Washington, July 2010

The International Emissions Trading Association (IETA) today released a position paper on the carbon market oversight provisions included in the American Power Act (APA).

The discussion draft of the APA includes provisions for the establishment and regulatory oversight of a US carbon market. Similar trading systems have proven effective at mobilizing markets to meet environmental challenges cost-effectively. However, the APA includes unusual restrictions on market participation that threaten to hamper the development of a functional carbon market.

IETA President and CEO Henry Derwent said, “Carbon markets need policies to ensure that the marketplace is vibrant and competitive, and that it is effectively regulated with rules to prevent fraud and market manipulation.  While Senators Kerry and Lieberman deserve a great deal of credit for their consistent efforts and leadership in working to create an effective market with strong oversight, there are provisions which need improvement.  Realizing the benefits of a market-based approach to emissions reduction requires broad participation by actors throughout the economy. Key provisions in the American Power Act would restrict participation, stifle competition and raise costs.”

IETA’s position on the APA market oversight provisions follows the principle that a consistent approach should be taken to oversee energy and environmental markets, including carbon markets. Henry Derwent continued, “While carbon markets have unique aspects, the experience of IETA members strongly suggests that carbon trading is essentially similar to trading in other energy and environmental markets.”

“We want to emphasize that IETA members endorse market oversight by the CFTC,” said Dirk Forrister, Managing Director of Natsource and Chair of IETA’s Market Oversight Working Group.  “But we want to make sure the market is fully functional so that it can deliver low cost compliance and consumer benefits.”

IETA has noted four areas where the APA market oversight provisions could be simplified or improved:

1. Grant the CFTC sole regulatory responsibility for carbon markets. IETA supports the APA’s selection of the Commodity Futures Trading Commission (CFTC) as the appropriate authority to oversee the U.S. carbon market. Yet by granting overlapping market oversight authority to other agencies, such as the EPA and the Department of Treasury, the APA unnecessarily complicates the already-challenging enterprise of establishing viable carbon markets.

2. Promote fair dealing and establish safeguards against abuse. IETA supports the APA’s provision of regulatory authority to protect against fraud and carbon market manipulation. IETA also supports the application of CEA authorities to guard against excessive speculation in the carbon markets, subject to conclusive findings.

3. Eliminate the access restrictions that prevent open participation in carbon markets. The APA discussion draft proposes to limit access to federal auctions to compliance entities and a few “market makers.” It also takes the highly unusual approach of bifurcating a commodity market’s regulatory structure, by establishing two distinct sets of rules that restrict who can trade compliance instruments for physical delivery and who can engage in trades that do not result in physical delivery. IETA strongly opposes these access limitations, which would impair price discovery, hamper the ability of regulated entities to fund compliance and hedge associated market price risks, and unnecessarily raise costs paid by ordinary consumers.

4. Eliminate the restriction on short sales. IETA largely supports the APA’s provision of regulatory authority to set rules and establish qualifications for trading organizations, clearinghouses and market participants. However, IETA suggests removing or substantially improving APA’s proposed limitations on short sales, which would impair basic market function and long-term price formation.

Ends --