As climate legislation slowly wends its way through the Senate and the economy struggles to recover from the impact of toxic assets, concerns over climate trading fraud abound. Skeptics are wondering whether a cap and trade regime will inevitably render the market vulnerable – again – to under-regulated trades of little-understood assets.
Somewhat less discussed is who will regulate the trades in a federal cap and trade program. The EPA has the authority to regulate emissions and has recently announced mandatory reporting rules (pdf) for greenhouse gasses.
There is some debate about whether EPA has the authority to implement a cap and trade program, however. Most acknowledge the EPA could regulate carbon under the existing Clean Air Act rules; others believe (pdf) that the EPA has sufficient existing authority to implement its own cap and trade system. But both Industry and the Obama administration have reservations about leaving the regulation of carbon emissions to the EPA. And legislation proposed by Republicans, longstanding opponents of EPA regulation of carbon, would limit the EPA’s authority to implement cap and trade.
But this summer, the Commodity Futures Trading Commission announced its intent to evaluate whether the Chicago Climate Exchange (CCX), an unregulated market, should be regulated because it “performs a significant price discovery function.” (This authority over Significant Price Discover Contracts (SPDC (pdf)) is new; it was exercised by the CFTC for the first time in July, 2009, making CCX only the second target.)
And so, a jurisdictional dispute (pdf) between FERC and CFTC is brewing, but not for the first time: a similar dispute between the agencies prior to re-authorization of the CFTC is described here (pdf). A detailed description of the regulatory gaps between these two agencies can be found here (pdf): one key gap is that while FERC regulates contracts for “physical energy,” that energy is often traded through standardized forward contracts, which could also be considered futures and subject to CFTC jurisdiction. Will energy-related emissions be traded as futures under the CFTC or as energy under FERC? Bridging that gap will be critical when it comes to implementing any federal cap and trade legislation that may emerge.