Blog: Regulation: IOSCO Begins Consultation On Carbon Markets – Commodities/Derivatives/Stock Exchanges – United States – Mondaq

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Regulation: IOSCO Begins Consultation On Carbon Markets

25 November 2022

Cadwalader, Wickersham & Taft LLP

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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 establishing sound Compliance Carbon
Markets” and “key considerations for enhancing the
resilience and integrity of Voluntary Carbon Markets. . . .”
The Compliance Carbon Markets (“CCM”s)
Consultation Report
and the Voluntary Carbon Markets (“VCM”s)
Discussion Paper
are open to public comment until February 10,
2023. IOSCO is asking for market participants to give feedback on
“how to foster fair and functional markets and increase
structural resilience to ensure these markets achieve their stated
purpose, i.e., the environmental objectives upon which
their existence is based.” The report on CCMs (which are
created and regulated by mandatory governmental carbon-reduction
regimes) offers various recommendations for jurisdictions that are
looking to establish compliant carbon markets as a way to achieve
their obligations under Article 6 of the Paris Agreement. The
report on VCMs (which operate outside of compliance markets)
details characteristics that can “foster sound carbon credit
markets,” together with weaknesses that currently limit the
growth of the carbon credit markets. The report requests that
respondents consider the role that financial regulators should play
in overseeing these markets.

Announcing the publication of the reports at COP27, Jean Paul
Servais, IOSCO Chairmain, IFRS Foundation Monitoring Board Chair
and Chairman of the Belgium Financial Services and Markets
Authority, said: “In recent years, carbon markets have gained
significant importance as a mechanism for corporates, and society
in general, to facilitate their transition towards net zero.
However, they have so far fallen short of their objectives. No
market can function without appropriate levels of integrity and,
transparency, and liquidity so IOSCO today hopes to lend its
international, market expertise to help develop appropriate
frameworks for sound and well-functioning carbon markets, focusing
on promoting integrity and liquidity and increasing transparency to
facilitate price discovery.”

Taking the Temperature: IOSCO is a significant force in
the regulatory landscape with its membership regulating over 95% of
the world’s securities markets in 130 jurisdictions. Its
proposals will likely carry great weight with their member
regulators. The carbon offset market has come under significant
scrutiny recently due to concerns that product inconsistencies and
lack of scrutiny may be leading to greenwashing. There are also
concerns that carbon offset markets can disincentivize or distract
corporate actors from the primary objective of reducing emissions.
The IOSCO consultation was launched in large part in response to
these concerns. Of course, the effectiveness of regulatory activity
in promoting well-functioning and high-volume carbon markets
remains to be seen, and the future verdict on that issue will have
to await the further evolution of any such regulation.

Notably, the U.S. Commodity Futures Trade
Commission’s (“CFTC”) Chair, Rostin Behnam, was
recently appointed as the vice chair of IOSCO. Behnam is an avid
advocate for the development of carbon markets in the U.S., and the
CFTC has been active in finding market solutions to climate change.
The CFTC has also published several reports on VCMs and in June
2022 hosted a VCM convening. The CFTC is currently working on a
report regarding the impact of climate change on the U.S. financial
market.

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

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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