the risk of reversal, DCMs
should consider whether a crediting program has a “buffer” reserve of VCCs that
can compensate for reversals.55
4. Robust Quantification. The proposed guidance indicates that DCMs should
consider the methodology used by a crediting program to calculate GHG
emission reductions or removals.56 In particular, DCMs should consider whether
the relevant methodologies are robust, conservative, and transparent.57 In the
CFTC’s view, methodologies that satisfy these standards allow DCMs to more
accurately assess the quantity of a VCC’s deliverable supplies.58
Delivery Points and Facilities
Appendix C to Part 38 of the CFTC’s regulations indicates that the delivery procedures for
physically settled derivatives should minimize or eliminate impediments to making or taking
delivery of an underlying commodity, so as to ensure the convergence of cash and derivative
prices at the expiration of a contract.59 In addressing this issue, the CFTC’s proposed guidance
identifies three matters that DCMs should consider in listing VCC derivative contracts:
1. Governance. The proposed guidance explains that DCMs should consider
whether the crediting program for underlying VCCs has a governance framework
that effectively supports the program’s independence, transparency, and
accountability.60 In particular, DCMs should assess a crediting program’s decision51 Id. at 89,417.
52 Id.
53 Id.
54 Id.
55 Id. at 89,418.
56 Id.
57 Id.
58 Id.
59 17 C.F.R. pt. 38 app. C(b)(2)(i)(B).
60 CFTC Proposed VCC Guidance, supra note 40, at 89,418.
Congressional Research Service
11
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
making procedures; reporting and disclosure procedures; public and stakeholder
engagement processes; and risk management policies, including financial
reserves, cybersecurity policies, and anti-money laundering policies.61
2. Tracking. The proposed guidance indicates that DCMs should ensure that the
crediting program for underlying VCCs has processes—such as the use of a
registry—to clarify the issuance, transfer, and retirement of VCCs.62
3. No Double Counting. The proposed guidance indicates that DCMs should
consider effective measures to prevent the double counting of credited emission
reductions or removals (i.e., to ensure that credited reductions and removals are
issued to only one registry and cannot be used after retirement or cancellation).63
Inspection Provisions
Appendix C to Part 38 of the CFTC’s regulations provides that any inspection or certification
procedures for physically settled derivatives should be included in a contract’s terms and
conditions.64 The proposed guidance explains that such inspection or certification procedures
should be consistent with the latest procedures in VCC markets.65 DCMs should consider how the
crediting program for underlying VCCs verifies that credited mitigation projects meet the
program’s rules and standards.66
A DCM Shall Monitor a Derivative Contract’s Terms and
Conditions as They Relate to the Underlying Commodity Market
As discussed, DCM Core Principle 4 requires DCMs to prevent manipulation, price distortion,
and disruptions of the physical delivery or cash settlement process through market surveillance,
compliance, and enforcement practices and procedures.67 The proposed guidance indicates that
monitoring VCC derivative contracts includes ensuring that underlying VCCs reflect the latest
applicable certification standards (e.g., by amending a contract’s terms to correspond to any
updates to those standards).68 The proposed guidance also notes that, under CFTC regulations
implementing Core Principle 4, a DCM must require market participants to keep records of their
trading in both derivatives and underlying commodities and make those records available to the
DCM upon request.69
A DCM Must Satisfy the Product Submission Requirements Under
Part 40 of the CFTC’s Regulations and CEA Section 5c(c)
The proposed guidance highlights three requirements for VCC derivative contracts. First, a
product submission must include an explanation and analysis of the derivative contract and its
61 Id. at 84,419.
62 Id.
63 Id.
64 17 C.F.R. pt. 38 app. C(b)(2)(i)(G).
65 CFTC Proposed VCC Guidance, supra note 40, at 89,419.
66 Id.
67 7 U.S.C. § 7(d)(4).
68 CFTC Proposed VCC Guidance, supra note 40, at 89,420.
69 Id. (citing 17 C.F.R. § 38.254(a)).
Congressional Research Service
12
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
compliance with the CEA and CFTC regulations.70 Second, this explanation and analysis must 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.”71 Third, DCMs must demonstrate that a contract complies with CEA
requirements, if CFTC staff request such materials.72
Other Guidance Regarding VCCs and VCC
Derivatives
Other groups have issued guidance to promote good governance in VCMs. The subsections below
discuss several examples.
