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On March 3, the Chicago Mercantile Exchange (CME) proudly announced the first trading results of its Global Emissions Offset (GEO) futures contract. The underlying assets of the GEO contract, from which the contract derives its fundamental value, are the credits eligible for use under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The CME elsewhere assured its potential clients that “GEO futures provide delivery of physical carbon offset credits that have undergone stringent screening” to ensure their scientific and accounting integrity.

However, just two weeks later, the Financial Times reported on a European Commission sponsored paper from September 2020 that stated CORSIA was “unlikely to materially alter the direct climate impact associated with aviation” and that the emissions accounting scheme could allow “international aviation emissions [to] remain unregulated.” The report’s authors stated the environmental integrity of the offset credits eligible under CORSIA could not be guaranteed. Transport and Environment (T&E), an NGO, had obtained the report through a European Commission freedom of information request. T&E’s aviation manager said the report showed that “we have wasted almost a decade coming up with a CO2 airline scheme which is actually bad for the climate.”

The International Air Transportation Association indirectly and swiftly responded to the criticism of CORSIA by announcing that it was attempting to negotiate a commitment to net zero emissions by 2050 among its 300 member companies. “Net zero” is an accounting framework to balance new CO2 emissions with equivalent emissions reductions. Nevertheless, the purchase of verified emissions offset credits in an amount to “reduce” aviation emissions and achieve the United Nations’ net zero voluntary targets still depends on CORSIA’s integrity, now under severe challenge. The root of the challenge is that offsetting contractually obscures the scientific difference between the geological CO2 derived from fossil fuels that remains in the atmosphere for hundreds of years and the forest or agriculture based offsets that sequester biogenic CO2 for a much shorter time. Offsetting can appear on the corporate balance sheet as a step towards meeting a net zero corporate commitment while a corporation’s CO2 emissions increase.

For example, on January 29, Oxy Low Carbon Ventures, a subsidiary of Occidental Petroleum, announced that it had delivered an offset two-million gallon shipment of crude oil to India. The offsets, under CORSIA accepted standards, claimed to cover everything from oil extraction to refinement, oil shipment and combustion. The GEO futures contract’s underlying asset is based only on a policy that requires airlines to buy CORSIA eligible offsets, but these offsets cover a small fraction of aviation emissions. Like other offsets, CORSIA eligible offsets equate short-term land-based offsets with long-term geological CO2. Given these severe limitations, can trading GEO futures, based on emissions offset project credits accepted under CORSIA, be an effective means to reduce corporate climate financial risk?

IATP’s Interest in the GEO Futures Contract

What interest does IATP have concerning an industry that our staff uses personally and for business reasons, but which is not core to our mission? The interest begins with the fact that the Commodity Futures Trading Commission (CFTC) allowed the CME to self-certify in a 19-page document that the GEO futures contract is consistent with both CME rules and CFTC rules. The trading of GEO futures shifts price risk among buyers and sellers, but it cannot contribute to reducing climate risks because CORSIA eligible carbon credits only offset aviation emissions without reducing them. In a world of offset, but not globally reduced, emissions, the more stable climate that agriculture requires to become environmentally and economically sustainable becomes less stable, disrupting agricultural price formation over the short and long term. Since the CFTC oversees the contracts and the markets that benchmark many agricultural prices, it is crucial that the CFTC provide stringent screening of the underlying assets of physical derivatives contracts, particularly new contracts, such as GEO futures, when trading venues fail to do so.

CORSIA eligible credits are but one source of demand for verified and tradeable CO2 offset credits for the fifteenfold increase in emissions offset derivatives trading by 2030 proposed in the Task Force for Scaling Voluntary Carbon Markets (TSVCM) report. The TSVCM released the report on January 25 at a virtual meeting of the World Economic Forum. A TSVCM Charter to begin to implement the report was adopted in March by Task Force members. A pilot offset contract, developed according to the Charter, would compete with the CME GEO futures contract.

(IATP commented on the draft TSVCM report and issued a press statement on the final report. The TSVCM estimates a global bio-physical potential for land-based carbon sequestration projects. The estimate will surely have to be revised downward in light of a meta-study of a 100 experiments on soil carbon sequestration capacity published on March 24 in the journal Nature. According to César Terrer, the study’s lead author, “We found that when rising CO2 increases plant growth, there is a decrease in soil carbon storage. That’s a very important conclusion.” A downward revision in soil carbon storage capacity should result in a TSVCM downward revision in carbon market offset potential and in the use of land-based offset trading for corporate net zero emissions claims.)

