Global Carbon Market Institutions: An Assessment of Governance Challenges and Functions in the Carbon Market

In late 2008, British Prime Minister Gordon Brown commissioned his Special Representative on Carbon Trading, Mark Lazarowicz MP, to draft a report identifying the current role of emissions trading systems and possible  challenges going forward. Michael Mehling of the Ecologic Institute in Washington DC was asked to prepare one of  four background papers for the main report. His study, entitled “Global Carbon Market Institutions: An Assessment of Governance Challenges and Functions in the Carbon Market”, stresses the institutional needs for linking carbon markets across nations and ensuring market efficiency. He also matches governance challenges with possible institutional solutions. The full report (“Global Carbon Trading: A Framework for Reducing Emissions”) was launched in London on 20 July 2009 by Mark Lazarowicz.

In its background report, Ecologic analyzed the institutional requirements to provide carbon markets with strengthened governance functions, such as market oversight and environmental stringency assurance. The interplay between market forces and mitigation objectives is of vital importance when considering the possibility of linking carbon markets between nations. Without assurances of environmental stringency and adequate market operation, integrating markets from different jurisdictions will be highly challenging, if not impossible.

To better facilitate linking, the background report identifies major governance challenges and institutional functions to address these challenges. Acknowledging the likelihood of different development scenarios, the report addresses both centralized and decentralized alternatives. One example of the governance challenges highlighted in the report is the need to address speculation and market abuse. Centralized institutional responses to market abuse include jointly defined, mandatory minimum margin requirements, bidding and position limits, and sanctions for violations. Decentralized options include the informal definition of standard practices on bidding and position limits as well as margin requirements, the adoption of a voluntary code of conduct, or the suggestion of minimum sanctions for violators.

Mark Lazarowicz MP, the Prime Minister's Special Representative on Carbon Trading, launched the full report entitled "Global Carbon Trading: A Framework for Reducing Emissions" in London on 20 July 2009. The main report considers the role of cap and trade systems in the prevention of climate change, as well as the measures necessary to link and extend trading systems over time. As one of the contributing authors, Michael Mehling of the Ecologic Institute was invited to attend the launch.