Could Cap and Trade Lead to the Next Financial Bubble?

Posted by Carol Sonenklar on September 30, 2009 at 12:14 pm

CFTC Chairman Gary Gensler tried to assuage the fears of the House Agriculture Committee. (image: wsj.net)

The over-speculation and wild financial risks that have contributed to the current economic crisis are looming large in the minds of several senators as they weigh the new carbon cap and trade bill, reports the New York Times. The Senate is examining the proposed regulations of over-the-counter (OTC) derivative contracts, which, in the opinion of some senators, too closely resemble the infamous credit default swaps that led to the housing bubble. Add to that Wall Street’s growing enthusiasm for the cap and trade bill and senators are voicing concerns that the potential for another under-regulated, over-speculated trading boom is all too real.

Gary Gensler, the chairman of the Commodity Futures Trading Commission, tried to allay those fears, testifying before the House Agriculture Committee that the new law would “cover the entire marketplace, without exception.”

The cap and trade bill, which passed in the House this summer, is a market-based program to attempt to reduce carbon emissions. Electric utilities, industrial plants, and other big emitters would have a set limit and a certain amount of tradable credits. A company that exceeded its limits would have to purchase additional carbon allowances on an open commodities market, where prices fluctuate. If a company could not cut its emissions, it could also buy “offsets,” which would help support clean-energy projects that need financial capital. The global market for carbon allowances is estimated to be in the trillions of dollars.

Senator Lisa Murkowski, the top Republican on the Energy and Natural Resources Committee, is attempting to influence the cap and trade bill through an amendment to a separate bill concerning EPA funding and warned that a gas emissions market could be “securitized, derivatized and speculated by Wall Street like the mortgage-backed securities.” Her colleague, Sen. Bob Corker (R-Tenn.) worried that offsets bought by U.S. companies could end up financing fraudulent environmental projects in other parts of the world.

And it’s not just Republican opposition: two Democrats, Maria Cantwell (D-Wash.) and Byron Dorgan (D-N.D.), avid supporters of paying for carbon emissions, have also expressed concerns.

It’s not as if these fears haven’t been considered: the CFTC and the Securities and Exchange Commission are conducting ongoing discussions about putting controls on energy commodity trading. If Wall Street can create incomprehensible new financial products for the carbon trades, carbon prices could skyrocket.

In fact, cap and trade tax evasion has already happened: seven carbon traders were arrested outside of London in August, and charged with selling huge numbers of carbon permits, which is the main currency in the European Union’s Emission Trading System, and not paying taxes on them. According to Green Inc., the alleged fraudsters ripped off a total of $38 million euros, or $63 million dollars.

The financial services industry is pushing back against stricter regulations, which claims that existing regulations are sufficient and that the involvement of financial institutions in carbon markets will keep carbon prices from being closely tied with energy prices, thereby decreasing volatility. with visions of investors buying and selling carbon futures, options, and swaps, once the cap-and-trade program is established.

Besides these concerns, there is more hardline opposition in the Senate from those who are against any global warming bill, regardless of what it includes, on the one hand, and those who don’t trust market solutions to climate problems, on the other. Both factions are being accused of using the fear of market abuse as a pretense to oppose the climate bill.

So fasten your seatbelts: expect yet another contentious ride when cap and trade comes to center stage in the Senate.