Comment Text:
December 17, 2010
Mr. Gary Gensler
Chairman – Commodities & Futures Trading Commission
United States of America
Washington, DC
Chairman Gensler:
First, may we take this opportunity to thank you for your service and excellent work in continuing to bring the aims of Dodd/Frank Wall Street Reform and Consumer Protection Act to better focus. We are excited to see how Dodd/Frank will ultimately help continue to build the credibility, efficiency and transparency of nascent emissions markets in the United States.
The Pacific Carbon Exchange, a start-up environmental commodities exchange platform being built in San Francisco, CA focused on the unique requirements and carbon market opportunity here in the western region, is privileged to present these comments to the Commodities & Futures Trading Commission in response to the Request for Public Input for the Study Regarding the Oversight of Existing and Prospective Carbon Markets.
PCarbX offers these comments in relation to questions outlined in the RFI posting. We would like to stress that we believe the emerging US carbon market would benefit most from clear rules and regulations established for the market as soon as is practicable. As California and the Western Climate Initiative commence with their emissions markets in parallel with the Regional Greenhouse Gas Initiative it is imperative that clear signals be sent to the marketplace as to how they will be regulated at the Federal level It is our sincere belief that an open, efficient, liquid and transparent market can be achieved if all stakeholders work together to establish a simple and reasonable regulatory framework to govern the market.
Thank you for this opportunity to provide information regarding the functionality of the trading mechanism for the United States’ impending carbon cap-and-trade markets. Please don’t hesitate to use us as a valuable and enthusiastic resource for continuing to move forward with the design and implementation of environmental markets nationwide.
Sincerely,
Aaron Singer
Chairman & CEO
Pacific Carbon Exchange
Request for Public Input for the Study Regarding the Oversight of Existing and Prospective Carbon Markets
INTRODUCTION
The Pacific Carbon Exchange believes that the environmental commodities markets being created in the United States will be best served by the highest level of transparency possible in these markets. Many of the problems suffered in the EU-ETS and in nascent US voluntary markets have been due to lack of transparency and oversight. PCarbX believes that an exchange platform with trading, clearing, and settlement services integrated with a highly efficient reconciliation process between the exchange and the registry systems tracking allowances and offsets, offers an excellent model for market efficiency and transparency. An exchange is best suited to the cost-efficient capture of specific data necessary for regulatory frameworks to maintain market surveillance and market integrity.
As related to the highlighted comments by CFTC Chairman Gary Gensler in Section 4.1.2.4, Evaluation of Options, WCI Markets Oversight White Paper, PCarbX shares the view that we must lower risk and promote greater market integrity and market transparency. A regulated commodity exchange will enable a very granular level of regulatory surveillance on the market, providing real-time data on pricing and trading activities, as well as daily reporting on positions, trading volume, open contracts, futures delivery notices and other information required by such current bodies as the California Air Resources Board (ARB), the Western Climate Initiative (WCI), Regional Greenhouse Gas Initiative (RGGI) and the CFTC. This is a distinct advantage of an exchange, as it will be difficult for the same transparency to be available in inherently opaque OTC markets without significant changes in clearing, market surveillance and reporting requirements. We believe an exchange like the Pacific Carbon Exchange best addresses the proposed requirements of Dodd/Frank to provide the most timely and granular level of market transparency requisite of the legislation.
Question 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?
The Pacific Carbon Exchange believes any regulatory objectives introduced by the CFTC should serve to create the most open, vibrant, liquid and transparent market possible. PCarbX favors the creation of a highly secure, transparent environmental commodities trading market, serving the needs of its trading members, as well as acting as custodian of the public trust.
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.?
