Lexxion Verlagsgesellschaft mbH

Regulatory challenges for financial and carbon markets

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The controversy about how financial derivatives markets are to be regulated that has been opened up by the credit crunch is in many ways parallel to the widening debate over regulation of carbon markets. Both markets involve hitherto untried attempts at commodification: in the case of the financial markets, commodification of an unprecedented range of uncertainties, and in the case of the carbon markets, commodification of climate benefits or the earth’s carbon-cycling capacity. Policy responses to the crises facing both markets can be divided roughly into two streams. One, inspired by neoclassical economics and doctrines of “market failure”, tends to assume that the production and exchange of the new proto-commodities can be successfully regulated by “internalizing externalities”. Another, more pragmatically oriented, looks to partial or full decommodification as a way of tackling the problems engendered by the new markets. In the
financial markets, a decommodification approach emphasizes measures such as removing certain instruments from trade, preventing the exchange of commercial bank deposits in uncertainty markets, limiting securitisation, and so forth. In the carbon markets, a decommodification approach might, for example, prohibit offsets from being exchanged with emissions reductions, or challenge the supposed equivalence, and thus the fungibility, among emissions reductions undertaken in different locations and technological contexts. Interestingly, both the calculative, “internalizing externalities” approach and the decommodification approach have supporters from wide ranges of the political spectrum, although an increasing number of policy analysts are adopting elements from the decommodification approach.

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