There’s still a lot of heavy lifting to do for Congress to meet the Dems’ goal of a climate change bill by Memorial Day, including deciding who would actually be in charge of what would likely be a huge new commodity market.
**Update: Markey and Henry Waxman released a “discussion draft” of a bill today. **
As Bloomberg reports U.S. Representative Edward Markey (D-Mass.) says his House Energy and Environment Subcommittee should be in charge. Rep. Collin Peterson (D-Minn.) said his House Agriculture Committee is the right home for CO2.
Depending on which lawmaker prevails, the market would be monitored by the Federal Energy Regulatory Commission, which is overseen by a subcommittee headed by Markey, or the Commodity Futures Trading Commission under the supervision of the Peterson’s committee.
The winner would be the rule-maker for the trillion-plus dollars in annual trades expected by 2020 and “influence the operations of companies from American Electric Power Co., the biggest U.S. producer of electricity from coal, to Goldman Sachs Group Inc., which would compete with other banks to handle companies’ carbon portfolios.”
It’s not yet clear who has the upper hand, FERC or the CFTC, but a trade group that includes AEP, Goldman Sachs and trading firm Natsource LLC may issue an influential recommendation this week.
“Most of the financial players in the market probably have more experience dealing with the CFTC, while a lot of the energy companies have more experience with the FERC,” said Dirk Forrister, who heads the International Emissions Trading Association panel studying the issue and is also a managing director of Natsource, a New York fund manager and carbon-credit buyer.
Markey says FERC’s experience makes it the obvious choice. Formed in 1977 it regulates wholesale power sales and the interstate transmission of electricity, natural gas and oil. It focuses mainly on physical products on spot markets rather than futures contracts.
“The Federal Energy Regulatory Commission has the historical expertise in the energy and electricity marketplace, and it is the proper venue for that regulatory responsibility,” Markey told reporters on March 3.
In 2005 FERC was given responsibility over a broader range of energy markets, so one might think that’s an argument in its favor. But some have pointed out the 2005 law that lets FERC go after market manipulation is based verbatim on the Securities and Exchange Commission’s fraud provisions. That may work well for stocks, where manipulation usually involves false information that impacts a stock price. But in commodities manipulation is usually achieved through market power, where a party has sway due to its dominant position.
As University of Houston finance professor Craig Pirrong says, “How do you pound a market power manipulation peg into a fraud-and-deceit hole?”
FERC’s chairman, Jon Wellinghoff, also doesn’t sound eager to grab the brass ring:
“I have a little bit of trepidation about a carbon market,” Wellinghoff said in an interview. “It really goes beyond the traditional boundaries of what FERC has regulated in the past.
Naturally Peterson’s ag committee is more comfortable with the agency that’s been the umbrella agency for everything from corn to pork bellies to natural gas since 1975, the CFTC. In Houston they may be best known as the agency that made things really uncomfortable for every natural gas trader for several years.
“The CFTC is already regulating markets where carbon trading is occurring and, as such, has the most experience with these markets,” Peterson said in an e-mailed statement. “I would prefer an experienced cop over a rookie any day.”
The politicians would gain one other benefit if it was their committee and key agency in charge:
“Campaign contributions tend to flow to members of committees with jurisdiction over legislation or regulations that affect particular industries.”