Any basic characteristics of US emissions markets and their respective instruments should harmonize with existing global emissions markets, as well as those emerging markets in the US already established in CA, WCI and RGGI. The regulatory authorities should specifically aim not to over-allocate allowances and to allow key cost-mitigation policies such as banking, borrowing and the use of offset credits. Any cost-containment mechanisms contemplated such as price floors and ceilings should not ultimately interfere with price discovery on a day-to-day basis. PCarbX would support a carbon reserve policy to moderate potential excessive expansion or contraction of the market. In general, the operation of emissions markets in the U.S. should be treated relatively no differently from other regulated commodities markets. Constraints upon emissions trading, disallowing certain techniques, methods, instruments, derivatives, etc. should be avoided.
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.
In general, In general, the operation of emissions markets in the U.S. should be treated relatively no differently from other regulated commodities markets. Constraints upon emissions trading, disallowing certain techniques, methods, instruments, derivatives, etc. should be avoided. The Pacific Carbon Exchange believes any regulatory objectives introduced by the CFTC should serve to create the most open, vibrant, liquid and transparent market possible. PCarbX favors the creation of a highly secure, transparent environmental commodities trading market, serving the needs of its trading members, as well as acting as custodian of the public trust.
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?
Pacific Carbon Exchange currently believes no additional statute provisions beyond what is currently provided by the CEA as amended by Dodd/Frank would be necessary for U.S. carbon markets.
5. What regulatory methods or tools would be appropriate to achieve the desired regulatory objectives?
Environmental commodities markets should be open, transparent, secure and efficient. Execution, clearing and settlement of emissions trading through exchange platforms linked with a centralized regulatory registry would be the best method of insuring the highest level of transparency in emissions markets.
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?
A regulated commodity exchange will enable a very granular level of regulatory surveillance on market participants and on the market in general, providing real-time data on pricing and trading activities, as well as daily reporting on positions, trading volume, open contracts, futures delivery notices and other information required specifically by the CFTC. We do not believe market surveillance and reporting need be materially different for different segments and/or participants in the emissions market.
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?
Pacific Carbon Exchange believes that a simple, unified set of rules and regulations for emissions spot and futures markets will send the clear signal necessary to mitigate market risks and promote greater market integrity, liquidity and transparency in U.S. carbon 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?
US environmental commodities markets should be open and promote linkages to global environmental commodities markets. This will ultimately lower risks and create greater liquidity that will lower the long-term costs of reducing greenhouse gas emissions in the United States.
10. Based on trading experiences in SO2 and NOX emission allowances what regulatory oversight would market participants and market operators, respectively, recommend?
The Pacific Carbon Exchange believes any regulatory objectives introduced by the CFTC should serve to create the most open, vibrant, liquid and transparent market possible. PCarbX favors the creation of a highly secure, transparent environmental commodities trading market, serving the needs of its trading members, as well as acting as custodian of the public trust. In general, the operation of emissions markets in the U.S. should be treated relatively no differently from other regulated commodities markets. Constraints upon emissions trading, disallowing certain techniques, methods, instruments, derivatives, etc. should be avoided.
Any basic characteristics of US emissions markets and their respective instruments should harmonize with existing global emissions markets, as well as those emerging markets in the US already established in CA, WCI, RGGI and MGGA. The regulatory authorities should specifically aim not to over-allocate allowances and to allow key cost-mitigation policies such as banking, borrowing and the use of offset credits. Any cost-containment mechanisms contemplated such as price floors and ceilings should not ultimately interfere with price discovery on a day-to-day basis. PCarbX would support a carbon reserve policy to moderate potential excessive expansion or contraction of the market. Pacific Carbon Exchange also recommends the implementation of single centralized registries for offset credits and allowance permits respectively to simplify physical settlement, compliance, and retirement of carbon instruments.
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?
Covered entities (eg. utilities, power generators, major industrials, oil and gas companies) and financial liquidity providers are the primary drivers of current emerging regional emissions trading markets in the United States. Carbon offset developers and project financiers, as well as renewable energy generation developers are also playing a significant role in shaping emerging environmental commodities markets. U.S. emissions markets should have no barriers to any specific qualified market participant or any specific segment of the economy, allowing open access to all aspects of the market. U.S. environmental commodities markets should strive to be as open, secure, liquid and transparent as possible.
