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CFTC EEMAC Meeting

Commodity Futures Trading Commission (CFTC)

Energy and Environmental Markets Advisory Committee (EEMAC) Meeting

Wednesday, September 15, 2021

 

Opening Statements
Commissioner Dan M. Berkovitz
In his opening statement, Berkovitz mentioned a recent report issued by the United Nations that warned of the dire effects of climate change and called for urgent action to significantly reduce emissions of carbon dioxide and other greenhouse gases. He said the derivatives markets, and particularly those for carbon allowances and offsets, can help companies optimize emission reductions and protect against the financial risks associated with global climate change and manage the risks arising from the transition to a carbon-neutral economy. Berkovitz said when EEMAC last met in June this year, Associate Member Matt Picardi proposed they take a closer look at how the Commission can support the energy transition by examining the design of carbon markets. He said the role of the subcommittee would be to examine the interplay between secondary cash markets for carbon allowances and offsets and the derivative markets for those products, with the goal of promoting uniformity across the various markets and enhancing liquidity.

EEMAC Subcommittee Proposal Discussion
Panelists:

In Slocum’s remarks, he said he supports forming a subcommittee to explore a carbon market but provided some considerations that the Commission and Advisory Committee should have. First, he said it needs to be acknowledged that legislative and regulatory policy mandates have been the primary driver of emissions reductions, whereas markets-based emissions programs serve as a supplement to these mandates. Second, he said this membership needs to feature public input and particularly have representation from the environmental justice community. Third, he said stakeholder interest needs to be transparent so the public understands who is informing commission policy, noting that many groups do not publicize their membership. Finally, he said the subcommittee should work to strengthen the verification standards of carbon offsets.

In Parsons’ remarks, he said the carbon market can be an important component of a government mandate and is a cheaper way to accomplish the goal. However, he said his worry is that people focus exclusively on the markets and trading but overlook the larger government mandate, essentially putting the cart before the horse. He showed a slide from years prior claiming the sulfur dioxide (SO2) allowance program was a market-based solution for U.S. acid rain. He noted that the SO2 allowance trading program is dead and there is no real trading because the price now is basically zero after it was “killed” by a series of regulatory actions and political decisions. Parsons said this slide created a false narrative that the market was the solution, when the Clean Air Act was the true effective program. He said if there is a subcommittee report, it should focus not only on the market but address the government authority and supervisory capacity needed to enable the market and generally assure reductions, no matter how the market functions. Second, Parsons said privately organized offset markets can be a tool for carbon emissions reductions within a larger state mandated system, but recently they have been organized exclusively by private actors. He said private actors are manipulating the markets, and having offset markets outside of a state mandated regime will not promote long term emissions reductions and could possibly lead to a disrupted asset bubble. Parsons’ final point was that the greenhouse gas problem encompasses vast swaths of industry and agriculture and should involve not only reducing carbon dioxide (CO2), but also finding substitutes for these industries. He said new commodities, such as hydrogen, will become important parts of a carbon neutral economy and concluded by saying there needs to be a market for more commodities than just carbon.

In Picardi’s remarks, he said voluntary offset programs continue to grow globally and set the stage for derivatives products and that in the absence of federal legislation, these markets will continue to develop organically. Picardi said the CFTC needs to understand carbon market fundamentals and realize how the development of carbon related derivatives markets will support and attract investment in things like renewable resources. He added that further standardization is necessary for these markets and related derivatives to function and flourish. Picardi concluded that the Commission will need to ensure carbon markets are properly regulated and monitored as well as ensure integrity and enhance liquidity.

Question & Answer
Paul Hughes asked what EEMAC expects as a final deliverable out of the subcommittee, for example, coming up with a list of fundamentals, a framework for a carbon market, or suggestions to consider in a growing carbon market. Picardi said the goal is to assess what the primary market looks like and understand how they function because it will affect the secondary and derivatives markets. Paul asked if it would result in a report or a recommendation. Picardi said after looking at the primary markets, a recommendation would focus on what the derivates market should look like.

A concern was expressed about the general initiative, arguing that past emissions reductions have had everything to do with global competitiveness, which means we are limited in our ability to de-carbonize. The member said if the U.S. does not have the technology to de-carbonize, then carbon pricing just becomes a cost, and they questioned the ability of border adjustments to work effectively.

Jackie Roberts stated that financial markets, environmental markets, and financial transmission rights (FTR) should be under jurisdiction of the CFTC.

Daniel Dunleavy discussed that, in the context of EEMAC’s efforts with carbon markets generally, Berkoviz’ vision to be inclusive and to hear the voice of the industrial and manufacturing end user be considered going forward.

William F. McCoy discussed how different types of market participants between secondary and derivatives markets necessitate not focusing on one market versus the other. He added that the panel should try to consider guiding principles to reduce barriers to globalization and harmonization.

Slocum asked a clarifying question about whether the details discussed need to be settled now with a concrete idea for the scope of the subcommittee or if that decision could be worked on by the subcommittee at a later time. He then applauded the Public Service Commission of West Virginia for its efforts to make the CFTC the main regulator with jurisdiction over FTRs in certain jurisdiction markets.

Lopa Parikh stated her opposition to the subcommittee focusing only on secondary and derivatives markets, noting that there is a lot of activity in this space including from the Environmental Protection Agency (EPA) and Congress. She added that while EEMAC’s effort is a good one, the CFTC should be aware of everything else going on in this space and make sure that the subcommittee’s scope is appropriately consigned to the jurisdiction of the CFTC.

Dena Wiggins highlighted her preference for recommendations from CFTC commissioners on environmental markets regulated by the CFTC and added that the debate surrounding bigger picture issues is beyond the CFTC’s scope. She stated that EEMAC’s goal is to ensure that secondary and environmental markets can perform their functions. She requested recommendations for the proper functioning of derivatives markets and highlighted confusion among market participants regarding the CFTC’s authority.

The motion for EEMAC to recommend the CFTC to consider forming the subcommittee that would provide a report to EEMAC on carbon market design was approved with one abstention vote from Lopa Parikh.

For more information on this hearing, please click here.