Regulatory: IOSCO launches consultation on carbon markets – commodities/derivatives/equity exchanges

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The International Organization of Securities Commissions (“IOSCO”), an international policy forum for securities regulators, has announced the publication of a consultation report and discussion paper. The 90-day public consultation covers “recommendations for building robust compliance carbon markets” and “key considerations for improving the resilience and integrity of voluntary carbon markets . . .” The Compliance Carbon Markets Consultation Report (“CCM”) and the Voluntary Carbon Markets Discussion Paper (“VCM”) are open for public comment until February 10, 2023. IOSCO is asking market participants to provide a feedback on “how to promote fair and functional markets and increase structural resilience to ensure that these markets achieve their stated purpose, that is, the environmental goals upon which their existence is based.” The report on CCMs (which are created and regulated by mandated government carbon reduction schemes) offers various recommendations for jurisdictions that are looking to establish compliant carbon markets as a way to fulfill its obligations under Article 6 of the Paris Agreement. The report on VCMs (operating outside compliant markets) details features that can “promote robust carbon credit markets”, along with weaknesses that currently constrain the growth of carbon credit markets. The report requests that respondents consider the role financial regulators should play in overseeing these markets.

Announcing the publication of the reports at COP27, Jean Paul Servais, President of IOSCO, Chairman of the Monitoring Committee of the IFRS Foundation and President of the Belgian Authority for Financial Services and Markets, said: “In recent years, carbon markets have gained significant prominence as a mechanism for businesses, and society at large, to ease their transition to net zero. However, they have so far failed to achieve their goals. No market can function without adequate levels of integrity, transparency and liquidity, so IOSCO today hopes to lend its international, market expertise to help develop suitable frameworks for robust and well-functioning carbon markets, focusing on promoting integrity and liquidity and increasing transparency to facilitate discovery of prices.”

Taking the temperature: IOSCO is a significant force in the regulatory landscape with its members regulating over 95% of the world’s securities markets in 130 jurisdictions. His proposals are likely to carry great weight with member regulators. The carbon offsetting market has recently come under scrutiny due to concerns that product inconsistencies and lack of control could lead to greenwashing. There are also concerns that carbon offset markets could disincentivise or distract corporate actors from the primary goal of reducing emissions. The IOSCO consultation was launched largely in response to these concerns. Of course, the effectiveness of regulation in promoting high-volume, well-functioning carbon markets remains to be seen, and the future verdict on this issue will have to await further evolution of such regulation.

Notably, US Commodity Futures Trade Commission (“CFTC”) chairman Rostin Behnam was recently named vice president of IOSCO. Behnam is an avid supporter of developing carbon markets in the United States, and the CFTC has been active in finding market-based solutions to climate change. The CFTC has also published several reports on VCMs and hosted a VCM conference in June 2022. The CFTC is currently working on a report on the impact of climate change on the US financial market.

(This article originally appeared in “Cadwalader Climate,” a bi-weekly ESG market newsletter.)

The content of this article is intended to provide general guidance on the subject. Specialist advice should be sought regarding the specific circumstances.

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