Early and ongoing transparency and checks against market manipulation are among the critical elements of well-designed carbon emissions trading markets, according to a new report by the Regulatory Assistance Project (RAP).
The report, Carbon Markets 101: “How-To” Considerations for Regulatory Practitioners, distills best practices drawn from various jurisdictions’ experience with carbon markets and identifies the key elements of markets that function well.
“There is a lot of experience to draw on,” said David Littell, RAP principal and co-author of the report. “If government regulators keep in mind guidelines and principles outlined in this report, they can create and monitor successful carbon emission markets.”
Starting with an open process, regulators can use stakeholder input to help in deciding whether to pursue a statewide or regional approach, among other design issues. Most carbon trading systems to date have been “mass-based,” focusing on total emissions under a cap relying on a system of tradable allowances. This offers the potential to be more flexible than an alternative “rate-based” approach. The report also notes that transparency remains important not just in market design, but also during implementation and review.
The report’s authors also consider how to auction process or initial allowance allocations, and ownership rules can affect the development of a secondary market. Secondary markets can support liquidity and accurate price discovery following initial state distributions of allowances.
Co-author David Farnsworth noted: “Once the Chinese national system is put in place by 2017, countries with more than 49 percent of global GDP will be covered by an emissions trading system for one or more sectors.”
Download the full report here.