2010-29780. Public Input for the Study Regarding the Oversight of Existing and Prospective Carbon Markets

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice and request for comment.

SUMMARY:

Section 750 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Act”) establishes an interagency working group (“interagency group”), headed by the Commodity Futures Trading Commission (the “CFTC”), to conduct a study on the oversight of existing and prospective carbon markets to ensure an efficient, secure, and transparent carbon market, including oversight of spot markets and derivative markets. The members of the interagency group are the Chairman of the CFTC, the Secretary of Agriculture, the Secretary of the Treasury, the Chairman of the Securities and Exchange Commission, the Administrator of the Environmental Protection Agency, the Chairman of the Federal Energy Regulatory Commission, the Chairman of the Federal Trade Commission and the Administrator of the Energy Information Administration, or their designees. In conducting the study, the Dodd-Frank Act directs the interagency group to consult, as appropriate, with representatives of exchanges, clearing houses, self-regulatory bodies, major carbon market participants, consumers, and the general public. To assist the interagency group in conducting the study and formulating recommendations for the oversight of existing and prospective carbon markets, the CFTC is issuing this request for information through public comment.

DATES:

Comments must be received on or before December 17, 2010.

ADDRESSES:

You may submit comments by any of the following methods:

• Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments through the Web site.
• Mail: David A. Stawick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
• Hand Delivery/Courier: Same as mail above.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to http://www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that is exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the procedure established in CFTC regulation 145.9 (17 CFR 145.9). The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the substance of the request for comments will be retained in the public comment file.

FOR FURTHER INFORMATION CONTACT:

Gregory Kuserk, Chief, Market Analysis and Strategic Review Branch, Division of Market Oversight, 202-418-5286, Irina Leonova, Financial Analyst, Division of Market Oversight, 202-418-5646, or Nela Richardson, Research Economist, Office of the Chief Economist, 202-418-5592, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

Recently a number of legislative proposals have been introduced in Congress setting out various approaches to reducing carbon emissions. Some of the proposals contain a market-based policy instrument. Various forms of carbon markets have also been established internationally as well as domestically. Some of the examples of those markets are the European Union Emission Trading Scheme, the Clean Development Mechanism, and the Regional Greenhouse Gas Initiative. In addition, markets exist in the U.S. for the trading of sulfur dioxide allowances under the EPA Acid Rain program and nitrogen oxide under the EPA NO_X Trading program. The CFTC also oversees the derivative trading of a number of environmental instruments on the Chicago Climate Futures Exchange and the Green Exchange.^[1] Under the various bills, different proposals have been set forth with respect to the oversight of a carbon market that would be established in those bills.

On July 21, 2010 the Dodd-Frank Act was enacted.^[2] Section 750 of the Act establishes an interagency working group to study the oversight of existing and prospective carbon markets. The interagency group is composed of the following members or designees: The Chairman of the Commodity Futures Trading Commission, who shall serve as the Chairman of the interagency group, the Secretary of Agriculture, the Secretary of the Treasury, the Chairman of the Securities and Exchange Commission, the Administrator of the Environmental Protection Agency, the Chairman of the Federal Energy Regulatory Commission, the Chairman of the Federal Trade Commission ^[3] and the Administrator of the Energy Information Administration.

The Dodd-Frank Act directs the interagency group to “conduct a study on the oversight of existing and prospective carbon markets to ensure an efficient, secure, and transparent carbon market, including oversight of spot markets and derivative markets.” In carrying out this study, the Act also directs the interagency group to consult with representatives of exchanges, clearinghouses, self-regulatory bodies, major carbon market participants, consumers and the general public, as the interagency group determines is appropriate. Finally, the Act requires the interagency group to submit to Congress a report, no later than 180 days after the date of enactment of the Act, on the results of the study, including recommendations regarding such oversight.

II. Solicitation for Comments on the Study on Oversight of Carbon Markets

To assist the interagency group in conducting the study on oversight of a carbon market, the CFTC seeks public comment on the following topics and questions:

1. Section 750 of the Dodd-Frank indicates that the goals of regulatory oversight should be to ensure that carbon markets are efficient, secure and transparent. What other regulatory objectives, if any, should guide the oversight of such markets?

2. What are the basic economic features that might be incorporated in a carbon market that would have an effect on market oversight provisions—e.g., the basic characteristics of allowances, frequency of allocations and compliance obligations, banking of allowances, borrowing of allowances, cost containment mechanisms, etc.?

3. Do the regulatory objectives differ with respect to the oversight of spot market trading of carbon allowances compared to the oversight of derivatives market trading in these instruments? If so, explain further.

4. Are additional statutory provisions necessary to achieve the desired regulatory objectives for carbon markets beyond those provided in the Commodity Exchange Act, as amended by the Dodd-Frank Act, or other federal acts that may be applicable to the trading of carbon allowances?

5. What regulatory methods or tools would be appropriate to achieve the desired regulatory objectives?

6. What types of data or information should be required of market participants in order to allow adequate oversight of a carbon market? Should reporting requirements differ for separate types of market participants?

7. To what extent is it desirable or not desirable to have a unified regulatory oversight program that would oversee activity in both the secondary carbon market and in the derivatives markets?

8. To what extent, if any, and how should a U.S. regulatory program interact with the regulatory programs of carbon markets in foreign jurisdictions?

9. What has been the experience of state regulators in overseeing trading in the regional carbon markets and how would that instruct the design of a federal oversight program?

10. Based on trading experiences in SO₂ and NO_X emission allowances what regulatory oversight would market participants and market operators, respectively, recommend?

11. Who are the primary participants in the current primary environmental markets? Who are the primary participants in the current secondary allowance and derivatives environmental markets?

III. Paperwork Reduction Act

Pursuant to the Office of Management and Budget (“OMB”) Regulation 5 CFR 1320.3(h)(4), this Notice and request for comment published in the Federal Register, which requests general public comment, does not include a collection of information that would require OMB approval. Accordingly, the Paperwork Reduction Act does not apply.

Issued in Washington, DC, on November 19, 2010 by the Commission.

Sauntia S. Warfield,

Assistant Secretary of the Commission.

Footnotes

1.  The CFTC designated the Green Exchange as a contract market on July 22, 2010; however, the exchange is not yet operational.

2.  Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

3.  The CFTC notes that the text of Section 750(a)(7) of the Act references the “Commissioner of the Federal Trade Commission” as a member of the interagency group, and the CFTC interprets this text as a reference to the Chairman of the Federal Trade Commission.