Voluntary carbon markets need to be regulated to build liquidity: Ieta panel

INDUSTRY players believe that voluntary carbon markets (VCMs) need to be regulated to get financing and ensure its integrity.

However, while they were generally in consensus that carbon credits should be regulated as tradable commodities, just like oil, they differed on how far these regulations should go and what form it should take.

These observers also felt that there should not be too much oversight to the point where it hinders the development of carbon projects and the building of liquidity in the market.

How these regulations should be designed for different stages of the VCM supply chain, the approach regulators should undertake, as well as concerns on greenwashing were discussed on Wednesday (Dec 7) at a panel session held at the Asia Climate Summit, organised by the International Emissions Trading Association (Ieta).

Sandeep Roy Choudhury, co-founder of carbon project developer VNV Advisory, said that there should be some “soft regulation”, which could come in the form of guidance to ensure that the carbon credits produced have integrity and truly reflect the offsetting of a unit of emitted carbon. This ensures the long-term survival of the market as well.

However, he believes that VCMs should largely be left unregulated, adding that countries which have restricted carbon credits from being exported are a result of misinformation to a large extent.

Other panellists have taken the middle-of-the-road approach. Belinda Ellington, managing director and general counsel at Citibank, said that a prudential regulatory body would not be necessary. But having standards to ensure the quality of carbon credits and its parameters, and establishing know-your-customer checks on buyers would help to have oversight on market players.

“So you have to create a market that people feel safe in, in order to create the liquidity within that market. And that’s about creating high-enough walls around the production of items, and the participants within that domain for people to feel safe and also to create function in the market,” she said. “What we’re trying to do is build liquidity, we’re trying to build a brand new market. So what is important is to create confidence within that market.”

Citing quantitative research, which have established that a “light-touch” approach to regulations – such as those governing stock markets – are the best form of enforcement, Singapore Management University’s finance professor Hao Liang said that regulations around VCM should also follow a similar form.

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On the other end of the spectrum, Thomas McMahon, chief executive officer of carbon trading exchange AirCarbon, said that having frameworks to regulate carbon credits as a financial instrument would be necessary for capital to flow into this emerging asset class that is being traded as a commodity.

Although AirCarbon has a presence in Singapore, it is currently not regulated. However, it has partnered with the Abu Dhabi Global Market for it to be the world’s first fully regulated carbon trading exchange and clearing house.

“So now from a banking perspective, we could invite banks to come in, and they could put it on a balance sheet for the first time. Now we can build financial products, fungibility, and all the other parts,” said McMahon.

He added that there will be plenty of pain points along the way before the right regulatory balance can be achieved, alongside a benchmark for carbon pricing, much like how the trading of several oil contracts in the 1970s eventually coalesced to the current few.

Greenwashing concerns were also highlighted during the discussion. Concerns over the integrity of carbon credits have been a common criticism among buyers and green groups.

Choudhury said that there needs to be trust in the standards that project developers are basing their carbon credits production on. “As a developer, I can’t be answering to the standard, and then to somebody else who says, ‘No, but your baseline isn’t right’. So then, who am I working for?” he said.

Criticisms over “dodgy credits” might have the unintended consequence of hindering companies from taking further steps in reducing their emissions, a phenomenon the industry has termed greenhushing.

Choudhury added: “It’s almost better for a company to not do anything than to do something today. And that’s a problem, because we are actually going after companies for doing something. Companies will just stop doing it, because they’re like, ‘This is not worth our time’.”