EMISSIONS TRADING CAN BE REGULATED - CFTC CHAIR

CFTC chair calls for comprehensive regulation of emissions markets
Nick Snow, November 4, 2009 (Oil & Gas Journal)

"Comprehensive regulation of financial derivatives will also need to be a critical component of a well-functioning domestic emissions trading market, US Commodity Futures Trading Commission Chairman Gary G. Gensler said…"

[Gary G. Gensler, Chair, US Commodity Futures Trading Commission (CFTC):] “As Congress moves forward with potential cap-and-trade legislation, I believe it should fully regulate the expanded carbon trading markets—including the futures market, the OTC market, and the cash market—without exception…Ensuring transparency, protecting the price discovery function, and addressing financial risk are every bit as critical for emissions markets as for other markets…It is crucial to ensure that carbon markets function smoothly, efficiently, and transparently. Effective regulation of carbon allowance trading will require cooperation on the parts of several regulators.”

Key design element: Oversight. (click to enlarge)

"Gensler said six regulatory components will need to be considered…[1] standard setting and allocation, [2] compliance with emissions caps and offset requirements, [3] record-keeping and registry maintenance, [4] trade execution system oversight, [5] clearing of trades oversight, and [6] protection against fraud, manipulation, and other abuses."

"The first three components, which Gensler said represent the “cap” portion of cap-and-trade, fall within other regulatory agencies’ expertise. CFTC is best equipped to handle the remaining components since it already fills this role in existing emissions trading programs…the US Environmental Protection Agency issues sulfur dioxide and nitrogen oxide allowances under the federal acid rain, NOx budget trading, and clean air market programs [while CFTC oversees contracts based on sulfur dioxide, NOx, and carbon dioxide allowances and offsets listed on the New York Mercantile Exchange and Chicago Climate Futures Exchange].…On a smaller scale, 10 states from Maine to Maryland form the Regional Greenhouse Gas Initiative and issue GHG allowances…"

Key design elements: Stringent penalties and assessment. (click to enlarge)

[Gary G. Gensler, Chair, US Commodity Futures Trading Commission (CFTC):] “…[O]ther entities issue allowances, ensure compliance, and maintain the registry. The constant, however, is that the CFTC regulates the emissions futures trading markets…In other words, the CFTC has a great deal of experience regulating the ‘trade’ part of cap-and-trade…In most respects, emissions contract markets operate similarly to other commodity markets the CFTC regulates…While each contract—such as SO2, wheat, treasury bills, or natural gas—presents its own unique challenges, the regulatory scheme is essentially the same.”

"[Gensler] said CFTC has thorough processes to ensure that exchanges have procedures in place to protect market participants and ensure fair and orderly trading, that products are designed to minimize potential manipulation, and that exchanges comply with the law and regulations…Its compliance staff monitors operations to ensure that exchanges are enforcing their rules and customers are protected from abusive practices. Its surveillance staff watches for signs of manipulation or congestion and determines how to best address market threats…Gensler said he considers it important for companies to be able to make long-term capital commitments and hedge their carbon emissions allowances’ long-term price risk…"