IOSCO report details recommendations for carbon market regulation

In an effort to support the use of cap-and-trade markets to combat carbon emissions, the International Organization of Securities Commissions (IOSCO) issued guidance for regulators.

The global umbrella group of securities regulators issued a final report, setting out its policy recommendations for the development of emissions trading systems, also known as compliance carbon markets. The recommendations aim to help regulators adopt requirements that facilitate the creation of markets that are sound, efficient and effective.

The report features a series of recommendations for both primary and secondary market operations, addressing issues such as transparency, access, market structure, and market stability mechanisms for both spot and derivatives markets.

While these kinds of markets have been in operation for almost 20 years, the report noted that, with governments increasing their promises to cut emissions, there’s growing interest in the development of so-called compliance carbon markets — government-mandated cap-and-trade regimes, distinct from voluntary carbon markets — particularly in Asia and Latin America.

“However, for these markets to be effective in meeting their decarbonization goals, it is important that they are underpinned by the same principles as any sound and robust regulated financial market, namely orderly functioning, transparency, integrity, stability and accountability,” the report said.

Among other things, the report aims to address universal market issues, such as concerns about conflicts of interest, fraud, insider trading, market manipulation and other kinds of trading misconduct, along with issues of transparency, governance and oversight.

These kinds of markets face unique issues, including how to effectively allocate emissions allowances.

“The report addresses historical challenges, such as oversupply of allowances, and describes market stability mechanisms that jurisdictions have implemented in response, which vary between price-based mechanisms and volume-based mechanisms,” it said.

Additionally, the report considers the possibility of connecting various emissions markets to one day produce a single consistent global carbon price.

Last year, IOSCO launched a pair of consultations of carbon market regulation (one focused on compliance markets, and one on voluntary carbon markets), and the results of that work are reflected in its final report.

“Sound, efficient and compliant carbon markets can be a key tool to help jurisdictions meet their climate goals,” said Verena Ross, co-chair of IOSCO’s sustainable task force’s work on carbon markets, and chair of the European Securities and Markets Authority. “Building on the experience of financial markets regulators at IOSCO, this report will support the continued development of these markets, that can contribute to reducing greenhouse gas emissions globally.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.