IOSCO Recommends Guidelines for Establishing Carbon Compliance Markets

In a Consultation Report, IOSCO examined existing carbon compliance markets ("CCMs") that allow corporations to buy and sell carbon emissions allowances.

On the basis of this review, IOSCO made recommendations to jurisdictions seeking to establish new CCMs as to how to maintain integrity and orderly function. IOSCO said that the goal of the recommendations was to advance an international carbon market in which there would be a consistent price for carbon globally.

IOSCO recommended that jurisdictions looking to establish carbon markets should rely on lessons learned by existing and well-established CCMs on how to run an efficient market. IOSCO said that functioning carbon markets should be operated under the same basic principles as any other financial market. IOSCO's recommendations covered markets involved in both primary and secondary offerings, including the trading of both physical spot markets and derivatives markets.

IOSCO recommended that regulators:

• promote predictability and transparency in primary market decisions;

• conduct frequent auctions for primary market issuances;

• establish strictly rule-based stability controls to allow for better predictability;

• allow broad-based participation in the primary markets;

• define the legal nature of allowances in each respective jurisdiction;

• scrutinize the auction outcomes;

• establish frameworks for (i) conducting market surveillance, (ii) oversight of firm behaviors in spot and derivatives carbon markets and (iii) ensuring appropriate enforcement;

• ensure relevant market infrastructures are properly supervised and regulated;

• encourage the development of standardized derivatives contracts;

• consider public disclosure and periodic reporting requirements; and

• maintain strong connections with carbon market authorities.

IOSCO also included a set of consultation questions. Response are due by January 9, 2023.