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Chilton: Reform Needed Ahead of Cap-and-Trade Market Frenzy

Noting that the cap-and-trade (CAT) market will likely become the largest commodity market in the world, Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton said late last week that the rapidly expanding trade of greenhouse gas emissions contracts are already making progress in the effort to combat global warming.

Speaking to an audience in Chicago, the regulator said the green CAT markets that are currently trading on a voluntary basis in Chicago and New York will continue to expand, but that regulatory reform is needed through the passage of federal legislation this year, which would have a "positive and dramatic impact" on markets, the economy and on the environment.

"Globally, these environmental markets have already grown on average 329% per year since 2002," Chilton said. With the passage of legislation, such as H.R. 2454 introduced by Reps. Henry Waxman (D-CA) and Edward Markey (D-MA), Chilton estimates "green CAT markets could become $2 trillion endeavors in five years."

Whether or not the controversial legislation passes is still up for debate. Despite growing opposition by House Democrats to the bill, it is still expected to pass the full House later this month, a spokesman for ConocoPhillips said last week (see related story). President Obama has said that he wants legislation to become law by the end of the year.

Currently the environmental trading of carbon emissions is done on a voluntary basis, but should the Waxman-Markey bill, or similar legislation become law, carbon-emitting businesses will be required to limit their output in order to meet mandated emissions reductions, the CFTC said. If they can't reduce below those levels, or caps, emitters will need to purchase allowances from others who have allowances to sell. The overall goal of the legislation would be to reduce U.S. carbon emissions which cause global warming by 17% (using 2005 as the constant base year) by 2020, and by 83% by 2050. In order to achieve those levels, companies would trade allowances to ensure compliance, the CFTC said. "That trading would be done on regulated futures exchanges similar to futures trading for other commodities like oil, gasoline, agricultural commodities and metals.

Siting the recent wild volatility in energy commodity markets, Chilton said that as part of the Green CAT Markets legislation, financial regulatory reform provisions are critically needed. "We don't want to see the largest commodity markets in the world -- these green CAT markets -- become a private jungle gym for speculators and fraudsters," he explained. "We need additional regulatory tools to protect consumers."

Chilton said that, "Last year we saw oil and gas prices go through the roof. As a regulator, I'm hard-pressed to say consumers were protected like they should have been. And here we go again this year with no changes in the law."

Chilton noted that crude oil prices have already increased 60% in 2009. At the same time that prices are climbing steadily, according to Chilton, oil supplies are at a 10-year high and demand is at a 10-year low. "If those figures didn't concern me as a regulator, I wouldn't be doing my job," he said.

"We need a two-pronged approach here," Chilton suggested. "Green CAT markets legislation to help our economy and our environment, and we need regulatory reform to ensure that existing and new markets are operating properly to protect consumers from rampant Ponzimonium, fraud, abuse and market manipulation."

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