Carbon Trading and Transparency: A Proposed Regulatory Framework

The Paris Agreement makes provision for market and non-market forms of cooperation between Parties and non-Parties for the purposes of climate mitigation. This paper addresses the challenge of establishing a transparent regime for in situ and linked carbon markets. Carbon credits are very new types of commodity markets, but are likely to grow significantly as the offset market expands to supply international aviation under the recently adopted CORSIA scheme (International Civil Aviation Organisation 2016). Their novelty and unique features make enforcement and market manipulation difficult to police and regulatory governance practices are still evolving. Critics claim that markets will not deliver the mitigation that was promised, in part due to the potential for regulatory capture, ‘gaming’ and fraud (Aldred 2016; Lohmann 2008). We also critique using offset credits through the Clean Development Mechanism and Joint Implementation projects which raise further ethical concerns about the commodification of nature and the breach of sustainable development norms. One solution to the problem of commodification and fraud is to improve the quality of oversight and make transparency and environmental integrity a priority of market design and oversight. They are also essential to good institutional design, procedural justice, verification and reporting in the case of a commodity which is ultimately ‘invisible’. We distinguish four types of transparency: procedural; market price; information and measurement; and outcomes. Procedural transparency covers both the decision-making process and the credibility of commitments undertaken by policy-makers. Market rules should be designed to avoid giving guarantees or free allowances to incumbent polluters, and initial allocations should align with principles of justice. Broad public participation and deliberation over objectives and design are essential to procedural legitimacy. Secondly market prices are used as the most explicit source of information about the preferences of buyers and sellers. However, in the absence of a global tax on carbon, market prices do not currently reflect the social cost of carbon and its burden to future generations. Therefore, market prices must be adjusted via lowering the cap, or increasing the carbon price floor to transparently reflect the ecological truth about climate harms. Thirdly verification, reporting and enforcement are vital to the legitimacy of carbon markets, and this will require regulatory oversight, as well as legislative reviews by national governments. Finally, transparency of outcomes requires an agreed methodology for the evaluation of environmental and social outcomes if carbon credits are to have any integrity in the context of mitigation. Our paper defines a framework for transparency for the design and oversight of carbon markets.