International Organization of Securities Commissions (IOSCO)
IOSCO is an international body of securities regulators from most of the world’s countries and a
global standard setter for the securities sector.73 In large part, IOSCO’s December 2023 Voluntary
Carbon Markets Consultation Report closely tracks the CFTC’s December 2023 proposed
guidance. For example, to address some of the concerns regarding quality standards, the IOSCO
report recommends the following:
•
•
•
•
•
•
VCC derivative contracts should detail how underlying carbon credits were
certified.74
VCM participants, including exchanges, should have comprehensive governance
frameworks with clear lines of accountability.75
Trading venues should consider appropriate ways to conduct market surveillance
and trading to identify fraud, manipulation, price distortion, and other market
disruptions.76
Carbon credit intermediaries and exchanges should have effective risk
management frameworks to address operational or technological risks.77
Entities operating derivatives exchanges should provide pre- and post-trade
disclosures similar to those in traditional financial markets.78
Trading venues and registries should provide public reports disclosing data on
trading volume, bid-ask spreads, and delivery of carbon credits.79
70 Id. (citing 17 C.F.R. §§ 40.2(a)(3)(v), 40.3(a)(4)).
71 Id. (citing 17 C.F.R. §§ 40.2(a)(3)(v), 40.3(a)(4)).
72
Id. (citing 17 C.F.R. §§ 40.2(b), 40.3(a)(10)).
73 The chairs of the U.S. Securities and Exchange Commission and CFTC are on IOSCO’s Board. See IOSCO,
“Ordinary Members of IOSCO,” at https://www.iosco.org/about/?subsection=membership&memid=1.
74 The Board of The International Organization of Securities Commissions (IOSCO), Voluntary Carbon Markets
Consultation Report (Dec. 2023), p. 66.
75 Id. at 67.
76 Id. at 45.
77 Id. at 68.
78 Id. at 66.
79 Id. at 65.
Congressional Research Service
13
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
•
•
Regulators should attempt to standardize a taxonomy of carbon credit attributes
and strengthen verification processes to promote standardization.80
Regulators should ensure conflict-of-interest rules to address any conflicts raised
by the issuance, verification, certification, transfer, and retirement of carbon
credits.81
The IOSCO paper also highlighted the need to reduce double counting and promote additionality
as additional concerns.82
The Integrity Council for the Voluntary Carbon Market
The Integrity Council for the Voluntary Carbon Market (ICVCM) refers to itself as an
independent governance body for the voluntary carbon market.83 In July 2023, it published 10
broad principles, with more detailed proposed requirements related to each one.84 The ICVCM
principles are broadly similar to the proposed CFTC guidance:
1. Effective governance: The carbon-crediting program shall ensure transparency,
accountability, continuous improvement, and the overall quality of carbon
credits.85
2. Tracking: The carbon-crediting program shall operate a registry to uniquely
identify, record, and track mitigation activities and carbon credits issued, to
ensure credits can be identified securely and unambiguously.86
3. Transparency: The carbon-crediting program shall provide comprehensive and
transparent information on all credited mitigation activities. The information
shall be publicly available in electronic format and shall be accessible to nonspecialized audiences, to enable scrutiny of mitigation activities.87
4. Robust independent third-party validation and verification: The carboncrediting program shall have program-level requirements for robust independent
third-party validation and verification of mitigation activities.88
5. Additionality: The GHG emission reductions or removals shall be additional
(i.e., they would not have occurred in the absence of the incentive created by
carbon credit revenues).89
80 Id. at 62.
81 Id. at 68.
82 Id. at 32.
83 The Integrity Council for the Voluntary Carbon Market, “About Us,” at https://icvcm.org/about-the-integrity-council/
. The ICVCM’s 22-member Board includes industry participants as well as others. See ICVM, “Our Governing Board,”
at https://icvcm.org/who-we-are-all/.
84 The Integrity Council for the Voluntary Carbon Market, Core Carbon Principles, Assessment Framework and
Assessment Procedure, July 2023, at https://icvcm.org/wp-content/uploads/2023/07/CCP-Book-R2-FINAL26Jul23.pdf.
