| Sourced From Bloomberg.com |
July 21 (Bloomberg) — Senator Barbara Boxer, the California Democrat writing a new version of a “cap-and-trade” bill passed by the U.S. House last month, said her legislation will sharply curtail over-the-counter, or “dark market,” trading in carbon dioxide permits.
Only “open, transparent” trading in the permits created by the program to curtail greenhouse gases, and derivatives contracts based upon them, will be allowed, Boxer, the chairwoman of the Senate Environment and Public Works Committee, said in an interview yesterday on Capitol Hill.
Boxer was responding to concerns among fellow Democrats that the legislation will allow unbridled speculation through over-the-counter trading that might hurt industry and consumers. Senator Byron Dorgan, a North Dakota Democrat, has said he will oppose any climate-change legislation that allows the permits to be traded. Over-the-counter trading is generally not subject to regulation and offers less transparency on pricing.
Dorgan and three other Democrats voted against a cap-and- trade bill Boxer wrote last year. To pass a climate-change bill, Senate Democrats will likely need 60 votes to overcome Republican efforts to block the bill. Without the support of all their 60 senators, the Democrats would need to find some Republicans willing to vote for the proposal.
Market Volatility
Last year’s volatility in oil markets, in which oil rose from $87 a barrel to an intraday high of more than $147 and back to $34 in less than 11 months, and the complex derivatives trading that helped trigger the global financial crisis, should make lawmakers wary of setting up a new market for carbon dioxide permits, Dorgan said.
“What’s happened on Wall Street in the past decade and what’s happened in the oil futures market, it seems to me ought to cause some alarm about establishing a new very large trading system of carbon securities,” Dorgan said in an interview in Washington. “Carbon capture, yes, cap and trade, no.”
Boxer said Dorgan’s fears are based on “dark markets” and that no one involved in writing the bill is “going to support a dark market.”
She said she is considering “very carefully” a proposal from Senators Dianne Feinstein, a California Democrat, and Olympia Snowe, a Maine Republican, that would require most trading in permits and their derivatives to take place on regulated exchanges or a “carbon clearing organization” established by the Commodity Futures Trading Commission.
CFTC Reporting
Under the Feinstein-Snowe bill, a small number of derivatives contracts that can’t be standardized for exchange- based trading could be bought and sold in private over-the- counter deals, as long as they are reported to CFTC.
“You have to trade on exchanges or you don’t trade, basically,” Andy Stevenson, a financial analyst with the New York-based environmental group the Natural Resources Defense Council, said of the Feinstein-Snowe proposal.
Under the proposal, any over-the-counter trading that is reported to CFTC would be “inconsequential in terms of size,” which should ease the fears of some lawmakers about setting up a cap-and-trade market, Stevenson said.
“If the regulator can see what’s going on, it’s not a dark market.”
‘Excessive Speculation’
Dorgan said he doubts Congress can come up with a carbon market oversight plan that prevents “excessive speculation.”
“What is put in a piece of legislation, and what effectively is the result of that, are two different things often,” he said.
While Dorgan is raising “a legitimate issue,” the climate-change legislation the Senate may debate as early as September will “take care of that” and carbon market oversight concerns shouldn’t be used as “an excuse not to support the bill,” Boxer said.
The California Democrat said a cap-and-trade system started in the 1990s to reduce acid rain pollution from coal-fired power plants “has been working perfectly.”
“To suggest that we should not have any faith in markets, it doesn’t fit our economic system,” Boxer said.
Senator Susan Collins, a Maine Republican who voted for Boxer’s bill last year and supported President Barack Obama’s $787 billion stimulus package in February, said cap-and-trade is a tougher sell to lawmakers after the involvement of complex derivatives trading in the bankruptcy of Lehman Brothers Holdings Inc. and the taxpayer rescue of American International Group Inc.
‘More Skepticism’
“I think there’s more skepticism about markets and about the ability of markets to function free from manipulation, excessive speculation and abuse,” Collins said in an interview. “We have to proceed carefully and do this right. Many people are worried about the economic impact of cap-and-trade and they’re worried about the complexity of cap-and-trade.”
Senator Ben Nelson, a Nebraska Democrat, said he is concerned carbon trading would be a “boondoggle of sorts” for the financial sector funded by higher utility bills “in states such as Nebraska that have a significant amount of coal-fired electricity generation.”
“I’m not opposed to financial markets, but creating a financial market at the cost of ratepayers in Nebraska, I’ve said all along, is a very difficult thing,” he said. “I can’t imagine any set of circumstances where I’d support that.”
Tyson Slocum, director of the energy program for Public Citizen, a Washington-based advocacy group, said in an interview that it’s “pretty darn important” to get the regulatory structure right because the program will lead to the creation of a “very large” derivatives market.
“There remains a lot of unease among members of Congress about Wall Street,” Slocum, said. “It’s going to be tough to get this thing out of the Senate in 2009.”
On the floor of the Senate last week, Dorgan estimated that the market for carbon securities might be worth as much as $1 trillion.
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To contact the reporter on this story: Simon Lomax in Washington at slomax@bloomberg.net.
By Simon Lomax
