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CME launches nature-based emissions offset futures contract

02 August 2021 IHS Markit Energy Expert

CME Group launched a Nature-based Global Emissions Offset (N-GEO) futures contract 1 August, one of a number of nature-based solutions (NBS) contracts now available or about to debut.

N-GEO contracts comprise offsets from agriculture, forestry, and other land use projects with additional climate, community, and biodiversity accreditation.

Evolution Markets said separately it had brokered the first trade in the contract, facilitating a deal for 200,000 offsets—equivalent to 200 contracts—for delivery in December at $5.40/mt between Hartree Partners and Andurand Climate and Energy Transition Fund.

"Carbon offsets originating from nature-based activities, such as improved forest management or land use, generate high-quality, high-demand carbon emission reductions," Evolution Markets CEO Andrew Ertel said in the statement. "This inaugural trade is another step forward in the development of risk management products for these types of carbon offsets."

The launch of the N-GEO contract at CME follows the launch of its GEO futures contract in April.

Evolution Markets also brokered the first trade in CME's GEO contract in April between Hartree and Gazprom.

A spot N-GEO contract debuted 16 April on the Xpansiv Markets CBL platform, with first-day volumes of 131,215 mt of CO2 equivalent trading between $4/mt and $5/mt, Xpansiv said at that time.

Since the Xpansiv N-GEO contract's inception, 2.93 million mt has traded, including 151,000 mt on 30 July, the company said. For the year, nature-based credit volumes have risen to 18 million mt, up twelvefold compared with their full-year 2020 totals, Xpansiv said.

GEO spot contract volumes on the CBL exchange topped 5 million mt so far in 2021, including 15,000 mt 30 July. The GEO also hit a record price 30 July of $3.30/mt, said Rob Dalton, vice president of communications at Xpansiv.

Trading volumes on the rise

The combination of the spot CBL contract and CME futures contract has resulted in increased participation in both trading markets as many participants are active on both exchanges, said Andy Bose, Xpansiv head of ecosystems and partnerships.

"As of now, participation in the spot market reflects higher levels of activity with respect to transactions and volumes, but the CME contract is gaining momentum as the first two contract dates have settled and delivered without any issues," Bose said. "We'd expect increasing volumes and transactions in the CME contract going forward, and for the spot and futures volumes to be complementary, as they are in many other trading markets."

Bose declined comment on the prospects for the CME N-GEO contract, but did note that the spot market has seen an increase in volumes ahead of the futures contract launch, which is something the exchange believes is a strong indication of the market's interest in nature-based solutions.

CME and Xpansiv are not the only ones looking to offer nature-based carbon offset trading. In May, the Singapore Exchange said it was joining forces with the Development Bank of Singapore, Temasek Holdings, and Standard Chartered Bank to develop an exchange for trading carbon offset credits.

Known as Climate Impact X (CIX), the offerings will include the exchange and a project marketplace. CIX will begin offering trading of carbon credits generated from projects involving NBS towards the end of 2021.

But government officials say prices must soar for offsets to help save forests, and in turn the planet. A 20-fold increase in the price of forest carbon offsets to $100/mt is needed to keep the world's second-largest tropical rainforest safe from farmers and loggers, Democratic Republic of the Congo President Felix Tshisekedi said in April, referring to the Congo Basin.

NBS need a great deal more backing, especially financially, to help slow climate change, according to the UN Environmental Programme.

--Based on original reporting by Jeremy Rakes, OPIS.

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