Will the CFTC oversee all US carbon-related trading?
On July 6, 2009, the Carbon Market Oversight Act of 2009 (CMOA) (S. 1399) was introduced in the Senate by Sen. Dianne Feinstein (D-Calif.) and Sen. Olympia Snowe (R-Maine). If passed, the CMOA would amend the Commodity Exchange Act to create federal oversight for markets that trade carbon allowances and carbon derivatives and grant full oversight authority for all carbon-market trading to the Commodity Futures Trading Commission (CFTC). Sen. Feinstein cited estimates from experts that the new carbon markets could generate “upwards of $100 billion to $370 billion in economic activity each year”. The bill has been referred to the Senate Committee on Agriculture, Nutrition, and Forestry.
The CMOA differs in several key respects from the American Clean Energy and Security Act of 2009 (ACES) (H.R. 2454), sponsored by Rep. Henry A. Waxman (D-Calif.) and Rep. Edward J. Markey (D-Mass.) and passed by the House on June 26, 2009. With respect to carbon-trading oversight, ACES divides authority between the CFTC and the Federal Energy Regulatory Commission (FERC), giving FERC oversight of cash-based allowances trading and the CFTC oversight of carbon futures and derivatives trading.
In announcing the CMOA, Sens. Feinstein and Snowe emphasized that carbon market trading will be “integral” to the cap-and-trade system and that the CMOA was “designed to prevent Enron-like fraud, manipulation and excessive speculation in the new federal, state and regional carbon markets that will be established by such a system.” According to the CMOA’s co-sponsors, the bill grants full oversight authority to the CFTC, rather than splitting authority between the CFTC and FERC,
. . . because carbon allowances and carbon derivatives will both be based on cash for paper transactions and will effectively function as a single market. In physical commodity markets, on the other hand, the cash market is based on transactions of cash for a quantity of energy (like oil or natural gas), metal or an agricultural product, and the derivatives market is based on transactions of cash for paper, in which delivery is very infrequent.
In addition to lodging all oversight authority with the CFTC, key provisions of the CMOA would:
- Create an “Office of Carbon Market Oversight” within the CFTC.
- Require that within 180 days of enactment the CFTC enter into a memorandum of understanding regarding information sharing and coordination of oversight roles with FERC, the Environmental Protection Agency and all state and regional organizations that operate market-based greenhouse gas emissions control programs.
- Require that all trading of carbon allowances and standardized allowance derivatives take place through “registered carbon trading facilities” and be cleared by CFTC-regulated clearinghouses.
- Require that “registered carbon trading facilities”:
- Create an electronic “central limit order book” to ensure every trade is recorded in real time.
- Publish trading data on at least a daily basis.
- Use electronic tools to monitor for manipulation on a real-time basis.
- Establish and enforce rules to assure fair trading.
- Utilize emergency authority to force traders to reduce positions.
- Establish a centralized, electronic database to track all trades and positions across multiple marketplaces.
- Prohibit price or market manipulation, fraud, false or misleading statements and excessive speculation.
- Authorize the CFTC to conduct investigations, bring cases and use subpoena power to protect the marketplace.
- Establish professional standards for registered carbon market brokers, dealers and traders and their associates.
CFTC Commissioner Bart Chilton, who chairs the CFTC’s newly-expanded Energy and Environmental Markets Advisory Committee (“EEMAC”), has estimated that the cap-and-trade market could grow to $2 trillion in five years. Anticipating the possibility of a substantially larger regulatory role, on May 13, 2009, the CFTC appointed 11 new members to EEMAC, including representatives from Exelon Corporation, Harvard University, the Pew Center on Global Climate Change, the Regional Greenhouse Gas Initiative and Public Citizen. (A Webcast of the May 13 meeting is also available.) EEMAC membership also includes representatives from Goldman Sachs, Morgan Stanley, the Chicago Climate Exchange and a range of other organizations.
Sens. Feinstein and Snowe introduced the CMOA one day before the Senate began hearings on climate-change legislation. On July 7, 2009, the Senate Environment and Public Works Committee, chaired by Sen. Barbara Boxer (D-Calif.), convened a hearing on “Moving America toward a Clean Energy Economy and Reducing Global Warming Pollution: Legislative Tools.” The details of the committee’s ultimate legislative proposal, including the manner in which it addresses oversight authority for carbon-market trading, remain to be seen.
