Watching Government: A carbon market glimpse

Feb. 7, 2011
Credit Section 750 of the Dodd-Frank Wall Street Reform and Consumer Protection Act for providing a glimpse of what might have been.

Nick Snow
Washington Editor

Credit Section 750 of the Dodd-Frank Wall Street Reform and Consumer Protection Act for providing a glimpse of what might have been. It basically made a federal interagency group, led by the US Commodity Futures Trading Commission, study how a carbon emissions market would need to function if last year's House climate change bill, with its cap-and-trade provision, had become law.

The group, which included the US Treasury and Agriculture secretaries, the EIA and EPA administrators, and chairmen from the US FERC, SEC, and FTC, issued its report on Jan. 18.

The report listed four main objectives: facilitate and protect price discovery in carbon markets; ensure appropriate carbon market transparency levels; allow for appropriate, broad market participation; and prevent market abuses.

"Regulatory oversight must ensure that proper levels of transparency exist in carbon markets. Both pretrade and posttrade market transparency measures should exist in order to provide timely and accurate information participants," it said.

At the same time, it said, oversight should encourage market participation with transparency provisions to preserve the confidentiality of traders and their positions consistent with commodities and securities laws and provide appropriate exceptions for large or "block" trades. Regulatory oversight provisions also should ensure appropriate provision of fundamental market data relating to aggregate emissions of regulated entities and the supply of allowances and offset credits in the market, it said.

Additional regulation

The report noted that the Dodd-Frank Act includes significant derivative market reforms that would apply to carbon derivative products, whether traded on an exchange or over-the-counter.

"However, primary and secondary carbon allowance and offset markets will not be subject to the same comprehensive oversight as derivative markets," it said. "Various characteristics of carbon markets suggest the need to consider whether additional regulation is necessary for primary and secondary carbon allowance and offset markets."

It recommended that carbon market oversight rely on existing programs, which will be enhanced by Dodd-Frank provisions starting in July. Carbon market oversight also should ensure that appropriate mechanisms are in place for primary and second allowance and offset markets, reflecting both their interdependence and unique characteristics, the report said.

"Appropriate oversight may not be the same for all markets," it indicated. "As such, more detailed work may be necessary to consider the appropriate oversight regime for existing and prospective primary and secondary carbon markets, particularly if or when Congress considers federal market-based options for reducing greenhouse gas emissions."

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