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Response to IOSCO Discussion Paper on Voluntary Carbon Markets

February 10, 2023

IOSCO (The International Organization of Securities Commissions) is an international association of financial regulators. At the end of 2022 they published two discussion papers on carbon markets, with one focussed on voluntary carbon markets. These papers are likely to shape thinking on the role of regulators in carbon markets.

Sylvera strongly supports and appreciates IOSCO’s work to support the emergence of effective, high integrity voluntary carbon markets (VCMs). The analysis and proposals in this Discussion Paper are of high quality, and will go a long way toward ensuring the VCMs are able to play a positive role in helping avert the worst impacts of the climate crisis. 

Our responses to the Discussion Paper’s 11 specific questions follow.


Question 1: Is the description of the issuance of carbon credits accurate? Are all key market participants properly reflected?

We broadly agree with the description.

Most large credit purchasers are increasingly using ratings agencies for due diligence and most marketplaces are now integrating / about to integrate ratings (e.g., Xpansiv, CIX, Salesforce, Rubicon). The description could draw a distinction between the mandatory use of certification companies and voluntary use of ratings agencies more clearly – currently that paragraph is unclear.

From a regulatory perspective, we are supportive of regulators factoring ratings agencies into their short term strategies in order to avoid the market evolving in the way that ESG ratings has.

We agree purchasers may not always use credits to “offset” emissions, but the description (and rest of the document) could be more consistent in referring to credits instead of offsets. 

Question 2: Has the consultation identified the relevant vulnerabilities? Are there any others that should be considered? Please explain.

We broadly agree with the vulnerabilities identified.

With respect to a uniform definition of high quality, we think the CCP designation has a useful role to play in the market. However, we are concerned that in creating any binary designation of quality, there is a tension between liquidity and quality (i.e., set the bar too low and you dilute quality, set it too high and you eliminate liquidity). We therefore think that quality must be thought of as a spectrum, with the CCP designation a useful minimum threshold, or quality floor, until carbon credits can truly be standardized.

With respect to the lack of standardization, we agree that standardizing based on some attributes is a helpful way to achieve the twin ambitions of quality and liquidity, but we think many attributes are not guarantees of equivalence. We think ratings are a useful attribute to standardize against, and have seen significant interest in rated basket contracts from new and existing marketplaces and exchanges.

With respect to the lack of transparent pricing data, we fully agree that this is limiting the ability of buyers to reward high-quality projects. Therefore we think that regulatory requirements to disclose pricing data could be one of the single most impactful changes to ensure future high-quality carbon credit supply.

We are also deeply concerned by greenwashing. We think it is vital that buyers are required to make standard, annual disclosures about the carbon credits they have purchased and/or retired, and that these disclosures cover new and historic purchases to ensure that buyers are forced to address the ongoing effectiveness of the projects they have supported. We set out below the standard disclosures we think buyers should be required to make.

We see one of the biggest risks at the moment as scaling the carbon markets without ensuring high environmental integrity. If we create a mature market that isn’t environmentally beneficial then we will have failed, and that must be borne in mind in each decision we make.

Question 3: What kind of role could IOSCO play in coordinating the actions of industry-specific organizations and public authorities?

We welcome IOSCO’s interest into the VCMs and agree regulation (and regulatory co-ordination) would help to ensure they operate with environmental integrity and societal trust.

We would caution that the carbon markets are not pure financial markets – there is currently a tension between the increasingly accepted reality that quality is a spectrum and not all carbon credits are equal, with the desire to build a standardized, scalable commodities market around carbon – IOSCO seems to acknowledge this in their description of the market.

From our perspective, a lot of work needs to be done before carbon credits can be considered truly fungible instruments, and one cannot underestimate the difficulty of this work.

Ratings agencies are doing some of that work and their value has been recognized by many key stakeholders, but there is a risk that, as with ESG ratings agencies, legitimacy remains flimsy without regulatory underpinnings.

We would therefore welcome IOSCO and national regulators taking steps towards regulating the activities of carbon credit ratings agencies, akin to the ESG space.

More generally, we are supportive of most of the proposals that IOSCO has made in the toolkit, and comment on these specifically below. 

Question 4: How do you think IOSCO should achieve these objectives?

