After the UN climate meeting in Egypt, carbon market participants are looking to establish a pricing benchmark similar to those present in other key commodities. Carbon offset futures from CME Group reached record interest in December, as businesses and corporations are under pressure to meet their climate commitments. The UN climate talks did not result in any breakthroughs, yet private sector leaders still showed up with a mindset of “let’s get it done”. Talks on Article 6 of the Paris Climate Accords, which deal with how carbon markets will be governed globally, will continue into 2023. The 60-page document created at the COP meetings provides key elements to implement high-integrity carbon markets.
Industry analysts argue investors need carbon offset markets to gain a window on what it costs to offset a metric ton of carbon. Carbon futures help provide those all-important benchmarks, similar to the way futures set prices on everything from corn to copper. A carbon offset credit is a transferable instrument certified by independent entities or governments, and each credit represents a reduction of one metric ton of carbon dioxide, or an equivalent greenhouse gas. CME Group launched the GEO futures contract in 2021 to make it a global benchmark, giving customers a way to manage risk and helping in price discovery.
The value of the voluntary carbon market surged to over $2 billion this year, according to a report from the Ecosystem Marketplace. Open interest for the CME Group suite of GEO contracts rose to nearly 30,000 in mid-December, a record. Companies like U.S. Venture use carbon futures to hedge forecasted emissions for clients and use offsets for their own needs. However, the current high-interest rate environment poses its own challenges.
Overall, interest in futures contracts is growing and a pricing benchmark for carbon offsets is gaining steam. This provides participants in the offsets market with confidence in the long-term importance of the voluntary carbon market. By establishing a pricing benchmark, investors can be provided with transparency and reference prices, allowing them to make strategic business decisions and use legitimate risk management tools.