A Clear Plan for Voluntary Carbon Trading

As world leaders head to Azerbaijan for COP29 next week, they must confront the urgent task of keeping the Paris Agreement objectives on track and accelerating the reduction of carbon emissions. This is an unprecedented global challenge, and governments cannot do it on their own - they need to leverage global capital markets to raise the funding that is needed. The voluntary carbon market could play a big role, but this requires robust and consistent standards. It will also involve the public and private sectors working together, and we've identified five key areas where that work should start.

First, we need a globally consistent definition of a ton of carbon that is adopted by all market participants and aligned with Article 6 of the Paris Agreement, which sets out how countries can cooperate to reach their climate targets. Linked to this is the need for a robust, independent system that uses scientific evidence to verify and audit the integrity of voluntary carbon credits (VCCs). These are non-negotiable prerequisites for an effective carbon market - there can be no shortcuts if the market is to work effectively.

Second, a sound legal framework is critical to create greater certainty and confidence in the trading of these products. ISDA has explored the key legal issues relating to VCCs in several jurisdictions and we set out steps to create greater legal certainty in a series of whitepapers. We've also developed standard documentation, which we published in late 2022, creating a single contractual framework that can be used for any carbon standard or registry.

Third, greater clarity is needed on the accounting treatment for VCCs. At present, there are no specific provisions relating to carbon credits under US Generally Accepted Accounting Principles or International Financial Reporting Standards. ISDA has explored the key accounting issues for this market, and we continue to advocate for an aligned approach that would allow consistent treatment of VCCs.

Fourth, the development of a liquid forward market would send valuable price signals to buy- and sell-side firms, enabling them to gauge supply and demand and manage their risk. A vibrant secondary market will help to secure long-term investment in carbon removal technologies and nature-based solutions, while also facilitating greater pricing transparency.

Finally, the development of a global regulatory framework must be an urgent area of focus. There is no need to reinvent the wheel - policymakers should be mindful of existing rules for trading in the secondary market, which are sufficiently robust and fit for purpose. We must also be ready for the big policy measures that lie ahead, such as the EU's Carbon Adjustment Mechanism, which will introduce a levy for carbon emitted during the production of certain goods imported into the EU. This will be a transformational change, putting carbon pricing right at the center of global trade policy.

As COP29 unfolds, ISDA's five recommendations offer a pathway to a vibrant, efficient voluntary carbon market. By placing a high premium on integrity and transparency, this market can play a key role in the transition to net zero. I was pleased to present our recommendations at a recent meeting of the Sustainable Finance Task Force of the International Organization of Securities Commissions, and we will continue to work with policymakers and market participants to take them forward.

Read the speech: Act Now: The Need for Public-Private Sector Collaboration on Climate Risk and Carbon Markets