New US interagency study on carbon markets
On Tuesday, the U.S. Commodity Futures Trading Commission released an interagency study on carbon emissions markets. The 54-page study for the U.S. Congress was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. While much of the study is taken up with explaining existing oversight tools and how they would apply to trading carbon emissions permit credits and offset credits, the agency authors leave no doubt that the legislative design of carbon markets will greatly affect whether carbon trading results in a reduction of greenhouse gases or an increase. They note, "[F]or the most part, absent specific action by Congress, a secondary market for carbon allowances and offsets may operate outside the routine oversight of any market regulator." Therefore, they recommend that Congress develop legislative authority specifically for trading carbon emissions credits in commodity futures markets.
The CFTC requested comments on 11 questions posed by interagency staff, but, unfortunately, not on the study itself. IATP was one of 23 organizations to submit comments. We informed the interagency group about the regulatory, methodological and scientific challenges in ensuring that carbon offset credits actually represented verifiable GHG reductions. Fraudulent and deceptive activities in carbon trade accounting and marketing, including for trades under the European Union's Emissions Trading Scheme, are reported on a near weekly basis. The interagency report addressed fraud and market manipulation only insofar as carbon would be regulated as if it were a consumable, and not a legislatively created, commodity.
The CFTC and other agencies are struggling to issue rules to implement Dodd-Frank under a torrent of criticism from financial industry service lobbyists and now a Republican majority in the House of Representatives that has called for repeal of parts of Dodd-Frank. Given this huge workload for generally understaffed agencies, it is understandable that the report cannot address all the legislative design challenges for carbon markets that Members of Congress, NGOs, academics and industry lobbyists have outlined. But if there is a single great fault in this relatively short report, it is the lack of any mention of the dearth of environmental integrity in many of the offset credits created in China, Brazil and elsewhere outside the United States (which is not to say that U.S. offsets are all environmentally effective). Under the American Clean Energy and Security Act passed by the House of Representatives in June 2009, more than half of all U.S. industry compliance with GHG caps would be accomplished by purchasing international offset credits, rather than by actually reducing GHGs. To rely to such an extent on the trading of assets of dubious environmental effectiveness to meet GHG caps is to invite disaster. Interagency staff whose agency budgets are on the Congressional chopping block may not be in a position to inform Congress about the very high risks of relying on carbon markets for climate change finance. NGOs and academics should not hesitate to perform this urgently needed due diligence.
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