Comment Text:
Emergent welcomes the opportunity to provide feedback on the proposed Guidance Regarding the Listing for Trading of Voluntary Carbon Credit Derivative Contracts published by the Commodity Futures Trading Commission (CFTC). We appreciate the CFTC’s work on the proposed Guidance.
Emergent is a non-profit created to urgently address the climate and biodiversity crises by incentivizing reductions in deforestation. We serve as a transaction platform between tropical forest countries and the private sector, creating a new marketplace in large-scale transactions of high-integrity carbon credits at the jurisdictional level.
Emergent coordinates the LEAF Coalition, a public-private partnership focused on halting tropical deforestation by 2030. Bringing together forest governments, the private sector, donor governments, Indigenous Peoples and local communities and civil society, LEAF aims to raise and deploy the finance needed to tackle deforestation by making tropical forests worth more alive than dead.
Feedback on the proposed Guidance:
Emergent would like to emphasize an overarching recommendation for the Guidelines: It is important to ensure DCMs are not positioned to evaluate VCC quality. This is a specialized task for which they are not adequately equipped. Instead, the Commission should allow and encourage DCMs to rely on VCC certification under high-quality crediting programs and industry initiatives.
In addition, Emergent would like to respond to the following consultation questions.
Question 2: Are there standards for VCCs recognized by private sector or multilateral initiatives that a DCM should incorporate into the terms and conditions of a VCC derivative contract, to ensure the underlying VCCs meet or exceed certain attributes expected for a high-integrity carbon credit?
Response: We believe that derivative contracts should utilize VCCs issued from crediting programs aligned with benchmarks for carbon credit quality, such as those endorsed by:
• ICROA (via the Carbon Crediting Program Endorsement Procedure)
• Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)
• Integrity Council for the Voluntary Carbon Market (ICVCM)
We note that this is not intended to represent a complete or fixed list of initiatives with benchmarks for quality, as this landscape is evolving.
Question 4: In addition to the criteria and factors discussed in this proposed guidance, are there particular criteria or factors that a DCM should consider, which may inform its analysis of whether or not a VCC derivative contract would be readily susceptible to manipulation?
Response: A DCM is responsible for ensuring there is no manipulation in its own market, but it is not responsible for overseeing all activities in the physical market. We would like to reinforce that it is not appropriate for a DCM to be involved in voluntary carbon credit development. It is the responsibility of the crediting programs and standard setters to ensure there is no manipulation or fraudulent activity associated with the creation of VCCs that may be included in a derivative contract.
Question 8: In this proposed guidance, the Commission recognizes 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. Is this the appropriate way to characterize additionality for purposes of this guidance, or would another characterization be more appropriate? For example, should additionality be recognized 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?
Response: The CFTC should allow DCMs to rely on industry standard definitions of additionality rather than defining additionality themselves, or requiring DCMs to layer different additionality requirements beyond what is required by the crediting program.
Question 9: Are there particular criteria or factors that DCMs should take into account when considering, and/or addressing in a VCC derivative contract’s terms and conditions, a crediting program’s measures to avoid or mitigate the risk of reversal, particularly where the underlying VCC is sourced from nature-based projects or activities such as agriculture, forestry or other land use initiatives?
Response: DCMs should rely on the crediting program’s methodology-specific mechanisms to account for reversals and should consider whether the crediting program has procedures to ensure mechanisms such as a buffer pool are scientifically based and contain an adequate number of credits to counter a loss of credits due to a reversal event. Further, DCMs should confirm buffer pool contributions are of a similar quality to the credits they replace to ensure, upon settlement, the expected quality of VCC is maintained (e.g., the buffer pool should not be funded with credits of a significantly different project type).
Question 10: How should DCMs treat contracts where the underlying VCC relates to a project or activity whose underlying GHG emission reductions or removals are subject to reversal? Are there terms, conditions or other rules that a DCM should consider including in a VCC derivative contract in order to account for the risk of reversal?
Response: DCMs should rely on the crediting program’s requirements and procedures when an underlying GHG emission reduction or removal is reversed. The DCM should therefore consider the crediting program's policy towards replenishing avoidable vs unavoidable reversals and whether the buffer pool contributions in each scenario are required to be of similar quality.
