At a Glance
Financial Services and Insurance
Financial Evaluation and Planning
Nick Nugent explored the role of new and emerging derivatives, such as carbon offsets futures products, in the voluntary carbon market.
CME Group, the world’s leading derivatives marketplace, launched its first voluntary carbon emissions offset futures product in 2021. CME Group worked with EDF Climate Corps fellow Nick Nugent to further explore the role of derivative financial products in the voluntary carbon markets, or VCM. The novelty of using carbon offsets and managing the price risks associated with carbon reduction strategies requires educating market participants around the underlying market (carbon removals or reductions through forestry projects or renewable energy, for example). As market participants explore the use of carbon offsets futures to reach their sustainability and net zero goals, Nugent and his CME Group colleagues worked to communicate the advantages of using carbon offsets futures for trading and/or hedging purposes.
Nugent and colleagues worked with various departments in CME Group to develop communications materials so that market participants understand the characteristics of the underlying assets that each carbon offset futures contract represents.
Using his experience in carbon project development, Nugent was able to help articulate the role of registries and how they determine the quality and integrity of carbon offsets, and what project types are eligible for delivery via CME Group products. For example, Nugent made communications materials explaining the importance of transparency around offset vintages, or the year in which the carbon offset credit was issued. Additionally, Nugent researched other carbon offsets futures that are emerging on competing exchanges and the difference between CME Group products and those of their competitors.
Finally, Nugent and his manager wrote and submitted an academic paper that discusses the role that derivatives play in the voluntary carbon markets to provide standardization, increase price discovery, and increase volume and liquidity.
Carbon offsets derivatives products are an emerging innovation in the voluntary carbon market. According to Ecosystem Marketplace, the market for carbon credits offsets could grow to above 1.5 billion units per year, valued at over $180 billion on the secondary market. Derivatives such as carbon futures help provide standardization, price discovery, and liquidity, which in turn could help aid in the overall development of these markets. As the carbon markets continue to grow, and carbon credits and offsets become increasingly popular tools on the pathway to net zero, CME Group will have an important role to play in price transparency and helping businesses manage their risk.The evolution of the voluntary carbon markets has taken a leap forward with the recent introduction of CME Group’s carbon offset futures products, and thus clarifying the role that these derivatives play in the market is critical to ensuring market participants understand the tools available to help manage strategies more effectively.