February 10, 2023
Japanese Bankers Association
JBA comments on the Discussion Paper “Voluntary Carbon Markets” by the International Organization of Securities Commissions (IOSCO)
Questions

Comments

1. Is the description of the issuance of carbon credits accurate?

・ It is critical to set out the role (including intention/financing) of project developer.

Are all key market participants properly reflected?

・ The sequestration period (particularly for nature-based offsets) should also be included, because weshould consider the financing of ‘carbon assets’ at the project developer stage with ex-ante
verification vs. offsets verified ex-poste the sequestration period. This varying time horizon
introduces financial risk given the price volatility/non-permanence/regulatory risks that can occur
in between.
・ We also suggest that the various offset platforms should be distinguished and explained here(auction, two-way, bilateral) and the price determination for each platform type.
・ Include the role of offset ratings providers such as Sylvera who can play an increasingly importantrole in market transparency.
・ The description of the issuance and key market participants are accurate. However, otherinformation needs to be reviewed as it is sometimes inaccurate or misleading.
-“In voluntary carbon markets, purchasers will offset their emissions by purchasing thereductions stemming from a third-party climate change mitigation project.”
This implies that there is no other option than offsetting when purchasing a credit, which is not
the case (trading is possible).

-“In many circumstances, the project will need to demonstrate qualities such as additionality,
permanence, and independent auditing, to name but a few.”
This implies that this is not always the case. We would argue that this is always the case forinternationally recognized VCM carbon offset programs as of today.

-“Given the difficulty in assessing projects, certification companies have also emerged as a keyplayer.”1

Questions

Comments
True, but their role is primarily to be independent, which gives confidence to investors that theproject actually achieves its objectives.
-“They will typically consider criteria such as…”
True, but certification companies base their evaluation on the criteria provided by carbon offset
programs. (e.g., The assessment will be slightly different for a GS project or a Verra project.)-“further announcements are expected from the United Nations on the practical aspects of such
implementation and will likely impact the functioning of the voluntary markets over time.”
Not the UN, but the COP.
The rulebook for corresponding adjustments has been approved as of COP26 in 2021.

-“Issuances, which have outpaced retirements every year, have begun to dramatically outstrip
them, resulting in an increasingly high surplus of voluntary credits.”:
True, but not for all credits. There is high demand for removals while there is less demand foravoidance credits. We would argue that the analysis provided is very shallow and gives thewrong impression about the market. (Oversupply and pricing are not the issue. Quality is.)2. Has the consultation identified the relevant vulnerabilities?

・ We think the following points should be highlighted regarding the lack of certainty as to the legal

Are there any others that should be considered? Pleasenature and treatment of carbon credits, the lack of certainty as to the accounting treatment of carbon

explain.

credits and the lack of certainty as to the capital (risk-weighting) treatment of carbon credits.
・ Platform risks-This is mentioned later in the paper, but worth including sooner to highlight the risks of trading
through non-regulated/observed platforms.

・ Regulatory and policy risks-

In the absence of a global cohesive UN registry and enforceable policy, FIs can be subject
significant losses in the net present value of carbon offsets for early project financing inparticular.

・ Lack of standardised methodologies-Methodologies are provided by carbon offset programs to determine baselines scenarios. The
determination of additionality is much more challenging than determining the baseline.
2Questions

Comments・ Permanency-“In terms of temporality, reducing emissions elsewhere rather than at home is indeed
equivalent if the project financed leads to an immediate reduction in emissions.”
This is not the common understanding of market participants.

-“Hence, permanence of GHG reductions or removals is a necessary requirement for offset
projects to serve their ultimate goals.”True, but only for removals.

-

Steps have been taken to de-risk permanence risks with carbon offsets programmes. We
strongly recommend that IOSCO looks into measures taken by Verra and GS, among others.

・ Double counting-“projects may be recorded on several registries that do not speak to one another.”:True, but 1. It is unlikely that GS and VCS, for example, will not check if another project is
implemented at the same facility (additionality checks require this), and 2. The World Bank iscurrently undertaking the development of a metaregistry, which will enhance crosschecks
between registries.

-“In addition, there are still questions about how and whether a credit can be used by acorporate and simultaneously claimed against a country’s national determined contributions(NDC).”:
Not true or misleading. Article 6 and rules agreed upon in COP26 require corresponding
adjustments for sectors included in NDCs. While those are mentioned, we believe this section
is misleading and should be revised.

