Companies subject to carbon compliance programs use carbon derivatives to meet their obligations and manage risk in the most cost-effective way.
Derivatives play an essential role in carbon markets. 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 PDF below to read the full paper.
for Role of Derivatives in Carbon Markets
Role of Derivatives in Carbon Markets(pdf)
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© ISDA - International Swaps and Derivatives Association
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