Carbon Offsets That Companies Are Gobbling Up Get a Futures Contract
By Ryan Dezember
Exchange operator CME Group Inc. plans to launch trading in
voluntary carbon-offset futures, tapping into the rush by companies
to make up for their emissions.
Offset credits are a climate-change currency earned through
endeavors that reduce or sequester greenhouse gasses, such as
paying timberland owners to leave trees standing and capturing
methane fumes at hog farms.
Companies, investment firms, governments and other entities that
have set carbon-reduction goals apply voluntary offset credits to
their internal ledgers in order to balance out emissions they can't
Companies including Apple Inc. and BP PLC have pledged carbon
neutrality in the coming decades, under pressure from investors who
have shoveled billions of dollars into so-called ESG funds that
promise to invest with environmental and social responsibility in
mind. That will require companies to produce or purchase large
numbers of offset credits, each of which represents a metric ton of
There are already futures contracts tied to carbon-offset
credits that are used in so-called cap-and-trade systems around the
world. California regulators, for instance, oversee a market that
seeks to reduce greenhouse gases by making it more expensive over
time for companies operating there to pollute. Companies must buy
allowances for certain volumes of emissions and may use cheaper
offset credits to cover a portion of their tab.
Prices for California offset credits are fairly transparent,
averaging $13.79 during the third quarter of last year, according
to the California Air Resources Board. CME rival Intercontinental
Exchange Inc. facilitates trading in futures tied to those
The market is opaque when it comes to offsetting credits meant
to appease investors instead of comply with regulators. Voluntary
credits usually change hands for significantly less than compliance
credits, though they vary greatly in price, depending on how they
were created and who is buying. A company may be willing to pay
more for credits tied to the preservation of forests near its
headquarters, for example, or affiliated with projects that deliver
With its Global Emissions Offset futures contract -- ticker GEO
-- CME aims to illuminate a fast-growing market that has thus far
operated in a black box via privately negotiated transactions, said
Peter Keavey, CME's global head of energy.
"A lot of emissions trading and carbon-reduction projects are
unique and regional in nature," Mr. Keavey said. "Ultimately you
need to develop a more global benchmark and viewpoint to harmonize
the valuation and trading of offsets."
CME envisions its offset futures being a price gauge for the
variety of credits, similar to how lumber futures are a barometer
for the array of regional and species-specific wood prices. Offset
futures will also allow companies to lock in prices for carbon
credits created down the road and to hedge against declines in the
value of those they already own.
Prices will be derived from transactions on a voluntary-offset
exchange operated by Xpansiv CBL Holding Group Ltd., a firm that
makes markets in data-based assets linked to energy, agriculture
and ESG investing. The credits sold must have been verified by one
of three carbon registries, organizations that uphold project
standards and certify offsets.
Offset buyers on Xpansiv's platform currently browse credits by
price and project, said Andy Bose, the firm's head of ecosystems
and partnerships. Xpansiv, which won't disclose prices until the
monthly futures contracts begin trading on March 1, created a spot
contract in conjunction with them. Both are intended to satisfy
bulk buyers who care more about price per ton than provenance, Mr.
Each futures contract represents 1,000 offset credits. They will
be settled physically, which means the holder of an expiring
contract will receive certificates for 1,000 metric tons of carbon
that have been eliminated or stashed away.
There were $320 million of voluntary-offset transactions in 2019
and a similar volume in 2020, according to Ecosystem Marketplace, a
nonprofit that tracks carbon markets.
Transaction and trading volume is expected to surge as deadlines
approach for companies to meet emissions targets.
Government policies could stoke demand even more. Some of the
world's largest companies have invested in offset producers and
market makers, wagering that the nascent asset class will boom.
In December, BP bought a controlling stake in Finite Carbon, a
Pennsylvania forestry firm that has been the most prolific U.S.
producer of carbon offsets, and earlier invested in Xpansiv.
Amazon.com Inc. last year invested in Pachama Inc., a company that
uses satellite imagery and computer programs to measure how much
carbon is stored in forests.
Write to Ryan Dezember at firstname.lastname@example.org
(END) Dow Jones Newswires
January 27, 2021 08:14 ET (13:14 GMT)
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