Climate change may be humanity’s greatest threat. Rapidly increasing greenhouse gas emissions have led to rising sea levels, recurring heatwaves and melting glaciers, all of which have contributed to an increasingly dismal economic and environmental outlook. Between 2030 and 2050, the World Health Organization forecasts there will be an additional 250,000 deaths per year as a direct consequence of climate change. Between 2016 and 2018, climate-related disasters were reported to have cost the global economy $650 billion.
In an effort to mitigate and ultimately offset these effects, governments and organizations across the globe have committed to implementing solutions to halve greenhouse gas emissions within the next decade, and eliminate net emissions by 2050. Specifically, the EU and US have committed to reaching carbon neutrality – or net-zero emissions – by 2050, China has committed to become carbon neutral before 2060, and other countries participating in the 2015 Paris Agreement have made similar commitments. More recently, decisions made at the 2022 United Nations Climate Conference reiterated the commitment to achieving carbon neutrality within previously proposed time frames. As a result of these initiatives, a number of new solutions to reduce or eliminate carbon emissions have developed, in addition to new markets to finance these solutions.
One particular area of focus has been the intersection between the net-zero transition and global energy security. The energy sector produces around three quarters of global greenhouse gas emissions, making it a primary contributor to the climate crisis. In order to ensure long-term energy security while achieving global net-zero targets, public and private investments in renewable energy and green technology must triple by 2050. However, recent volatility in energy markets, exacerbated by geopolitical conflict, has negatively affected green investment. Innovation in financial and risk management solutions will be vital to safeguarding energy security and facilitating the transition to a net-zero economy.
This paper from the ISDA Future Leaders in Derivatives program aims to build on existing literature on the topic of decarbonization and provide insight into how the derivatives market can protect energy security while facilitating the transition to net zero.
Insights and recommendations include:
- Current state of the market: Insight into the current state of the market and the challenges resulting from extreme price volatility in energy markets, most notably for corporates in the energy sector participating in cleared derivatives markets.
- Medium-term recommendations: Scale existing voluntary carbon credit markets, further standardize emissions products and create the necessary legal framework to establish a unified global market.
- Long-term recommendations: Update derivatives products to reflect rapidly evolving needs as renewable energy grows in adoption and importance to global energy security.
Documents (1) for Energy Security and the Road to Net Zero: the Role of the Derivatives Market
Latest
A Positive Step to Improve the FRTB in the EU
As the Basel III capital reforms are finalized for implementation in key jurisdictions, ISDA is maintaining a laser focus on making sure the rules are robust and risk-appropriate. Simply put, if capital requirements are set disproportionately high, this will have...
Trading Book Capital: Scott O'Malia Remarks
Trading Book Capital: Policy Challenges for the EU 2024-2029 Mandate March 25, 2025 Welcoming Remarks Scott O’Malia ISDA Chief Executive Officer Good morning and welcome to ISDA’s trading book capital event. It’s great to be here in Brussels and...
Setting Out the Value Proposition of Derivatives
History enthusiasts may have heard of the Code of Hammurabi, an early legal text from ancient Mesopotamia, carved into a stone slab about 3,700 years ago. The code covers everything from property rights to divorce, but it also recognizes the...
Appropriate Capital Rules Critical for Markets
“Setting capital requirements for globally active banks is a fine balancing act. As regulators learned during the global financial crisis, insufficient capital creates vulnerabilities in the banking sector that can have damaging consequences in times of stress. However, if banks...