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Energy Risk & Markets

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

Fortnightly Magazine - July 2008

GHG emissions and distribute allowances, but the EPA shouldn’t regulate emissions-allowance trading once it has distributed those allowances. If it wants to regulate emissions-allowance trading, Congress should pass the oversight baton to the CFTC by expressly stating that neither FERC nor the EPA have jurisdiction over manipulation in those trading markets.

Devilish Details

Under the bill, the EPA would issue regulations that provide for the timely dissemination of allowance price and availability data to the EPA, state regulators, market participants, and the public. The EPA could gather the information or hire someone to gather and disseminate the information for it. The EPA must consider the degree of relevant price transparency provided by price publishers and trade processing services in existence when the bill is enacted.

Congress should consider changing the transparency provisions to give the EPA (or preferably the CFTC) the discretion to gather data if the market itself, through such entities as Bloomberg, Platts, or various trading platforms, doesn’t publish allowance data. The legislation also should consider that extensive information on emissions allowances will be lacking “when this bill is enacted” because federal GHG allowances won’t exist until Congress enacts climate change legislation and the EPA implements the program. Thus, the bill’s language needs to adjust the timing for assessing whether there is adequate data available from public sources.

Proposed position limits and accountability rules also need some clarification. Senators Feinstein and Snow would require the EPA to adopt position limits or accountability rules for speculators on the transaction quantities that an entity is allowed to conduct, and the positions the entity is eligible to hold, in any emission allowance market or any federal emission-allowance auction. The bill also would create an exception for a transaction or position that is a bona fide hedging transaction or position. The EPA would issue regulations defining the term “ bona fide hedging transaction or position.”

Although the EPA would be required to consult with the CFTC, FERC and FTC in implementing these requirements, the CFTC clearly has more experience than any of the other agencies in establishing and enforcing position limits and hedge exemptions, and thus it should be given the task for the carbon markets. 10 Congress also should consider allowing exchanges to assist with oversight, including by letting them set position limits or accountability rules, as is currently done under the CFTC’s regulations.

The Lieberman-Warner climate change bill improves on Feinstein-Snowe by establishing a “Carbon Market Working Group” to ensure the integrity of the allowance markets. The Group would consist of the EPA administrator, the treasury secretary, the chairs of FERC, the CFTC and the SEC, and any other executive branch official appointed by the president. Taking into consideration the recommendations of the group, the president would delegate to its members and the heads of other appropriate federal entities the authority to adopt regulations for enhancing the integrity, efficiency, orderliness, fairness, and competitiveness of the U.S. emissions-allowance markets. Thus, the Lieberman-Warner bill allows the possibility that the group might see the wisdom of recommending the CFTC be given federal oversight authority for