Gensler: CFTC prepared for carbon trading

WASHINGTON -- Commodity Futures Trading Commission Chairman Gary Gensler told the Senate Agriculture Committee Sept. 9 the CFTC is prepared to oversee a market for trading carbon credits, but that carbon trading would require the cooperation of s...

WASHINGTON -- Commodity Futures Trading Commission Chairman Gary Gensler told the Senate Agriculture Committee Sept. 9 the CFTC is prepared to oversee a market for trading carbon credits, but that carbon trading would require the cooperation of several agencies and for the CFTC, more staff and new technology.

After the hearing, Gensler declined to comment on statements by Sen. Byron Dorgan, D-N.D., who has said he does not want a market in carbon allowances and credits to be dominated by Wall Street traders.

Big questions

At the hearing, Gensler did deal with some controversial issues at the insistence of then-Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, who later that day moved to become head of the Senate Health, Education, Labor and Pensions Committee. In his testimony, Gensler said the carbon market should be structured like the other commodity markets the CFTC oversees, but he did not address the controversial issue of whether to regulate over-the-counter derivatives. In response to questions from Harkin, Gensler said all futures on carbon markets "should be on-exchange," just as corn, oil and wheat markets already are. Gensler said standardized swap contracts should be traded on exchanges, but companies and farmers still could use over-the-counter carbon derivatives products tailored to their specific needs. Those derivatives contracts should be carefully regulated along the lines of a proposal the Obama administration already has sent to Congress as guidance for the financial services reform bill that lawmakers hope to take up later this year, he says.

Harkin, whose hearing discussed the merits of establishing a cap-and-trade market as part of a climate change bill, said capping emissions is necessary, but he warned a cap-and-trade system could spark excessive speculation in carbon markets.


"We should not put too much faith in the markets alone to deliver results," Harkin said. "Do we want to repeat the adverse impacts of excessive speculation in the crude oil market last year for carbon? Do we want to replicate the allowances and offsets, the freewheeling derivatives market that helped bring down the economy?"

Gensler countered that transparency could help market participants. But Sen. Mike Johanns, R-Neb., arguing that a climate change bill will increase input costs, said transparency had not stopped the Nebraska turkey industry from failing when corn prices rose to $6 a bushel last year.

But Gensler cited one example of what might have been excessive speculation. Index trading on wheat contracts in Chicago last year, he said, "did contribute to the lack of convergence" between cash and futures prices.

Capping and trading

In his prepared testimony Gensler said other federal agencies "are better equipped to regulate the 'cap' part of 'cap-and-trade,'" but that the CFTC already "has a great deal of experience regulating the 'trade' part of 'cap-and-trade.'"

An effective carbon credits market, he said, would require other federal agencies to impose a ceiling on the total amount of greenhouse gasses that covered entities could emit and set up "allowances" for a limited emission of a quantity of carbon dioxide equivalent and "offset credits" for activities that reduce, trap or sequester carbon. In addition, he noted that a registry of allowances and credits would have to be maintained.

Gensler noted that the CFTC in August, under direction from the 2008 farm bill, put out a proposal for public comment to classify the Carbon Financial Instrument contract traded on the Chicago Climate Exchange as a significant price discovery contract. In most respects, he said, emissions contract markets operate no differently than the other commodity markets the CFTC regulates. Carbon allowances and offsets, he said, are similar to agriculture commodities in that there is a yearly "crop" and important programmatic regulations governing the nature of the product while government-issued allowances and offset credits would be similar to Treasury-issued debt instruments. Gensler concluded by claiming that the CFTC has "thorough processes to ensure that exchanges have procedures in place to protect market participants" and that it is "the exclusive regulator of futures markets."

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