The International Institute for Finance and Mark Carney, formerly the chair of the intergovernmental Financial Stability Board and now the U.N. Secretary General’s Special Envoy on Climate Action and Finance and vice-chair of the Toronto based Brookfield Asset Management, instigated the TSVCM. Mr. Carney has advocated emissions offset trading as a “net zero climate solution.” Per the TSVCM methodology, the anticipated increase in aviation emissions will be “reduced” to net zero by buying offset credits that represent an equivalent amount of CO2 equivalent metric tons.

Corporate Net Zero Claims

Corporate claims that they will make their operations, supply chains and/or financial portfolios “net zero” by 2050 has not convinced many investor groups of the viability of the corporate planning and investments to achieve the 2050 objective. The Climate Action 100+ investor group found that just six of 159 companies, which account for 80% of global industrial emissions, had long-term capital investment plans that aligned with their net zero objectives. According to Climate Action’s report, released on March 22, none of the companies have yet  attempted to align their future capital investments with the United Nations Framework Convention on Climate Change (UNFCCC) Paris Agreement goal of limiting the planet’s warming to 1.5⁰ C above pre-industrial age levels.

Climate Action 100+ has 575 institutional members that manage $54 trillion in assets. Presumably, if these big emitting companies cannot convince Climate Action 100+ analysts that they have viable long-term investment plans to reduce their emissions, some of the 575 institutional members will reallocate their assets to companies that are acting more effectively to manage their climate financial risks. But such reallocations and their timing may not suffice to prevent the impacts of greenhouse gases that heat the planet above the 1.5⁰ C target.

In late February, Mr. Carney retracted an earlier claim that the Brookfield Asset Management (BAM) portfolio was net zero. Critics showed that BAM’s claims that its renewable energy holdings amounted to avoided emissions from their fossil fuel holdings did not result in a credible net zero claim. The Science Based Targets Initiative (SBTi), which is used by nearly 1,300 companies to help them set net zero objectives to reduce their emissions in a contract with SBTi, discourages the use of avoided emissions claims as a legitimate pathway to net zero.  

Bill Baue, a former SBTi advisor, told Climate Home News that “Science Based Targets” is not a science-based approach.” In a formal complaint to SBTi, Baue wrote, “SBTi now finds itself in what we might call an ‘inconvenient’ position of recommending against the very methodology that is the most robust!” Because nearly 1,300 companies in 50 economic sectors with a total market capitalization of at least $20.5 trillion are using SBTi’s methodology to develop net zero emissions plans, SBTi is in a very inconvenient position indeed.

The TSVCM project relies on SBTi methodology “to define the role of offsetting in supporting net zero claims.” (p. 19) SBTi criteria for limiting the use of offsets will be hard to monitor because of the latitude given for setting a low ambition  emissions reduction target with an aggressive use of offsetting for intended reductions beyond the target: e.g., “The use of offsets must not be counted as emissions reduction toward the progress of companies’ science-based targets. . . Offsets are only considered to be an option for companies wanting to finance additional emission reductions beyond their science-based targets.” (p. 7)

Work for the New CFTC Climate Risk Unit

In February, the CFTC staff allowed the CME to self-certify that its GEO futures contract is consistent with both CME rules and any CFTC modifications to those rules. There was no public hearing to discuss the scientific and marketing integrity problems of earlier and current emissions offset contracts. However, the reported critique of CORSIA to achieve emissions reductions along the 1.5⁰ C pathway provides evidence of the need for a public meeting on the integrity of the underlying asset of the CME GEO futures contract. Such a public meeting should include a request for information to all interested parties about whether emissions offset futures trading in a voluntary market, without emissions regulation, will be able to deliver sustained price signals to help companies make long-term investments to reduce emissions.

On March 17, acting Chair Behnam announced the formation of a CFTC Climate Risk Unit.  According to the announcement, one purpose of the Risk Unit could be to enable "A better and more complete understanding in the CFTC of the derivatives and related products being developed to address climate-related market risks and to facilitate the transition to a net-zero economy, and how such products fit within and interact with the CFTC’s regulatory and supervisory framework, including the identification of areas where refinements or modifications could be made either to the products or to the CFTC’s approaches."

One task for the Climate Risk Unit could be to evaluate the criticisms made of CORSIA eligible credits, the underlying asset of the GEO futures contract, to determine the climate financial risk consequences of trading the GEO contract if offset credits accepted by CORSIA have weak accounting or scientific integrity. The Risk Unit could recommend that the self-certification process for the GEO contract be revoked and that the Commission should decide whether to formally approve the contract. In any case, the public interest in a viable climate should lead the CFTC to more carefully evaluate new emissions offset contracts for voluntary markets that are not subject to the emissions cap of contracts in compliance markets that the CFTC has approved.

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