Role of Derivatives in Carbon Markets

Derivatives play an essential role in carbon markets. Companies subject to carbon compliance programs use carbon derivatives to meet their obligations and manage risk in the most cost-effective way. Derivatives can also be used by a variety of businesses that have financial positions indirectly tied to carbon prices. Investors can use the price signals from carbon derivatives to assess climate transition risk in their portfolios and can then access liquidity pools to manage risk and allocate capital to benefit from energy transition opportunities.

Derivatives markets also play a major role in enhancing transparency by providing forward information on carbon, which contributes to long-term sustainability objectives and provides helpful signals to policy-makers on the regulation of carbon prices.

This paper describes the role of derivatives in carbon markets and reviews exchange-traded and over-the-counter carbon derivatives. It also provides some insights on compliance and voluntary carbon markets and explains how firms use these markets and carbon derivatives to meet their compliance obligations, achieve corporate social responsibility goals and manage risks. In addition, the paper summarizes global climate change mitigation efforts and international carbon markets.

Click on the attached PDF to read the full paper.

Documents (1) for Role of Derivatives in Carbon Markets

Paper on Proposal 6 on Margin Transparency

On November 16, ISDA published a document that looked at proposal 6 in the final Basel Committee on Banking Supervision (BCBS), Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) report on margin transparency. Proposal...

Tender Issued for DC Administrator Role

ISDA and the Credit Derivatives Governance Committee have issued an invitation to tender for an independent regulated entity to serve as the administrator for the Credit Derivatives Determinations Committees (DCs), which includes assuming the role of DC secretary. The DC...

ISDA SIMM: The Standard for IM Calculations

The ISDA Standard Initial Margin Model (ISDA SIMM) plays an important role in ensuring margin calculations are consistent, transparent and aligned with global best practices and regulatory requirements. Since its launch in 2016, the model has been rigorously tested, regularly...