IOSCO Recommends "Good Practices" in Voluntary Carbon Markets

The International Organization of Securities Commissions ("IOSCO") recommended twenty-one non-binding "Good Practices" for regulators, trading venues and market participants to facilitate "orderly and transparent trading of carbon credits."

In its Final Report on Voluntary Carbon Markets ("VCMs"), IOSCO expanded on its previous work (see 2023 Final Report on Compliance Carbon Markets and 2023 Consultation Report, et. al.) to provide "a clearer description of the current carbon credit ecosystem and the market structures that underpin it in primary and secondary markets." In the Report, IOSCO addressed key vulnerabilities in VCMs, including (i) the quality of carbon credits and availability of information pertaining to their quality; (ii) data availability, accessibility and general lack of transparency in the market; (iii) the operating framework of registries; (iv) conflicts of interest across the value chain; and (v) the lack of standardization.

IOSCO proposed the following Good Practices for regulators and trading venues:

On Regulatory Frameworks

• Clarify Legal and Regulatory Treatment. IOSCO recommended that regulators consider defining the legal and regulatory status of carbon credits within their jurisdictions. This includes determining whether carbon credits qualify as financial instruments, commodities, or another classification.
• Promote Consistency and Cooperation. IOSCO encouraged regulators to foster domestic and international collaboration, including the use of cross-border enforcement mechanisms to address potential fraud or market manipulation.
• Enhance Market Participant Competence. IOSCO recommended regulators implement education programs to enhance understanding of VCM benefits and risks among market participants, while ensuring that key entities in the ecosystem maintain adequate skills and oversight.

On Primary Market Issuance

• Standardization and Transparency. IOSCO urged regulators and other authorities to work with carbon crediting programs and private initiatives to harmonize taxonomies, verification methodologies and disclosure standards for carbon credit issuance.
• Registry Oversight. IOSCO recommended that registries adopt operational standards, including measures to prevent double counting of carbon credits, as well as IT and cybersecurity safeguards.

On Secondary Market Trading

• Access and Integrity. IOSCO recommended regulators foster open and fair access to VCMs, promote standards for carbon credit quality and prevent conflicts of interest. IOSCO recommended aligning trading venue practices with those in established financial markets, such as public reporting of trade data and transparency around trading rules.
• Governance and Risk Management. IOSCO recommended regulators implement governance frameworks with clear accountability measures for key market participants. Additionally, IOSCO recommended that intermediaries and exchanges deploy enterprise risk management systems to address operational and technological risks, including fraud and cybersecurity threats.

On Disclosure and Retirement of Carbon Credits

• Improved Transparency. IOSCO called for clear disclosures regarding the use of carbon credits by entities to meet net greenhouse gas emissions targets, including details on the type of credits used, the projects they support and the third-party verification processes in place.