Recommended Principles for Market-Based Solutions

© Environmental Markets Association, November 14, 2017

The Environmental Markets Association (EMA) is focused on promoting market-based solutions for environmental challenges through sound public policy, industry best practices, effective education and training, and member networking. EMA represents a diverse membership including large utilities, emissions brokers and traders, exchanges, law firms, project developers, consultants, academics, non-governmental organizations, and government agencies.

EMA strongly supports the utilization of markets to achieve environmental policy goals. Well-designed markets yield many benefits including, but not limited to, transparent price signals determined through competition, risk mitigation opportunities, incentives for technological innovation, efficient allocation of capital and resources, investor certainty, and rate payer protection.  To that end, EMA endorses the following principles for meeting environmental policy goals through market-based programs:

 
1)      Tradeable Products

EMA supports the utilization of tradeable products for meeting environmental policy compliance obligations.  Clearly defined tradeable products provide a means for facilitating commercial transactions through bilateral markets to enable market participants to manage risk on a forward basis outside of a centralized allocation or auction process.  In addition, relying on tradeable products allows for market participants, who may not have entitlements or compliance obligations, to provide market liquidity and risk management services to those entities with future entitlements to the product (for example, renewable resource developers) and to those entities with future compliance obligations (for example, load serving entities).

 
2)      Market-Based Pricing

EMA supports the pricing of environmental products through market-based mechanisms as opposed to administrative processes.  The formation of prices of environmental products should be driven by competition that accounts for the economic preferences of market participants.  Market-driven prices provide transparent signals to all market participants in order to achieve emission reductions, encourage innovation, promote competition, and facilitate risk management.

 
3)      Market Design That Fosters Transparency, Competition, and Liquidity

EMA supports market design features that create transparent and reliable price signals capable of facilitating market or auction objectives to channel the allowance or offset units to the participants who most highly value them. Design components should ensure that all participants have both an incentive and interest to ensure that efficient price discovery occurs and is revealed to the market in a timely and transparent manner. If design components include features such as price boundaries and alternative compliance payments, such features must be transparent to market participants, must facilitate competitive market outcomes, and must support the integrity of the market.  Also, EMA supports market design that enables diverse participation and competition in environmental markets, since a competitive market reduces liquidity risk and ensures that no one entity can influence the market.  Any regulation that could potentially increase the cost for participants should be carefully evaluated as to its impact on market liquidity.  EMA does not support efforts to limit participation in environmental trading markets or allowance auctions to only those with compliance obligations.

 
4)      Market Oversight

Successful market design must include robust measures to protect the market from activity that is illegal or detrimental to the function of the market.  EMA supports clearly-defined independent oversight of environmental markets in order to maximize the benefits of competitive commercial behavior in achieving policy goals and providing transparency while guarding against fraud and manipulation and minimizing systemic risk.   In addition, EMA supports independent oversight of the market structure and operation, which includes periodic review, and as needed, recommendations for addressing any identified market design flaws.

 
5)      Market Integrity and Stability

Long-term regulatory and policy certainty will allow a robust market-based system to evolve with price discovery and liquidity.  Constantly changing rules creates uncertainty and stifles market development. EMA supports legislative, regulatory, and rulemaking efforts to establish a stable, clearly-defined, and transparent market regime. EMA promotes the inclusion of experienced market participants at all stages of the development process and post-implementation market review process in order to contribute to the overall strength and vibrancy of markets.  Both the design process and the post-implementation review process must be transparent to all stakeholders.

In addition, EMA supports the usage of robust tracking mechanisms and methodologies to provide certainty of ownership.  Failure to implement a system to track ownership of environmental compliance products can undermine the success of the market.  Developing such mechanisms and methodologies must be part of the market design process and must be completed prior to implementing the market design.