CFTC muscles into emerging U.S. carbon market

NEW YORK (Reuters) - A proposal by the U.S. Commodity Futures Trading Commission to oversee a greenhouse gas contract on a voluntary Chicago trading exchange shows the agency is staking out its territory before Congress decides which agencies should regulate the country’s burgeoning carbon market.

CFTC officials have long indicated they think the United States’ carbon market will be huge. CFTC Commissioner Bart Chilton reiterated in June he expected carbon futures to become a $2 trillion market in five years, based on an assumption that the cash market would be about $200 billion.

Congress is debating a bill that would set up an emissions market under which the government would set a cap on greenhouse gas pollution that declines over time and polluters and investors would buy and sell the rights to release greenhouse gases.

But who would regulate that market remains to be seen.

The unanswered question is a large reason why the CFTC proposed this week to oversee a contract on the Chicago Climate Exchange, a voluntary market in which publicly traded companies, cities and other members sign legally binding contracts to reduce emissions. [ID:nN17377833]. The members can buy credits representing emissions cuts if they choose not to reduce their own pollution levels.

“Congress is regulator shopping, and the CFTC is making the case they are right for the job,” said Kevin Book, an analyst at ClearView Energy Partners LLC in Washington, D.C. “Just in case the CFTC doesn’t make that case, they are going to start doing that job anyway.”

Under the climate bill passed by the House of Representatives in June, cash allowances in any future U.S. carbon market would be regulated by the Federal Energy Regulatory Commission while carbon derivatives, including futures, would be regulated by the CFTC.

On the other hand, a side bill introduced by Senators Diane Feinstein and Olympia Snowe would grant all of the carbon market regulation to the CFTC.

The Senate is expected to unveil its version of the House bill next month and put forward which agencies should regulate the market. Democratic leaders hope the bill will be voted on in October, though its not clear if there are enough votes for it to pass.

How well the government regulates any national carbon market could help determine to what extent the world’s second largest polluter after China lowers emissions blamed for global warming.


Under the CFTC’s proposal, it could determine whether a contract on the Chicago Climate Exchange, which currently operates as an exempt commercial market, would function as a price maker in the developing carbon market.

Several market participants said the CFTC’s move was an early show of muscle into the carbon market for two reasons. First, the carbon contract is tiny compared to the natural gas contract on the Intercontinental Exchange, the only other one CFTC boosted oversight on through new authority provided by Congress.

“It’s much too early to make any kind of assessment on such an immature market,” said Peter Fusaro, a carbon markets expert at Global Change and Associates in New York. “We’re barely trading any carbon in the United States compared to what our carbon footprint is.”

Book agreed. “How do you prove significant price discovery in a market that is practically brand new?” He said the CFTC runs the risk of strangling trade on the contract by excess regulation.

For its part, the CCX said the CFTC proposal was a sign of the “increasing maturity” of the carbon market.

The other reason the CFTC’s move was seen as early show of power is that any big federal market could eclipse small, voluntary carbon contracts, such as on the CCX and another exchange. “The voluntary market conceivably is going to go away,” said one market participant. “The CFTC move makes sense in that they are trying to exert influence in advance of the legislation being signed.”

Editing by Marguerita Choy