(Bloomberg) -- A key US regulator is planning to put in place guardrails for the fast-growing market for voluntary carbon-credit derivatives.
The Commodity Futures Trading Commission on Monday floated fresh guidance for exchanges that want to list futures or other derivatives products based on carbon credits. Critics say the market lacks transparency and could be manipulated by fraudsters.
Carbon credits are increasingly popular with energy producers, financial services and transportation companies that have promised to reduce their environmental footprint. They allow purchasers to claim they offset their overall emissions by purchasing a certain amount of credits.
As interest in the offsets has increased, demand for derivatives based on them has surged. CME Group Inc., the world’s biggest futures exchange, has seen trading volumes rise, underscoring the need for accuracy in pricing and preventing fraud or manipulation.
Read more: Are ‘Carbon Offsets’ a Credible Climate Solution?: QuickTake
“Market participants from across all asset classes will increasingly turn to the derivatives markets as they manage the impact of physical and transition risks related to extreme weather events and climate-related financial risk,” CFTC Chairman Rostin Behnam said in a statement.
The CFTC’s guidance lays out how the agency’s rules apply to the emerging asset class. The goal is to increase standardization in the asset class to improve transparency, risk management, liquidity, accurate pricing and market integrity, according to the regulator. It will take public feedback on the plan until Feb. 16 and then offer a final set of guidelines.
US Treasury Secretary Janet Yellen called the CFTC’s guidance a significant step toward promoting “the integrity of carbon credits and enabling greater liquidity, price discovery, and responsible product innovation.” The Treasury Department issued its own guidance two months ago on principles for net zero financing and investment, including carbon credits.
The inability to verify carbon credits can make some of the derivatives products designed on top of the underlying assets suspect or unreliable, according to Democratic CFTC Commissioner Kristin Johnson. “Environmental commodities markets and the underlying spot markets for carbon credits are rife with fraud,” she said in a statement. Johnson called for the agency to go beyond guidance and issue comprehensive rules.
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