U.S. Senate bill gives CFTC carbon market oversight

The sun reflects on downtown skyscrapers as it sets through the Los Angeles smog and haze, October 22, 2006.

WASHINGTON (Reuters) - A U.S. Senate bill introduced on Tuesday would give the Commodity Futures Trading Commission full authority over markets that buy and sell pollution permits issued to companies as part of a climate change plan to cut greenhouse gas emissions.

Such markets will be critical to the success of a U.S. cap-and-trade system that allows companies to trade carbon allowances, which are permits to emit one metric ton of carbon dioxide that is a cause of global warming.

Under the climate change plan, companies that use cleaner-burning fuel and take steps to cut their emissions could sell their permits to investors or other companies that spew more emissions.

The bill, introduced by Senators Dianne Feinstein and Olympia Snowe, would grant oversight authority for all carbon market trading to the CFTC, which now regulates commodity markets like the New York Mercantile Exchange.

The House of Representatives last month passed a climate change bill that divides oversight of carbon trading between two federal agencies.

The House bill would put cash-based permit trading under the jurisdiction of the Federal Energy Regulatory Commission, while the CFTC would have oversight of carbon futures and derivatives trading.

In addition to giving the CFTC sole authority over carbon trading, the Senate bill would also establish a centralized, electronic database to track all trades and positions across multiple marketplaces, so the CFTC has a full view of the marketplace in real time.

Feinstein cited estimates from experts that the new carbon markets could generate up to $370 billion in economic activity each year.

"That's why it is so critical that we provide consistent federal oversight now -- at the outset -- to guard against fraud and manipulation in every federal, state or regional carbon trading market," she said.

"Market manipulation must not be associated with reductions in greenhouse gas reductions and as a result, this measure must be a fundamental component of any climate change bill," said Snowe.

The Senate is still formulating its climate change legislation. Senate leaders what a vote on the measure before lawmakers leave for their August recess.

(Reporting by Tom Doggett; Editing by Marguerita Choy)