Mr. President, I rise today to introduce The Carbon Market Oversight Act, which is cosponsored by Senator Snowe. I believe this bill is necessary to ensure that future markets created by proposed…
Mr. President, I rise today to introduce The Carbon Market Oversight Act, which is cosponsored by Senator Snowe.
I believe this bill is necessary to ensure that future markets created by proposed climate change legislation are transparent and free from manipulation.
Our legislation would establish a comprehensive framework to regulate both primary and derivative carbon markets at the Commodity Futures Trading Commission, CFTC.
Trading would be transparent and electronically monitored.
Manipulation, fraud, and excessive speculation would be prohibited, and violations would be severely punished.
All carbon permits and standardized carbon derivatives would have to be traded through facilities that monitor trading, establish fair trading rules, and follow established regulatory principles.
All standardized contracts would have to be cleared through a centralized counterparty clearinghouse, to reduce systemic risk.
CFTC would maintain a centralized position accounting system to monitor all large traders across multiple markets.
Traders, dealers, and brokers would have to be educated, would have to pass an exam to demonstrate competence, and would need to maintain certification.
Bottom line: the legislation would use lessons learned in other markets to establish the most comprehensive and efficient market oversight structure in the U.S.
This legislation is necessary because cap and trade legislation would create, in an unprecedented manner, an extremely large new financial market.
Without regulation, this market would likely emerge quickly into one of the largest over-the-counter derivatives markets in the world.
Resources for the Future Economist Dallas Burtraw recently testified in Congress that putting a price on carbon dioxide emissions through ``a cap and trade program would constitute the greatest creation of government-enforced property rights since the 19th century.''
Depending on the stringency of the cap, the breadth of the program, and the cost containment measures employed, the annual value of the pollution permits alone is estimated to range from $100 billion to $370 billion. Secondary markets for futures, options, and over-the-counter derivatives are expected to be considerably larger than that market.
If we fail to establish a framework for oversight, the greenhouse gas market could turn into a wild west.
The market would invite the worst kind of manipulation, fraud, and abuse.
The resulting volatility would affect consumer energy costs and harm the environmental goals of the system.
My concerns regarding the emergence of new over-the-counter derivatives markets are based on real experience, not hypothetical situations.
In 2000 and 2001, newly created California energy markets lacked the basic protections proposed in this legislation.
Specifically, there was no federal oversight to assure transparency, no limits on speculation, no prohibition on manipulation, no requirements to prevent systemic risk, no monitoring of trading to address price spikes and irregularities, and no professional requirements to ensure that energy traders and dealers knew the law and followed a professional code of conduct.
In short, the electricity and related natural gas markets emerged before the law caught up, and much of the manipulation that resulted, shock- ingly, was legal.
The market that looked more like the wild west than an efficient price discovery tool.
Enron, for instance, ran a market where only it knew the prices. It was able to manipulate natural gas and electricity prices beyond the view of any third party, and it swindled the people of California to the tune of billions of dollars.
Not until enactment of the Energy Policy Act of 2005, years after the crisis, were we able to amend the Natural Gas Act and the Federal Power Act to clarify that this manipulation was unlawful.
Not until the Farm Bill in 2008 were we able to close the infamous ``Enron Loophole'' that had allowed Enron to operate an unregulated electronic energy trading exchange in which prices were not public, speculation was unlimited, and there was no audit trail.
More recently, our government failed to establish a regulatory framework for over-the-counter, OTC, credit default swap and energy derivative markets.
First, energy swaps markets wreaked havoc on oil and other energy commodity prices during the speculative energy bubble of 2008.
Then, credit default swaps emerged from the shadows to bring our entire financial system to the brink of collapse.
According to the Treasury Department's recent report titled Financial Regulatory Reform: A New Foundation, a ``lax regulatory regime for OTC derivatives'' can be blamed for creating a situation in which ``regulators were unable to identify or mitigate the enormous systemic threat that had developed.''
The Obama administration has called for Congress to rectify this failure by giving regulators tools to provide transparency, limit excessive speculation, require margins, and require clearing and other systemic risk mitigation measures.
First in California, then in energy derivatives markets, and finally in financial swaps markets, we have learned the same three lessons.
First, unregulated and non-transparent markets do not perform the price discovery function effectively. They are more volatile than supply and demand can explain.
Second, transparency leads to informed buyers and sellers, improving market functionality and price discovery. Economics stands on a basic tenet: perfect markets require perfect information. The more transparent the market, the more likely it is functioning efficiently.
Third, totally unregulated markets are prone to increased risk taking and manipulative schemes that can bring about market failure, posing a risk to our financial system.
In each of the cases I have described, we in government have learned these lessons the hard way.
A systemic or near-systemic collapse in each market reminded us that regulation plays an essential role in market functionality.
Scientists tell us that we need to reduce greenhouse gas emissions by approximately 80 percent by 2050, and
economists believe that a cap and trade system with a greenhouse gas emissions allowance market would be the most cost-efficient way to guarantee specified levels of emissions reductions.
The economists also tell us that markets are most efficient when: buyers and sellers have complete information, no market participant can cheat another, and prices result from supply and demand, not manipulation.
That is why we need to prevent manipulation, fraud, and a lack of transparency.
Senator Snowe and I introduce this legislation today so that we will not have to learn the lessons taught by recent unregulated over-the- counter derivatives markets one more time.
We propose to establish mature and effective regulation for this market before it booms, busts, and threatens our economic wellbeing.
Our legislation would establish a transparent carbon market governed by proven regulatory principles and practices to maintain stable prices that reflect supply and demand, including: transparency. We know that transparency can be provided by requiring reporting, record keeping, and publication of trading information.
Position Limits. We know that speculation can be limited by imposing comprehensive, aggregate position limits across multiple markets.
Monitoring. We know that fraud and manipulation can be prevented and identified by active, electronic monitoring of trading.
Clearing. We know that systemic risk can be mitigated by requiring margins and central counterparty clearing through a CFTC regulated clearing house.
Professional Standards. We know that trader and dealer abusive behavior can be controlled and punished if traders and dealers are governed by a code of conduct.
Bottom line: this legislation is vital to protecting the market integrity of greenhouse gas emissions markets, and it should be included as part of any cap and trade legislation approved by Congress.
Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.
