Summary/Abstract
Futures contracts are exchange-traded financial instruments that enable parties to fix a price in advance, for later performance on a contract. Forward contracts also entail future settlement, but they are traded directly between two parties. Futures and forwards are used in commodities trading, as producers seek financial security when planning production. This paper discusses the potential use of futures contracts in Carbon Dioxide Removal (CDR) markets; concluding that they have one principal advantage (near-term price security to current polluters), and one principal disadvantage (a combination of high price volatility and high trade volume means contracts issued by the private sector may cause systemic economic risk). Accordingly, the paper notes the potential for the development of futures markets in CDR, but urges caution about the prospects for market failure. In particular, it considers the use of regulated markets: to ensure contracts are more reliable, and that moral hazard is minimized. While regulation offers increased assurances, the paper identifies major insufficiencies with this approach—finding it generally inadequate. In conclusion, it suggests that only governments can realistically support long-term CDR futures markets.