Remarks by Under Secretary for Domestic Finance Nellie Liang on Voluntary Carbon Market Integrity

As Prepared for Delivery

I. Opening

Good afternoon and thank you all for being here today. I have been looking forward to this conference and would like to thank the Integrity Council for the Voluntary Carbon Market (IC-VCM), the Global Carbon Market Utility (GCMU), and the Voluntary Carbon Markets Integrity Initiative (VCMI) for hosting this event. The focus of today's conference - delivering high integrity carbon markets - is critically important to meeting our climate goals. As stated by Secretary Yellen, to meet the challenges of climate change, "We need to use all the tools at our disposal-creatively, thoughtfully, and at scale."

As the Secretary mentioned in her speech earlier today, several US government agencies came together to issue the Voluntary Carbon Markets Joint Policy Statement and Principles in May of this year. These VCM Principles acknowledged that the market, in its current state, isn't working as well as it should. They highlighted the need for improvements in supply integrity, demand integrity, and market integrity, each of which is a necessary condition to support the quality, consistency, and scale of the market.

Today, I will be speaking mainly about market integrity issues in the VCMs. But before I do, I would like to acknowledge the critical and complementary efforts around supply and demand integrity.

Before publishing the VCM Principles, buyers consistently told us that discovering and identifying high quality credits had been their most significant challenge. There are hundreds of methodologies in the market, and it can be difficult for any single buyer to discern the supply integrity of credits. Buyers still see this as a challenge, but I have been pleased to see that the market has begun to make some progress in this area, progress that needs to continue.

Institutions like IC-VCM are simplifying the search process by setting integrity floors for credit quality. A single Core Carbon Principle-Approved label that cuts across a wide range of methodologies and standards should make it easier for buyers and other market participants to assess and compare credits available for purchase.

Credit standard bodies are updating methodologies to ensure projects deliver additional and durable emissions impacts. Carbon credit rating firms have continued to issue ratings on new and existing carbon credit projects, helping buyers to be more discerning in their choice of credits. And on the regulatory front, the CFTC recently published final guidance for regulated exchanges, allowing for industry-recognized standards to be used as tools for the evaluation of carbon credits underlying futures contracts. A more robust futures market will also help support market integrity, particularly with respect to price transparency.

The VCM Principles published in May also spoke to the importance of demand integrity. Corporate buyers should prioritize reducing their own emissions through adopting net-zero targets, planning their climate transitions, and being transparent about their efforts and progress. However, VCMs can also play a significant and complementary role in these efforts. We support ongoing efforts in the market to create frameworks that allow companies to use high quality carbon credits to further accelerate their progress toward net-zero.

Once a mechanism for ensuring the supply integrity of carbon credits and their appropriate use is in place, it is then equally important to ensure that the buying and selling of these credits is efficient, which is why I am pleased to open this conversation on market integrity.

II. Market Integrity

A well-functioning market should make it easy for participants to buy and sell a given product through clear product disclosure, transparent price information, efficient settlement, and without excessive search costs. Accordingly, the VCM Principles state that stakeholders should improve "transparency and the publicly available data of credit-generating projects and programs, including transaction volumes and prices."

Treasury's responsibility for US financial markets leads us to naturally focus on the market structure of VCMs. We hear from market participants that buying a carbon credit is an opaque and time-consuming process. Carbon credits from the same project can trade at vastly different prices, and some buyers have even told us that they spend over 50 percent of their carbon credit budget in search costs. The US capital markets are large, deep, liquid, and efficient. This is thanks not only to a robust and innovative private sector, but also to a combination of regulatory and market structures that promote transparency, efficiency, fairness, and measures that mitigate conflicts of interest.

We can draw from our expertise in existing financial markets to help strengthen VCMs. I will suggest a few ideas today, ideas that we believe represent the most fundamental elements of market integrity that are currently lacking in VCMs and are essential to unlocking buyer demand. These ideas will focus on both improving data quality and comparability and enhancing price transparency in VCMs.

Data Quality and Comparability

Carbon markets have grown organically, with a broad ecosystem of registries, compliance programs, methodologies, measurement and verification systems, and products. There is no widely accepted and consistent data protocol across the industry at the current time. Collaboration and data sharing across parties is fragmented, cumbersome, and holding back the market's evolution.

Developing interoperable data protocols for carbon credits and making this information available to the public can promote market trust and integrity. A data protocol where every carbon credit includes consistent data tags for project location, rating, description, issuance, and units, among other features, regardless of its original crediting program, would allow for credits to become comparable across market platforms and registries. This would facilitate easier benchmarking and aggregation of product baskets, as well as the creation of global identifiers, and lead to more financial scalability and innovation.

I understand that several market participants have begun to explore how to structure accessible data across the carbon credit lifecycle and make it available to the marketplace. Some examples include meta-registries from private market participants, and a blockchain-based open data platform. Some market integrity consultation groups have been formed recently to discuss global data protocols, among other topics. We commend these efforts and look forward to tracking progress on this topic as it develops.

Price Transparency

Today, the vast majority of transactions in voluntary carbon markets are over the counter (OTC), meaning buyers and sellers negotiate prices directly or through a broker. These OTC transactions are typically opaque, with pricing and transaction details generally remaining confidential. While we have seen the emergence of several OTC pricing data sources, these sources are heavily dependent on what buyers and sellers will report voluntarily. Data can be reported by market participants with a long lag of up to a year, and is often aggregated such that single transaction prices, date stamps, vintages, and other useful datapoints for price formation and discovery are unavailable.

Some platforms and exchanges aim to standardize this landscape by offering harmonized contracts that enhance transparency and accessibility for all market participants. Despite these efforts, a significant spread persists between OTC and exchange-listed prices, underscoring the market's continued reliance on OTC mechanisms and highlighting the challenges in achieving a cohesive price discovery framework.

Market participants should consider the benefits of price and transaction transparency in VCMs. Increased transparency will lead to market prices reflecting fundamental information more clearly, such as project details, integrity floors, and ratings, thereby mitigating information asymmetries. If price history were available to market participants, buyers could look across projects and credits to better understand and assess an appropriate price of carbon and use those prices to forecast and plan future purchases. More pricing credibility will lead to more buyers.

Increasing transparency is not always easy, but it is a common theme in successful market evolution. A repository where price and transaction history for carbon credits are gathered, organized, and stored would have a transformative effect in VCMs. In other established markets, such as the consolidated tape systems for equities, or the swap data repositories for swap markets and TRACE for corporate bonds, this shared data allows for deeper liquidity and investment, and ultimately enables the kind of long-term growth we need from VCMs to reach our climate goals.

III. Conclusion

The Treasury Department continues to support a high-integrity voluntary carbon market and looks forward to contributing our expertise and convening power to help develop solutions to market integrity. With the right market structure in VCMs, we can succeed in unlocking buyer demand and strengthening trust and credibility in this market.

To conclude, we are confident that with improved integrity and marketplace function, VCMs can reach their full potential. We applaud and thank the ICVCM, VCMI, and GCMU for co-hosting this event and organizing today's session. I look forward to hearing new perspectives from those present and thank you again for the opportunity to share our views on this subject from the Treasury Department

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