85 Id. at 17.
86 Id.
87 Id.
88 Id.
89 Id. at 18.
Congressional Research Service
14
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
6. Permanence: The GHG emission reductions or removals should be permanent
or, where there is a risk of reversal, there shall be measures to compensate for
reversals.90
7. Robust quantification of emission reductions and removals: The GHG
emission reductions or removals shall be robustly quantified, based on
conservative approaches, completeness, and scientific methods.91
8. No double counting: The GHG emission reductions or removals from the
mitigation activity shall not be double counted (i.e., they shall be counted only
once towards achieving mitigation targets or goals. Double counting covers
double issuance, double claiming, and double use).92
9. Sustainable development benefits and safeguards: The carbon-crediting
program shall have clear guidance, tools, and compliance procedures to ensure
mitigation activities conform with or go beyond industry best practices on social
and environmental safeguards while delivering positive sustainable development
impacts.93
10. Contribution toward net zero transition: The mitigation activity shall avoid
locking-in levels of GHG emissions, technologies, or carbon-intensive practices
that are incompatible with achieving net zero GHG emissions by mid-century.94
One CFTC commissioner noted the similarities between the CFTC’s proposed guidance and these
ICVCM principles and assessment framework.95 She added that the proposed guidance adapts
terminology, concepts, and standards from the ICVCM’s core principles and assessment
framework.96 One issue she raised was whether exchanges can realistically improve VCCs’
market integrity by relying on the carbon crediting programs’ own processes and diligence—as
assumed in the proposed CFTC guidance—or whether exchanges should conduct additional due
diligence themselves into specific protocols or projects.97
Carbon Offsetting and Reduction Scheme for International
Aviation (CORSIA)
CORSIA is a carbon reduction program that seeks to lower GHG emissions from international
aviation. The International Civil Aviation Organization (ICAO)—a United Nations agency that
serves as a global forum of countries for international civil aviation—developed and adopted
CORSIA in October 2016.98 ICAO member states agreed to implement CORSIA to address any
annual increase in total CO2 emissions from international civil aviation (i.e., civil aviation flights
90 Id.
91 Id.
92 Id.
93 Id. at 19.
94 Id.
95 Commissioner Christy Goldsmith Romero, Statement of Commissioner Christy Goldsmith Romero on Exchange
Listing Standards for Voluntary Carbon Credit Derivative Contracts, December 4, 2023, at https://www.cftc.gov/
PressRoom/SpeechesTestimony/romerostatement120423.
96 Id.
97 Id.
98 The United States is one of the 193 member states that are on the ICAO’s Governing Council. See ICAO Council
States 2022-2025, at https://www.icao.int/about-icao/Council/CouncilStates/Pages/default.aspx.
Congressional Research Service
15
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
that depart in one country and arrive in a different country) above the 2020 levels, taking into
account special circumstances and respective capabilities.99
CORSIA relies on the use of carbon credits to offset the amount of CO2 emissions that cannot be
reduced through the use of sustainable aviation fuels or technological and operational
improvements.100 CORSIA began voluntary implementation in 2021. Compliance was to be
measured against the average from all international civil aviation in 2019 and 2020.101
Participation in CORSIA is voluntary through 2026, after which it is slated to become mandatory
for members, and the U.S. aviation industry agreed to participate. To fulfill U.S. commitments,
the Federal Aviation Administration implemented the CORSIA Monitoring, Reporting, and
Verification Program in 2019.102
It is unclear whether the CORSIA market for carbon credits will more closely resemble the VCM
or a compliance market, once participation in CORSIA becomes mandatory in 2026. In the
interim, CORSIA has published a list of carbon credits it deems eligible for the CORSIA program
(referred to as “Eligible Emissions Units”).103 For the 2024-2026 phase-in period, only two VCC
programs are listed in the document, updated in November 2023: the American Carbon Registry
and Architecture for REDD+ Transactions.104 By contrast, for the 2021-2023 period, a total of 10
VCC programs were listed as eligible for CORSIA.105
In 2019, CORSIA published the required characteristics for the VCCs it deems eligible.106 Many
of these characteristics mirror those in the CFTC 2023 proposed guidance. For instance, the
ICAO sets out eight eligibility criteria needed for VCCs to be eligible for CORSIA:
1. Carbon offset programs must represent emissions reductions, avoidance, or
removals that are additional.107
2. Carbon offset credits must be based on realistic and credible baselines. Baselines
and underlying assumptions must be publicly disclosed.108
3. Carbon offset credits must be quantified, monitored, reported, and verified.109
4. Carbon offset credits must have a clear and transparent chain of custody within
the offset program. Offset credits should be assigned an identification number
99 For background on CORSIA and emissions, please see CRS In Focus IF11696, Aviation, Air Pollution, and Climate
Change, by Richard K. Lattanzio.
100 Id.
101 However, due to the effects of the Coronavirus Disease 2019 (COVID-19) pandemic on international air travel in
2020, ICAO adopted a baseline based solely on 2019 emissions for a three-year pilot phase, and a baseline of 85% of
2019 emissions for the period 2024-2035. See id.
102 See 84 Fed. Reg. 9412 (March 14, 2019).
103 International Civil Aviation Organization, CORSIA Eligible Emissions Units, ICAO Document, November 2023,
https://www.icao.int/environmental-protection/CORSIA/Documents/TAB/
CORSIA%20Eligible%20Emissions%20Units_Nov2023.pdf.