We’d recommend IOSCO publish their findings with a set of recommendations to follow, and then work with national regulators (and private initiatives) to support the bringing about of those recommendations

If the FCA, SEC and ESMA move as quickly as the FCA and ESMA did to endorse IOSCO’s recommendations on ESG ratings agencies, then that approach could develop critical momentum to build on.

Question 5: Should IOSCO seek to collaborate more closely with these private initiatives? How might such a collaboration function?

We have engaged in the ICVCM and VCMI consultations and development process, and have been largely supportive of their proposals.

We continue to consider that each body has to date given the most thought and consideration to supply and demand side integrity respectively, and are therefore the best place to “regulate” behavior on each side of the market. We hope that recent additional funding for each will also give them sufficient capacity to do so.

However, we are conscious that governance codes and industry regulation is most effective when all market participants align behind a single code. There is therefore a risk that if financial regulators and lawmakers seek to require or deviate from the requirements of each, their work is undermined and/or there is fragmentation. We would therefore recommend that IOSCO and financial regulators seek to engage directly with and then support the work of each to ensure mass adoption.

Collaboration could fall into three parts: (i) engagement and refining of proposals to ensure financial regulators can endorse the work in full, (ii) resource-based support for the initiatives to ensure each has sufficient resources to perform its role (e.g., secondment of people with financial regulatory experience), and (iii) adherence-based support, e.g., by requiring that corporates take a “comply-or-explain” approach to each when active in the carbon markets.

We would caution however, that the proposals of each initiative do not release the need for other initiatives in the market:

  • The IC-VCM’s CCPs represent “good enough” to ensure that integrity does not come at the expense of achievability. Quality is a spectrum above and below that fixed line, and there will always be a role for organizations shining light on that.

  • The VCMI Claims, to be usable, will inherently lack nuance. There will therefore always be a role for deeper, nuanced disclosure and assessment to understand the wider context of any claim. 

Question 6: What, in your view, is the legal nature of an offset credit? Should IOSCO recommend a specific approach to relevant authorities?

We agree with the findings of ISDA’s paper on this matter.

Carbon credits are inherently global and the market is nascent – we would encourage global legal standard setters (e.g., UNCITRAL, UNIDROIT) to provide a globally harmonized agreement to this question.

Carbon as an asset is (relatively) novel and there’s an environmental imperative to ensuring this market works effectively, so we’d encourage a decision driven by the right environmental outcomes more than legal precedent, if there is a tension. 

Question 7: What is the role of blockchain and distributed ledger technology in voluntary carbon markets?

We recognise the value that DLT can bring to rigour and transparency in any market, especially one as fragmented as the VCMs.

The Climate Action Data Trust (CAD Trust) metaregistry is an example of an initiative using blockchain to improve transparency and accountability and avoid double counting. In this context, with extensive testing, blockchain has proved to be an appropriate solution to a specific challenge. 

However, the VCMs are already riddled with complexities and adoption risks. We fear adding multiple blockchain layers could make those insurmountable in the time available to get this right. 

Question 8: What are the benefits and vulnerabilities of using tokenization over-relying on more traditional market infrastructure? Do these benefits outweigh how energy-intensive the use of blockchain is?

As above, we do not believe that, in general, the complexities and controversies of tokenization is an efficient use of time, money, or energy in the context of wider VCM issues. 

Question 9: Should IOSCO recommend good practices regarding transparency on the use and impact of carbon credits by market players?

Yes, we are fully supportive of clear requirements for disclosing the use and impact of credits.

Financial regulators have already proposed this (e.g., SEC) and we would welcome IOSCO proposing a standardized set of disclosures for financial regulators to follow to ensure consistent global disclosures.

We think those disclosures should cover the following, for each group of credits with like characteristics:

  • Number of credits purchased
  • Credit ID and certification standard
  • Vintage
  • Host country
  • Whether a corresponding adjustment has been applied
  • Price paid
  • Date of purchase
  • Number and ID of credits retired
  • Date of retirement
  • The specific use to which the credit retirement was put, including the emissions scope retired against
  • Whether third party verification was used, and if so of what form and from which organisation(s) - see second paragraph below

All of the above details should be provided comprehensively, meaning that in any given year reporting entities should provide this information for every credit they have bought, every credit they hold, every credit they have retired, and any claims made in association with any credits bought or retired. 

