The CFTC, California Carbon Market and Regulatory Status of Carbon Credits

January 1, 2014 marks the one-year anniversary of the commencement of the California greenhouse gas cap-and-trade program.  Under the program, entities with significant greenhouse gas emissions like power plants and large industrials are required to submit allowances or offsets (i.e., permits to emit issued by the California Air Resources Board (ARB)) equal to their greenhouse gas emissions.  Emitting entities and other parties like banks or individuals are allowed to trade allowances and offsets.  ICE also offers physically-settled futures and options contracts in California allowances.

In general, physically-settled allowances and offsets in the California carbon market will be regulated like other nonfinancial commodities. Depending on the particular transaction, transactions in California allowances and offsets may qualify for the forward exclusion from the definition of a swap under the CEA—and thus not be subject to CFTC rule—if the transactions satisfy certain requirements, the most important of which is the parties’ intent to physically settle each transaction. ARB has indicated that the California carbon market "is expected to generate derivatives markets falling under the jurisdiction of the [CFTC]" and that "ARB is actively working with the CFTC" on a range of ongoing market surveillance and oversight initiatives.

The CFTC does have authority over forwards transacted in the California market under the CEA’s anti-manipulation provisions prohibiting manipulation, making false and misleading statements and omissions of material fact to the CFTC, fraud and deceptive practices and false reporting.

Launch of IETA’s California Emissions Master Trading Agreement

On October 2, 2013, the International Emissions Trading Association (IETA) launched the California Emissions Trading Master Agreement (CETMA), which is a free template contract for secondary market transactions of California allowances and offsets.  The CETMA is the result of a six-month process involving a broad-based, 40-member drafting committee comprised of energy and carbon traders, legal counsel, electricity providers, fuel refiners and suppliers, financial intermediaries, brokers, offset project developers and others.

A standardized trading document was deemed necessary by many market participants in order to reduce uncertainty in the evolving California market and attempt to develop common trading practices in response to unique regulatory requirements. The goal of the CETMA process was to lower transaction costs for market participants and help increase liquidity in the secondary market for allowances and offsets.

The CETMA is available for download on IETA's website at