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US Climate bill authors want active market

Washington, 12 May 2010

Liquidity concerns led to a provision in the Senate bill encouraging broader market participation. Briefing reporters on Capitol Hill Wednesday, a Senate staffer said Senators John Kerry and Joe Lieberman wanted to ensure the “workability” of both the primary and secondary carbon markets envisioned in their bill by allowing outside participation. Kerry and Lieberman's American Power Act sets an economy-wide greenhouse gas emission reduction target of 17 per cent below 2005 levels by 2020.

Electric utilities would participate in a a cap-and-trade programme starting 2013, which would be expanded to include manufacturers in 2016.

The bill enables the participation of “market makers”, firms that buy and sell securities and commodities, to provide liquidity to the market.

“Our fear was there wouldn’t be sufficient liquidity, so we included provisions to add additional members as necessary to prove that liquidity, to act as market makers so you always have a small bid-ask spread,” said a staffer, who helped draft the bill.

He said the Treasury Department will determine whether a market maker is needed. If it does, Treasury will choose the market maker through a "deliberative process".

Treasury will also ensure that the market maker makes only a “reasonable rate of economic return”.

The staffer emphasised that the aim of market maker participation would not be to allow a firm to profit hugely from a US carbon market.

“Market makers would be in this business not to make vast sums of money,” he said.

About 7,500 facilities will be required to turn in allowances to the government in the early years of the programme, according to a summary of the bill.

Liquidity was also a concern in the secondary market, so the authors decided to open participation to a larger number of players.

“No one has to be in the secondary market, but if you want to be in the market you need to make sure there is liquidity there, so that’s open to a larger number of players,” he said.

“If you need price certainty, if you need to be able buy a carbon future to make your investments, we want you to have access to that, but we don’t want anyone to be required to play in that market if they don’t feel comfortable or don’t have the sophistication,” he said.
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