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Energy Risk & Markets

Allowance trading needs oversight, but don’t overdo it.

Fortnightly Magazine - July 2008

the U.S. emissions trading markets.

The group would focus on efforts that include achieving comprehensive emissions-market oversight and enforcement, including cooperation with other national and international oversight regimes. It also would be charged with recommending efforts aimed at ensuring market transparency and avoiding excessive speculation, thus mirroring certain of the objectives in the Feinstein-Snowe bill. In addition, the group would be charged with the core principle of ensuring the emissions markets are designed in a manner that prevents fraud and manipulation, including as a result of market power concentration or the abuse of material, nonpublic information.

To achieve these, the working group—in consultation with emissions-market participants, exchanges, clearing entities, the FTC, the Federal Reserve and a variety of other entities—would identify and report on: 1) the major issues related to developing a U.S. emissions market that has integrity and is efficient, orderly, fair, and competitive; 2) any relevant recommendations provided by federal, state, or local governments, organizations, individuals, and entities; and 3) activities (such as market regulation, contingency planning and policy coordination) to carry out those recommendations. Within nine months of enactment, and based on the outcome of the group’s activities, the federal agencies to whom the president would have delegated rulemaking authority would promulgate rules to achieve the recommendations of the group and the statute.

Within that same time frame, the EPA administrator also would enter into a memorandum of understanding with the head of each appropriate federal agency that would address regulatory and enforcement coordination, information sharing, and other matters to minimize duplicative or conflicting regulatory efforts. Although a clear statutory allocation of enforcement authority would be the preferred way of avoiding another Amaranth-like debate, the MOU proposal at least provides a forum for attempting to avoid inter-agency conflicts.

In sum, the Lieberman-Warner bill appears to be an improvement over past emissions market oversight proposals, but there remains the possibility that the group approach could result in a complex, bureaucratic oversight model that protects political fiefdoms at the expense of regulatory clarity and market liquidity. Moreover, until a climate change bill is actually passed, it’s also possible Senators Feinstein or Snowe will attempt to substitute their approach for the one included in the Lieberman-Warner bill, or whatever bill the Senate or House considers.

Given all the uncertainties raised by proposed legislation, the key question might not be “who’s in charge of carbon markets?” but instead “who isn’t in charge of carbon markets?” In its fear of |a repeat of Enron, Congress might be more willing to layer the oversight rather than streamline it by designating the agency most capable of regulating a new market—the CFTC—as the sole regulator. Even as it becomes clearer that climate change legislation will not pass in 2008, the next Congress could address the oversight conundrum sooner rather than later.




1. “California’s Cap-and-Trade Won’t Work,” L.A. Times , Mar. 10, 2008.

2. id.

3. “Time to Tax Carbon,” L.A. Times , May 28, 2007.

4. Air Pollution as a Commodity: Regulation of the Sulfur Dioxide Allowance Market , Congressional Research Service, RL34235, at