Providing a standardised platform for managing global emissions price risk

By: Russell Karas, Senior Director, Energy Products, CME Group Aug 2021

The shift to net-zero emissions has recently accelerated and, according to the United Nations, 120 countries, 31 regions, 733 cities, 3,067 businesses, 173 investors, and 622 higher education institutions across the globe have pledged to become carbon neutral by 2050.

A variety of solutions have emerged to help achieve these goals, including the use of voluntary offset projects and associated credits. Voluntary markets allow firms to take near-term action to meet carbon reduction goals as they work to transition to more sustainable business practices. However, the uniqueness and regional nature of these projects have prevented harmonisation between programmes and, ultimately, the development of a standardised price. It is a difficult task to mitigate climate risk without a universal pricing benchmark.

CME Group, the world’s leading and most diverse derivatives marketplace, and Xpansiv market CBL, a leader in spot energy and environmental markets, jointly developed the CBL Global Emissions Offset (GEO) futures contract to help solve this. GEO futures provide a way for market participants across various sectors and geographical borders to manage their price risk.

Aviation offsetting

The GEO contract is based on the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The airline industry is a prime example of the private sector leveraging voluntary offset projects to reduce emissions. Prior to the steep decline in airline travel due to COVID-19, emissions from the airline industry were higher than all but five countries in the world. The International Civil Aviation Organization (ICAO), a UN specialised agency, adopted CORSIA as a market-based mechanism to meet the ambitious goal of carbon-neutral growth from international aviation beyond 2020.

Under CORSIA, airlines will be required to purchase voluntary carbon offsets to compensate for their increase in CO2 emissions above 2020 levels. All aircraft operators with emissions greater than 10,000 tons of CO2 will be required to report their emissions to their national authority annually. CORSIA will be implemented in three separate phases, each with unique requirements and participant pools.

CORSIA calls for international aviation to offset part of its CO2 emissions through the reduction of emissions elsewhere (outside of the international aviation sector), involving the concept of "emissions units". One emissions unit represents one ton of CO2 emissions reduced. Emissions units are generated when emissions from a specific project or programme are reduced, compared with a baseline (or business-as-usual), through the implementation of emission reductions techniques/technologies. These projects or programmes can be implemented in various sectors, such as electricity generation, industrial processes, agriculture, forestry, waste management, etc.

CORSIA-eligible emissions units are outlined by an ICAO Council, using specific eligibility criteria that focus on transparency, accuracy, and permanent reduction benefits. The criteria ensure environmental integrity, guaranteeing that emissions units delivered under CORSIA provide the desired CO2 reduction. Because of the rigorous screening process and vetting at the international level, firms across industries and geographies are now using this framework to assess the validity of offset credits.

‘Large, transparent, verifiable, robust’

The Taskforce on Scaling Voluntary Carbon Markets, a private sector-led voluntary carbon market initiative of which CME Group is a member, has stated that “a large, transparent, verifiable and robust voluntary carbon market will be critical to reaching net-zero and net-negative goals,” and that the current voluntary market also needs to scale by at least 15 times by 2030 in order to achieve these goals. Among their key recommendations around properly scaling the market is a call for a physically delivered futures market.

The GEO futures contract allows for delivery of CORSIA-eligible voluntary offsets from three ICAO-approved registries: Verified Carbon Standard (VCS), American Carbon Registry (ACR), and Climate Action Reserve (CAR). Firms that choose to take delivery must be onboarded with CBL’s Standard Instrument Program. After conducting a two-step verification process to ensure the credits are CORSIA-compliant, CBL transfers the offsets to the buyer and the cash to the seller upon expiration of each futures contract.

The shift to a net-zero economy requires a long-term effort, but near-term reduction strategies that leverage voluntary offset projects can be part of the solution today. The GEO futures contract provides a standardised platform for companies to manage their emissions risk, while also helping to establish a much-needed global emissions offset pricing benchmark.

Since launching earlier this year, GEO futures have seen a variety of participation from Europe, APAC, and North America, including commercial firms, banks, hedge funds, and liquidity providers. Nearly 500 contracts across five contract months have traded to date, equivalent to roughly 500,000 credits, with open interest currently sitting above 240 contracts and prices extending out to December 2024. The first successful delivery cycle was completed on June 30, 2021, when 21 total contracts were cleared, totaling 21,000 offsets transferred.

CME Group recently announced that it will launch Nature-Based Global Emissions Offset (N-GEO) futures on August 1, pending regulatory review. Nature-based solutions are projects which protect, transform or restore land, allowing for nature to absorb more CO2 emissions from the atmosphere. Xpansiv launched the CBL Nature-Based Global Emissions Offset (N-GEO) spot contract earlier this year, which is based on eligible voluntary offsets from Agriculture, Forestry, and Other Land Use (AFOLU) projects, with additional co-benefits through Climate, Community, and Biodiversity (CCB) accreditation.

As market participants across the world continue to navigate the energy transition, market-based solutions like GEO and N-GEO futures can help create a more transparent and efficient voluntary emissions offset market.

– The CME Group is Vice-Chair of the WFE’s Sustainability Working Group.