CFTC Plans to Regulate Chicago Climate Exchange, Gensler Says

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Aug. 27 (Bloomberg) — The Commodity Futures Trading Commission will move ahead with regulation of the Chicago Climate Exchange Inc.’s voluntary carbon credit trading program for farms, factories and power plants, the regulatory body’s chairman, Gary Gensler, said today in an interview.

The CFTC will use the same “significant price discovery” authority it invoked July 27 to impose position limits and reporting requirements on the IntercontinentalExchange Inc. Henry Hub natural gas swap, Gensler said in an interview today.

“These markets and the carbon markets in the future will benefit by having a market regulator overseeing it to protect the market from manipulation and fraud,” Gensler said.

CFTC’s move to regulate the trading of carbon financial instruments on the Chicago Climate Exchange comes as Congress debates a “cap-and-trade” program in which the federal government would create pollution credits that could be bought and sold. How to regulate the trading and picking an agency to enforce the rules are in dispute.

The CFTC announced Aug. 17 it was considering regulation of carbon financial instruments on the Chicago Climate Exchange and a public comment period is still open until Sept. 4.

“We’re going to take a public comment (period) but we believe it does perform a significant price” discovery function, Gensler said.

Voluntary Program

Launched in 2003, the Chicago Climate Exchange is a voluntary program based on promises from firms such as Columbus, Ohio-based American Electric Power Inc. and Dearborn, Michigan- based Ford Motor Co., to cut their emissions.

By 2010, the exchange’s members have pledged to cut their emissions by 6 percent. Those who cut their emissions by more than this amount can sell carbon financial instruments they don’t need to firms that fall short of the target.

Farmers can also earn carbon credits through changed soil and land-management practices that pull carbon dioxide out of the air or prevent greenhouse gases from being released.

The Chicago Climate Exchange’s voluntary emissions trading program has “provided the opportunity for companies to calculate their carbon emissions and get some experience in trading before there was a mandatory requirement to do so,” Kari Larsen, a Washington-based partner at law firm McDermott, Will & Emery LLP, said in a phone interview.

Cap & Trade

Mandatory cap-and-trade systems already exist in Europe and the U.S. Northeast, and CFTC already has jurisdiction over derivatives contracts based on the carbon dioxide allowances issued by those programs, Larsen said. Contracts for these allowances trade on the Chicago Climate Futures Exchange and the New York Mercantile Exchange.

Since carbon credits, and not futures contracts, are traded on the Chicago Climate Exchange, CFTC’s interest in the voluntary emissions trading program shows it wants to regulate both the cash and derivatives markets under any cap-and-trade program established by Congress, Larsen said.

Under cap-and-trade legislation that passed the House June 26, CFTC’s jurisdiction would be limited to carbon-based derivatives, with the Federal Energy Regulatory Commission overseeing cash transactions in the allowances themselves.

A rival proposal in the Senate, sponsored by Senator Diane Feinstein, a California Democrat, and Olympia Snowe, a Maine Republican, would give CFTC authority over both cash and derivatives trading in carbon dioxide credits, also called allowances.

Carbon Regulator

By asserting jurisdiction over the Chicago Climate Exchange, CFTC is “establishing their presence as the regulator of carbon, not just strictly the futures contracts,” Larsen said.

While CFTC oversight of the Chicago Climate Exchange “will bring regulation to the cash allowance market,” Gensler said “I wouldn’t read any signals into it” concerning the agency’s oversight role under carbon cap-and-trade legislation.

Chicago Climate Exchange spokeswoman Brookly McLaughlin declined to comment.

In an Aug. 18 statement on the exchange’s Web site, its chairman and founder Richard Sandor said CFTC’s interest “reflects the increasing maturity of the carbon market and we welcome the critically important function that regulation and transparency plays in new and emerging markets of all kinds.”

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To contact the reporter on this story: Simon Lomax in Washington at [email protected].

Tagged as: Carbon Credit, Carbon Dioxide, Carbon Market

Posted on September 1, 2009 · in USA