104 Id. at 11. The ACR and ART are crediting programs for VCCs.
105 Id. at 3-10.
106 International Civil Aviation Organization, CORSIA Emissions Unit Eligibility Criteria, ICAO Document, March
2019, https://www.icao.int/environmental-protection/CORSIA/Documents/ICAO_Document_09.pdf.
107 Id. at 2.
108 Id. at 3.
109 Id.
Congressional Research Service
16
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
5.
6.
7.
8.
that can be tracked from when the unit is issued through to its transfer or use
(cancellation or retirement) via a registry system.110
Carbon offset credits must represent emissions reductions, avoidance, or carbon
sequestration that are permanent. If there is risk of reductions or removals being
reversed, then either (a) such credits are not eligible, or (b) mitigation measures
must be in place to monitor, mitigate, and compensate any material incidence of
non-permanence.111
A system must have measures in place to assess and mitigate incidences of
material leakage. Offset credits should be generated from projects that do not
cause emissions to materially increase elsewhere (the concept known as
leakage).112
Offset credits are counted only once towards a mitigation obligation. Measures
must be in place to avoid:
a. Double issuance (i.e., more than one unit is issued for the same emissions or
emissions reduction).
b. Double use (for example, if a unit is duplicated in registries).
c. Double claiming (for example, both an airline and the host country of the
emissions reduction activity claim the same credit).113
Carbon offset credits must represent emissions reductions, avoidance, or carbon
sequestration from projects that do no net harm.114
CORSIA most closely aligns with the portion of the CFTC proposed guidance that addresses the
integrity and quality of the VCCs underlying any derivatives trading. Specifically, CORSIA’s
eligibility principles seem to broadly align with the three characteristics identified by the CFTC
that DCMs should address in VCC derivative contracts: (1) quality standards, (2) delivery points
and facilities, and (3) inspection provisions.115
CORSIA does not set out guidance on a secondary market trading regime, as CORSIA does not
aim to create a market trading system. Instead, it seems to track the CFTC proposed guidance
regarding the underlying quality and integrity of the VCCs upon which derivatives may be traded.
Other CORSIA publications focus on measuring emissions for participating airlines, and on
calculating net emissions after offsets, rather than on principles for designing a market for carbon
credits, or for verifying carbon credit eligibility.116
110 Id.
111 Id.
112 Id.
113 Id.
114 Id. at 4.
115 CFTC Proposed VCC Guidance, supra note 40, at 89,416.
116 International Civil Aviation Organization, Training Material on Model Regulations to Assist States in the
Implementation of CORSIA, ICAO Document, July 2023, at: https://www.icao.int/environmental-protection/CORSIA/
Documents/
Training%20material%20on%20model%20regulations%20to%20assist%20States%20in%20the%20implementation%2
0of%20CORSIA_v2_2023_forweb.pdf.
Congressional Research Service
17
Voluntary Carbon Credit Markets and the Commodity Futures Trading Commission
California Voluntary Carbon Market Disclosures
In October 2023, California adopted AB 1305, Voluntary Carbon Market Disclosures.117 The
statute includes detailed disclosure requirements for entities that participate in carbon markets in
California. Specifically, AB 1305 applies to firms that market or sell carbon offsets, purchase or
use carbon offsets, or make various claims regarding progress toward carbon reduction goals. The
statute requires such entities to disclose how carbon-reduction claims were determined to be
accurate or accomplished. Violations of the disclosure requirements are subject to a civil penalty
of up to $2,500 per day for each day that the required information is unavailable or is
inaccurate.118
Under the new law, an entity that sells or markets voluntary carbon offsets (VCOs) must disclose,
among other things, details of the project; the protocol used to estimate emissions, location,
duration and dates of the project and its associated emissions reductions; the project type; whether
the project meets third-party standards or independent certification; and the quantity of emissions
removed annually. The entity selling VCOs must further specify what accountability measures
there will be if the offset project is not completed or does not provide the anticipated emissions
benefits. The seller must also disclose any data and calculation methods needed to reproduce and
verify the emissions reductions claimed to be associated with the VCO.
Author Information
Rena S. Miller
Specialist in Financial Economics
Jonathan L. Ramseur
Acting Section Research Manager
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.
117 Assembly Bill 1305 at Bill Text - AB-1305 Voluntary Carbon Market Disclosures, at https://legiscan.com/CA/text/
AB1305/id/2841701.
118 Assembly Bill 1305, Section 44475.3, at Bill Text - AB-1305 Voluntary Carbon Market Disclosures.
Congressional Research Service
R48095 · VERSION 1 · NEW
18
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.