・ Transparency-This section is misleading at best. Standardized methodologies are used across carbon offset
programs, with no major differences for well-established sectors. These have been establishedsince the CDM and revised according to best practice. When this is not the case, methodologies
undergo an extensive (and lengthy) review by an expert panel. This applies to all major carbon
offset programs. The carbon market cannot be liable to less-known, minor players that do not
use these methodologies and do not put their own through thorough peer reviews. Regarding3

Questions

Comments
transparency, methodologies are available publicly. There could be more work done to compare
the methodologies. But, this is not the responsibility of market players and carbon offset
programmes.
・ Conflict of Interest-The source is from 2009. We do not think this reflects the current state of affairs.

-Annual reporting on emission reduction is required to issue credits. (How is that not regular?)

3. What kind of role could IOSCO play in coordinating the・ The key priorities would be determination of the legal classification of the asset type andactions of industry-specific organizations and publicconsistency amongst global regulators. It is important to recognize consideration for a new asset

authorities?

class that behaves like a commodity yet is subject to entirely different supply and demand
determinants. Second would be clear 'taxonomy' and labelling of offset types and quality levels.
This should be mirrored across voluntary and compliance markets in the same jurisdiction, if notglobally.
・ We do understand the merits of better coordination between environmental regulators and securities
market regulators. For example, it may be a good step to ensure with environmental regulators that
underlying carbon credits used for securities are of good quality (i.e., defining the attributes required
for securities).

4. How do you think IOSCO should achieve these objectives?

・ Participation in TSVCM, but also engagement through a new NGFS workstream will be important
for regulatory harmonisation. The cross-jurisdictional arbitrage today in VCM warrants further
research and consideration to support decision making. The significant role of non-FIs investing inproject developments directly and/or purchasing large quantities of offsets should be considered,given that they are regulated separately from financial institutions yet contribute meaningfully toglobal supply/demand dynamics.

5. Should IOSCO seek to collaborate more closely with these・ Yes. It might be a good opportunity for continued collaboration with TSVCM and VCMI, to holdprivate initiatives? How might such a collaboration function?

discussions directly through NGFS for a new workstream/effort, and define environmental
attributes based on these organizations’ work or together with these organizations.

6. What, in your view, is the legal nature of an offset credit?

・ Yes. It should be treated as a commodity asset class specifically for carbon. Price discovery isShould IOSCO recommend a specific approach to relevant

entirely different given how supply/demand dynamics and regulated carbon price influences the4Questions
authorities?

Commentsmarket. Consideration or preparation should also be made for the emergence of a 'shadow' VCM
where buyers may consider it more efficient to source offsets directly vs. through any regulated
forum/platform.

7. What is the role of blockchain and distributed ledger
technology in voluntary carbon markets?

・ Strong potential. We would recommend including AirCarbon and Carbonplace as some of the morecredible blockchain-based offset marketplaces.

8. What are the benefits and vulnerabilities of using

・ Marginal. The benefits do not outweigh the energy intensiveness and infrastructure required to set

tokenization over relying on more traditional market

it up. A significant level of detail is required to describe some nature-based offsets so digitisation isinfrastructure? Do these benefits outweigh how energy-

helpful, but this requires some taxonomy/consistency for tokens to be meaningful.

intensive the use of blockchain is?

・ A key feature for some blockchain exchanges such as AirCarbon is two-way price transparency (andthe ability to trade more like a commodity vs. auction marketplaces).

9. Should IOSCO recommend good practices regardingtransparency on the use and impact of carbon credits by・ Yes. Any additional support or recommendations on transparency is useful, but should be done incoordination with market players.

market players?
10. Are these the key considerations appropriate for the sound
functioning of voluntary carbon markets?

・ Yes. They reflect key considerations. Now, key consideration 9, especially interoperability withcompliance carbon markets, should be taken into consideration very carefully, as those markets
depend on local regulations (which often do not allow voluntary credits).

11. What other key considerations may be necessary in orderto scale up carbon markets?

・ Review, transparency and financial/valuation risks to ex-ante project development investment andtrading
・ Review of insurance products and mechanisms to protect offset buyers
・ Consistent approach to calculating the net asset value of carbon (given jurisdictional differences incarbon price and offset types)
・ Considerations on how FIs should consider calculating their Mark-to-market risk of offsets(End)

5