CME Group plans to launch a futures contract in March that would provide a regulated, market-based solution to manage global emissions risk.
The Global Emissions Offset (GEO) futures contract, which is pending relevant regulatory reviews before a launch on March 1, was jointly developed with Xpansiv CBL Holding Group, a data and technology firm focused on market transparency. CME announced the contract on Tuesday.
“Demand for voluntary carbon offsets is growing around the world as more countries and companies take action toward creating a lower carbon economy,” said CME’s Peter Keavey, global head of energy. “GEO futures will provide a regulated, market-based solution that can help address risk management needs for near-term emissions reduction strategies, as well as a standardized pricing benchmark to help facilitate long-term climate goals.”
CME developed the contract working alongside clients and market participants that are members of the Taskforce on Scaling Voluntary Carbon Markets, a private sector-led voluntary initiative. The group, which aims to help achieve a “more robust and transparent voluntary offset market,” has recommended the need for a physically delivered futures market.
Voluntary offsets allow businesses to purchase credits to help reduce their overall carbon footprint to transition to more sustainable practices, according to CME. The scale of trading in the voluntary carbon offset market is currently around $320 million and expected to grow as demand for global decarbonization increases.
Xpansiv’s chief strategy officer Nathan Rockliff said after a decade building the largest voluntary carbon market in the world, “it’s remarkable to witness this watershed moment.” Xpansiv worked with corporations, project developers and trading firms to develop the GEO. It is said to be the first standardized contract for carbon offsets across multiple project types and geographies.
“The GEO helps to establish a global price for the voluntary carbon market based on offsets vetted by a multi-year process, and with this landmark futures contract, CME Group and Xpansiv provide a clear path to action for net-zero commitments,” Rockliff said.
The GEO futures contract is based on the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The scheme includes globally accepted carbon offset standards based on a set of criteria developed by the International Civil Aviation Organization (ICAO), a specialized United Nations agency, CME said.
GEO futures would allow for delivery of CORSIA-eligible voluntary offset credits from three ICAO-approved registries. They are to be listed by and subject to the rules of the New York Mercantile Exchange. More information and contract specifications can be found here.
NGI’s Patrick Rau, director of Strategy & Research, called the planned launch “significant.” He noted there are few “truly global” commodity futures prices since many contracts are localized. “For example, Henry Hub doesn’t represent a global natural gas price, and Brent doesn’t necessarily represent the global crude price,” Rau said. “West Texas Intermediate crude typically trades at a discount to Brent, and while they are heavily correlated, Brent isn’t a prevailing price mechanism in the United States.”
Rau also pointed out that with initiatives on environmental, social and governance (ESG) risk gaining importance, the contract may provide an opportunity for companies not required to participate in carbon trading to hedge their exposure. “The contract allows for physical delivery, so companies can acquire credits as well.”
If use of the contract gains momentum, ESG scores may improve for companies that utilize the product, according to Rau. This could attract interest from the investing community as some pension funds phase out oil and gas investments. New York City’s largest pension funds on Monday voted to pull their money from fossil fuel investments within five years, portfolios that hold an estimated $4 billion in securities.
Meanwhile, how the CME contract may impact the development of other submarkets in the United States is unclear. BP plc, for example, now has a majority stake in Finite Carbon, the largest developer of U.S. forest carbon offsets. Finite Carbon has about 50 projects that represent every region from Appalachia to coastal Alaska.
Global exchange operator Intercontinental Exchange Inc. has futures and options connected to European and California carbon allowances, regional greenhouse gas initiative and renewable energy credits. The environmental complex hit record open interest of about 2.65 million contracts in November.
Rau questioned whether other regions may come under pressure to develop markets if the CME contract proves to be liquid “or could they just impose restrictions, and allow companies to use this contract to obtain those credits?”
How and to what extent the contract is utilized overseas also will be of importance, according to Rau. The European Union has a mandated carbon market, but some companies may use the CME futures contract in the voluntary market. “For example, a European firm with a large presence in the U.S. Gulf Coast could use this product for that,” he said.
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