Coordinated action is needed now to harmonize the principles of emissions trading markets around the world and develop a framework which will ensure that the carbon trading process maintains trust and efficiency, says a new report from PricewaterhouseCoopers (PwC).

Carbon trading is one of the major policy tools for addressing climate change, and as a market-based mechanism it depends on trust and confidence – “in systems and processes, in markets and market participants, in regulators and regulated”, says the report. To build this confidence, that market must ensure transparency, accountability and integrity, while maintaining systems and processes that are simple and efficient, says PwC.

The report then examines a range of leading emissions trading markets around the world and evaluates their relative merits as well as the overall health of the global patchwork of systems. The analysis includes an overview of the Ontario SO2 and NOx Program and the similar US system; the two schemes are not linked but a proposal to do so has been made, the report notes.

Unfortunately, despite good intentions, PwC describes the general situation worldwide as “one of new and immature markets, inconsistent and complex frameworks and, consequently, risk”. In response, the report urges action to develop a new ‘Global Emissions Compliance Language’, based on financial market protocols.

This would include generally accepted principles for monitoring and reporting emissions, and tracking emissions targets. Currently existing standards such as ISAE 3000 and ISO 14064-3 are good tools, but are not universally accepted, causing difficulties in verifying emissions reductions and credits, notes the report.

Selecting a standard for harmonization would help reduce risk for all involved, including regulators, investors, companies, and market intermediaries. Common frameworks would also allow for linkage of schemes around the world to create a global carbon marketplace.

Verifying that credits represent real emissions reductions is important not only for investors but also to ensure that the trading system is achieving its intended goal of mitigating climate change.

As well, for companies participating in emissions trading, the processes of quantification, reporting, and trading must be efficient and easily understood. For firms to minimize risk of non-compliance and maximize opportunities for gain, the markets must be well designed and standardized.

Even within the European Union’s Emissions Trading Scheme, there were differences in national standards during the first phase, PwC notes, increasing risk of fraud, non-compliance, and possible market failure.

Other differences between systems include the provision for project-based credits, which can be earned by investing in projects which reduce emissions, such as installing renewable energy or capturing methane from a landfill. Some markets, including those created by the Kyoto Protocol, allow for such investments to achieve compliance, while others do not. Talks have already begun for linkage of markets in the European Union, the state of California, and a group of seven north-eastern states. Key to integration will be adoption of minimum standards for monitoring, reporting, verification, and compliance mechanisms, says PwC.

From an economic standpoint, the establishment of a worldwide market which can set a ‘global carbon price’ is attractive, as it theoretically allows emissions reductions to be achieved where they are most economical, one of the main ideas behind emissions trading.

PwC advocates a global emissions trading framework based on financial market controls, which it contrasts with carbon markets throughout the report.

“Emissions trading is one of the main policy tools for addressing climate change. It is vitally important that the framework for reporting and compliance in this new global market is built on trust. There are many parallels with financial reporting, where trust is at the heart of corporate transparency,” says Sam DiPiazza, Global CEO of PwC.

Read the full report, Building Trust in Emissions Reporting (PDF).