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.
Swiss Re withdraws from carbon emissions trading activities; Insurance industry still evaluating climate change issues
Swiss Re has enjoyed a reputation in the marketplace as an insurance market leader in climate change issues. However, apparently due to falling carbon prices and much weaker trading of carbon emissions allowances in European markets, Swiss Re has announced that it is closing its carbon emissions trading desk and will no longer be engaging in carbon trading activities. Swiss Re’s move seems somewhat surprising given some of its significant prior efforts in this area, including deals in China and having been scheduled as a speaker at the upcoming EU Emissions Trading Conference in July. In any event, Swiss Re’s move likely underscores the fact that the insurance industry will continue to view climate change issues through the lens of profit opportunities and act accordingly.
The insurance industry continues to spend considerable resources in evaluating climate change issues, as exemplified by a recent report jointly issued by Lloyd’s and the International Institute for Strategic Studies. The report focuses on four major areas: water scarcity, food supply, energy, and natural resources. The report also notes that the dramatic impacts from climate change bring “some specific opportunities and responsibilities for the insurance industry.”
Indeck Energy files lawsuit challenging New York's authority to implement RGGI
Indeck Energy has filed suit against several New York state agencies over their participation in the Regional Greenhouse Gas Initiative (RGGI), a carbon trading system between 10 Northeastern states designed to limit greenhouse gas emissions by power plants. Indeck Energy is the owner of Indeck-Corinth Generating Station, a combined-cycle natural gas plant in upstate New York. RGGI began its first compliance period on January 1, 2009. The Indeck lawsuit alleges that the agencies did not have authority from the New York legislature to implement the system. The complaint further alleges that the multi-state RGGI compact is unconstitutional without Congressional authorization. The complaint names Governor David Paterson, the New York State Department of Environmental Conservation, the New York State Energy Research and Development Authority, and the New York State Public Service Commission as defendants.
According to Indeck, regulations implemented pursuant to the RGGI would essentially impose an unauthorized tax on it. Under RGGI, power plants must buy permits or allowances to cover the amount of carbon they produce. Furthermore, Indeck alleges, it would not have a fair opportunity to recover its costs. Indeck contends that because the RGGI regulations target clean, low-emitting stations with onerous costs, the net result would be to actually increase emissions.
In a statement released to the press, Indeck’s President Gerald F. DeNotto claimed, “The regulations arbitrarily discriminate against a few electric generators that are bound by long-term fixed price contracts.” Furthermore, he contends that “New York’s version of RGGI levies a ‘RGGI tax’ on electric generators.” According to DeNotto, this leaves Indeck’s Corinth plant with “a heavy cost of the allowance tax, and no opportunity to recover it.” These claims echo statements made by DeNotto in public comment hearings regarding RGGI implementing regulations in 2007.
Environmental groups and the New York state agencies named in the complaint have begun to respond quickly to Indeck’s allegations. According to Peter Iwanowicz, director of the Office of Climate Change in New York’s Department of Environmental Conservation, Indeck’s claims are without merit. Iwanowicz claims that his department adopted the RGGI pursuant to authority the legislature had previously provided. As to the issue of the constitutionality of the multi-state compact, Iwanowicz denied that was an issue, noting that each state in the RGGI adopted separate regulations and maintained full sovereignty. State government watchdog group Environmental Advocates of New York (EANY) also issued two statements objecting to Indeck’s claims. Among other statements, EANY notes that the two-year public process to finalize RGGI regulations already resulted in a 1.5 million ton set aside for power plants in long term contracts.
