Carbon ‒ a hot topic as the world begins to focus on the environmental impact of business practices.
So how do market participants manage efficient business operations with public expectations associated with their carbon footprint? The Global Emissions Offset (GEO) futures contract, from CME Group, is the answer.
The CBL Global Emissions Offset (GEO) futures contract, Globex symbol GEO, is a market-based solution that sets its foundation in an international framework and is positioned to harmonize the buying and selling of carbon offsets from registries and emission reduction projects across the world.
The GEO futures contract is a physically settled contract that allows for delivery of CORSIA-eligible voluntary carbon offset credits.
Assume it’s November and a Fortune 500 company has just committed to eliminate its carbon emissions over the next five years. After conducting their due diligence, they have determined this would require offsetting one million tons of carbon equivalent every year. In order to achieve the mandate in year one, they will need to utilize offset credits.
To protect against the risk of rising offset prices, the firm can purchase 1000 GEO futures contracts that expire in December, the following year. Therefore, locking in their offset price 13 months in advance. The firm does not need to pay the full amount up front, but rather posts margin – which is a percentage of the notional value – to secure the position.
If the price of carbon offsets declines, the firm will experience a loss in their futures position, but will be able to buy carbon offsets in the spot market at a lower price. Fast forwarding 13 months later, assume the offset prices have increased.
The company carries their long futures position into expiration and takes physical delivery upon the December contract’s expiry. In this case, physical delivery takes the form of receiving contracts granting ownership of one million units of carbon offsets from one of the CBL-approved voluntary offset registries. The company will then have the ability to retire all the purchased contracts.
CBL, an Xpansiv company, is a global leader in spot energy and environmental markets providing secure, seamless access to ESG inclusive commodities like carbon, renewable energy, water, and gas. CBL will be responsible for the transfer of funds and offsets between GEO buyers and sellers.
GEO futures are a seller’s option contract, meaning the seller can choose which qualifying registry to deliver the offsets from. Therefore, buyers of the GEO contract must be onboarded with all applicable registries.
The contract size for GEO futures is 1,000 offsets. Assume GEO futures are trading at $1.50. The notional value of one GEO futures contract would be $1500.
The tick size of the GEO futures contract is quoted in pennies, making a one tick move in the GEO futures equivalent to $10 US dollars per contract.
GEO futures can be traded on CME Globex Sunday afternoon through Friday afternoon, nearly 24 hours per day, or cleared as a block transaction through CME ClearPort. Counterparty risk is mitigated through CME Clearing and associated clearing members for all market participants.
Expiration and final settlement for GEO futures will take place three business days prior to the last business day of the contract month. Delivery will be facilitated through CBL on the last business day of the contract month. Intra-commodity margin offsets will also be available for those interested in trading or spreading different GEO futures contract months.
GEO futures, from CME Group, provide a transparent, established, and secure financial instrument for managing price risk for evolving carbon offset markets.