The Fundamental Review of the Trading Book (FRTB) includes higher capital charges for carbon trading under the standardized approach to market risk, which has implications for banks in their role as intermediaries in the emissions trading system (ETS).
In an earlier paper,
ISDA investigated whether the regulatory treatment of carbon credit
trading under the FRTB is justified by focusing on the EU ETS. The
appropriate treatment is important as overly stringent capital
requirements would impair the functioning of the carbon market and
hamper the willingness of firms to invest in the transformation to a
green economy.
This paper extends the findings by investigating the risk of carbon
certificate trading in two North American markets – the Western Climate
Initiative and the Regional Greenhouse Gas Initiative – as well as the
UK’s ETS.
ISDA
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