To further aid this assessment of risk, credit buyers should also disclose the due diligence they have performed on the credits purchased, and how they assessed the impact, additionality, permanence, and risk of leakage of the credits (per Key Consideration 5). This could include both internal processes or verification, authentication, or subsequent monitoring / assessment by a reliable third party, for example carbon credit ratings agencies. This could also include information from independent initiatives such as IC-VCM, including whether a credit meets their Core Carbon Principles. However, this should be with the understanding that this is a binary judgement, and more nuanced quality assessments help further mitigate risk. 

Per the proposed disclosures for the toolkit as part of Key Consideration 5, these disclosures should be made in the context of disclosures around how the purchaser is using credits as part of their climate pledges and how they have ensured they are not abusing credits to maintain business as usual emissions.  

Question 10: Are these the key considerations appropriate for the sound functioning of voluntary carbon markets?

Taking the toolkit in turn:

(i) Open Access – we are supportive of increasing price transparency, assuming access to diligence materials is not lost when moving from OTC to exchange-based trading. We expect enhanced price transparency will demonstrate the price premium for quality, which is a critical signal for carbon markets to scale with maximum environmental impact. We would add ‘ratings agencies’ to the list of entities to include in the broader participation (in section c. of the toolkit).

(ii) Market Integrity – we are supportive of proposals to reduce the risk of market manipulation and disruptive conduct, especially with respect to intermediaries. We would caution that project developers are not PLCs and can’t be expected to comply with equivalent standards as debt/equity issuers in the short-term (without a potentially distracting investment in compliance resources). We would therefore encourage a phased-in, lighter touch approach to developer requirements here, with more rigorous controls applied to financial intermediaries. 

(iii) Publicly Available Data to Promote Transparency – we are fully supportive of initiatives to maximise market transparency and minimise information asymmetry.

Regarding buyer disclosures, we are fully supportive of these proposals, as set out above in response to Question 9.

(iv) Price Discovery – we are broadly supportive of proposals to enhance price discovery, and would suggest that ratings are a useful addition to c(i) for exchanges to incorporate.

(v) Product Standardization/Environmental Integrity – we are supportive of any approach that does not sacrifice environmental integrity for product standardization and market development. This includes encouraging exchanges to pre-screen credits for quality, which we are aware many new exchanges and trading facilities are doing (in some cases drawing on our data).

(vi) Interoperability – we are broadly supportive of moves to make credit registries more interoperable, and to support initiatives towards facilitating the convergence of the voluntary and compliance markets, including the CAD Trust (formerly the Climate Warehouse).

(vii) Financial Integrity of Transactions including Settlement and Delivery Certainty – we’re broadly supportive of initiatives to ensure financial integrity, provided the profit motives of financial intermediaries are not permitted to compromise the environmental integrity of the markets.

(viii) Legal Certainty – we are supportive of initiatives towards ensuring legal certainty at all stages of a credit’s life cycle. See our response to question 6 above for more detail.

(ix) Governance – we are supportive of initiatives towards strong governance frameworks for market operators and market participants.

(x) Conflicts of Interest – we are supportive of initiatives towards requiring the avoidance, management and disclosure of potential conflicts of interest for market participants.

(xi) Enterprise Risk Management – we are supportive of initiatives towards strong risk management for market operators and market participants. 

Question 11: What other key considerations may be necessary in order to scale up carbon markets?

In the last three years, five carbon credit ratings agencies have been established and more are expected to follow. Given the wide variance in project quality and lack of comparability between project methodologies, we consider ratings to be critical to buyer diligence and to drive a price incentive for developers to pursue quality. Without regulation or governance oversight, we expect the market to develop similarly to that for ESG ratings – multiple competing and uncorrelated perspectives with user confusion in light of methodologies that are not transparent and potential conflicts of interest. We therefore strongly advocate for regulatory oversight of carbon credit ratings.

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About the author
Head of Legal and Ops

Hayden Cooke is the Head of Legal and Ops at Sylvera. He studied History at the University of Oxford before starting his legal career at Slaughter and May. Prior to Sylvera, Hayden led the Legal and Compliance teams at a heavily regulated, international payments business. He works closely with the Policy team at Sylvera to ensure that incoming regulation will facilitate the scaling of the VCMs with integrity at the forefront.