The Commodity Futures Trading Commission’s Energy and Environmental Markets Advisory Committee (EEMAC) voted to approve the creation of a subcommittee which will consider the design of derivatives and underlying cash markets for environmental products, such as carbon allowances and offsets, that are used to address greenhouse gas emissions. At the recent EEMAC meeting, some members voiced reservations regarding the scope of the initiative and potentially burdensome recommendations imposed on industrial market participants. The measure was approved on an 8-0 vote, with one abstention.
The EMMAC also heard from three presenters, representing a diverse set of views, including Tyson Slocum, director of Public Citizen, who also serves as an EEMAC member; John Parsons, PhD and a Special Government Employee; and Matthew Picardi, representing the Commercial Energy Working Group, and who also serves an EEMAC associate member. The subcommittee anticipates providing a report to the full EEMAC regarding recommended guiding principles surrounding efforts to transition to a low-carbon economy. A video of the EEMAC meeting can be viewed here.
A call for urgent action to reduce greenhouse gas emissions. In his opening remarks, Commissioner Dan Berkovitz, the EEMAC sponsor, set the stage for the day’s meeting by citing the recent landmark report issued by scientists from the United Nations Intergovernmental Panel on Climate Change which warns of the dire effects of climate change. Berkovitz noted that the report "unequivocally" linked the planet’s warming to human activities and called for urgent action to significantly reduce emissions of carbon dioxide and other greenhouse gases. Importantly, the commissioner further observed, "Derivatives markets, and particularly those for carbon allowances and offsets, have an important role to play in achieving these reductions." He added, "They can help companies optimize emission reductions, protect against the financial risks associated with global climate change, and manage the risks arising from the transition to a carbon-neutral economy."
Support from a consumer advocate. Tyson Slocum declared his support for the creation of the subcommittee so long as five considerations are considered. They are as follows:
- It should be acknowledged that legislative and regulatory policy mandates have been the primary drivers of emissions reductions. These include obligations that utilities produce or procure certain amounts of renewable energy; the establishment of clean energy standards; requirements for energy efficiency investments; electrification dictates; and corporate procurement programs.
- The subcommittee’s membership should feature robust representation of public interest stakeholders, including environmental justice perspectives.
- The stakeholder interests of all subcommittee members must be transparent so the public has a clear understanding of who exactly is seeking to influence Commission policy.
- The subcommittee should scrutinize the problematic role of offsets in emission reduction compliance and seek to strengthen verification standards.
- The subcommittee should assess whether carbon markets’ intrinsic volatility limits the efficiency of emission reduction goals. A mission of the subcommittee should be to explore whether carbon markets should be considered a benefit or a barrier to effective emission mitigation.
Parsons also observed that privately organized offset markets can be precarious. He pointed out that within a larger state-mandated and supervised system, offsets may play a useful role. However, offsets by their nature are inherently voluntary, even when they are enabled through a state mandated and supervised system, such as California’s cap-and-trade program. Parsons noted recent talk in the financial community and some in parts of industry supporting voluntary offsets created outside of any state-mandated and supervised systems and organized exclusively by private actors. In Parson’s estimation, this a horse of an entirely different color.
The need for standardization and some concerns from industry. In his comments, Matt Picardi on behalf of the Commercial Energy Working Group, the organization that initially proposed the formation of the subcommittee, underscored the need to move forward on the initiative. Picardi noted that in the absence of federal legislation in the United States establishing a national carbon policy, these markets will continue to evolve organically and in a piecemeal fashion. He further observed that the CFTC, in its role as a market regulator, needs to clearly understand carbon market fundamentals, and how the development of liquid secondary carbon markets and related carbon derivative markets will support market participants’ compliance efforts, including, but not limited to, the ability to attract investment capital to finance emission reduction technologies.
At the same time, Picardi noted that for these markets, and related derivatives markets, to function and flourish in a global environment, further standardization will be necessary and formal regulatory oversight may be required. Picardi also expressed the need for the CFTC to avoid what he referred to as "mission creep"—expanding its mission and telling other regulators what to do and how to do it.
Some of Picardi’s concerns were echoed and amplified by EEMAC Associate Member Paul Cicio of the Industrial Energy Consumers of America. He directly questioned the size and scope of the subcommittee’s undertaking, its deliverables, and expressed his concerns that the subcommittee’s recommendations could lead to compromising the manufacturing sector’s competitiveness on the global stage. Cicio asserted that industry in constrained by its opportunities to decarbonize and questioned whether the creation of the subcommittee will be a good thing.
A commissioner departs with cause for optimism. The meeting marked the last one where Commissioner Dan Berkovitz served as EEMAC sponsor given his recent announcement to leave the Commission in October. During the course of the meeting, fellow commissioners and many EEMAC members expressed their gratitude to Commissioner Berkovitz for his many years of service to the committee, the CFTC, as well as his prior role as the agency’s general counsel during the early years of the Dodd-Frank market reforms. In his unscripted final remarks, Commissioner Berkovitz conveyed a message of optimism for the future of both the CFTC and the nation. While acknowledging that we are living in times of unprecedented cynicism, polarization, and distrust for governmental institutions, the commissioner pointed to Jeffersonian democracy which, at its heart, is informed by and serves the people. Berkovitz further observed ours is not a government of the aristocracy or the elite, but rather one that is informed by people operating in the real world. He pointed to the voluntarism and diversity of views on the EEMAC itself, and noted its strength emanates from this diversity.
In conclusion, the commissioner noted he will be interested in reading the subcommittee’s report one day. On that score, the next step will be the publication of a notice regarding the subcommittee’s formation appearing in the Federal Register and a call for those interested in becoming members.