Single price for carbon a must, CME says as ISDA calls for faster regulatory engagement

A single price on carbon is needed to further scale up the carbon offset market and provide confidence that offsets are fair-value products, CME's chief commercial officer warns

by | July 12, 2021 | bobsguide

A single price on carbon is needed to further scale up the carbon offset market and provide confidence that offsets are fair-value products, CME’s chief commercial officer warned as the market segment keeps gaining traction worldwide.

With the issue of pricing becoming more pressing as interest in carbon trading has increased dramatically, Julie Winker echoed recommendations made in the Commodity Futures Trading Commission (CFTC)’s report on managing climate risk.

“The US really should establish a single price on carbon that is fair and economy-wide,” she said at an Institute of International Finance event last week. “It is one of the single most important steps that we can take to manage that climate risk.”

Winkler said that up until a couple of years ago, only 5-10 percent of clients asked about carbon trading.

“Now, it’s in about 90 percent of conversations,” she said. “The strongest voices and interest are coming certainly from Europe, but also North America and APAC,” coming from commercial firms, banks, hedge funds and liquidity providers, she added.

However, US capital markets remain laggards in carbon trading.

“Clearly we’re being dwarfed by the efforts of Europe and now China in terms of overall size and scale of the market,” said Jon Creyts, chief program officer at the Rocky Mountain Institute, a sustainability think tank.

Encouraging climate investment

Given the fact that technologies like carbon sequestration will require a sustained flow of long-term investment, Scott O’Malia, CEO of the International Swaps and Derivatives Association (ISDA), said markets will need to develop good and innovative products to make those investments appealing.

“Our job is to really figure out how we can drive long-term investment to support both innovative and conventional technologies to eliminate carbon.”

Developing these products, however, may require a trial-and-error approach to continuously changing client needs and markets, said Winkler.

“This is going to be an evolution, not a revolution. What everybody needs to understand is, you have got to be in it for the long haul.”

Regulators need to pitch in

Though a voluntary market, Creyts believes offsets should be considered by regulators as part of their climate-risk assessments.

“We do want carbon market reductions to be validated on the regulatory side as well.”

As the private sector progresses quickly in developing a standardised carbon trading market, O’Malia agreed regulators still have a role to play in steering the market to make the right transition.

“We’re going to have voluntary carbon trading faster than we’re going to get a global regulatory regime. Let’s not discourage that, let’s make sure that we get everybody moving forward here at pace.”

“Each industry is developing solutions. How do we develop the taxonomy […] and the governance around that to make sure that everybody gets credit, that everybody is doing something in a consistent, transparent manner?”

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