The role of market operators in scaling up voluntary carbon markets

Abstract

As the effects of climate change are affecting countries across the globe, companies are increasingly turning to voluntary carbon markets to offset their greenhouse gas emissions (GHGE).1 Carbon markets comprised two types of markets: markets which are embedded in governmental GHGE reduction schemes (compliance markets) and markets that are the result of private initiatives (voluntary markets). Voluntary markets are more and more harnessed by public actors to reduce GHGE, allowing regulated entities to use voluntary credits for compliance purposes.2 However, issues concerning integrity, liquidity and quality are beleaguering these markets, causing inefficiencies and distorting price formation. If voluntary carbon markets are to support climate change mitigation strategies and if supply is to meet the growing demand for voluntary carbon credits (VCCs), these markets need to resolve these issues in order to grow (scale up).3 This article investigates which roles market operators authorized under the Markets in Financial Instruments Directive (MiFID II)4 could play in scaling up these markets. Market operators already facilitate transactions in voluntary markets, but their involvement is relatively limited. Given their experience with operating multilateral systems and providing transparency in markets in financial instruments, they could contribute to the resolution of these issues. The conclusion of this article is that market operators can indeed fulfil several key roles in voluntary markets while observing their obligations under MiFID II.