Statement at US CFTC Energy & Environmental Markets Advisory Committee

On The Proposal To Form A Subcommittee To Explore Whether Derivatives Markets Can Facilitate The Transition To A Low-Carbon Economy, Including The Utilization Of Carbon Trading Market Mechanisms ¬

By Tyson Slocum

As a voting member of the advisory committee, I support the creation of a new subcommittee to explore both the opportunities and hazards that market mechanisms present to mitigating greenhouse gas emissions—as long as five conditions are considered.

First, it should be acknowledged that legislative and regulatory policy mandates have been the primary drivers of emissions reductions. Obligations that utilities produce or procure certain amounts of renewable energy; the establishment of clean energy standards; requirements for energy efficiency investments; electrification dictates; corporate procurement programs; and tax policy have established the policy parameters and coherent long-term targets that capital-intensive industries require to make emission reduction investments. Overreliance on market-driven tools like carbon trading, on the other hand, can produce volatility that, while serving as a lucrative source of profit-making for traders, can undermine policy goals of science-based emission reductions. Emissions trading can, in limited and well-regulated circumstances, assist with cost-effective compliance, possibly serving as a supplement to regulated mandates. This orientation should frame the subcommittee’s work.

Second, the subcommittee’s membership should feature robust representation of public interest stakeholders, including environmental justice perspectives. It is important for the Commission to recognize the significant resource challenges such public interest organizations face in being able to meaningfully participate in subcommittee activities. Public interest organizations often lack the staffing and technical support needed to effectively contribute to such committee work, and therefore considerations should be made to increase the number of public interest members, and help coordinate staff resources to assist with their participation.

Third, 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. For example, the entity that proposed the subcommittee’s creation—The Commercial Energy Working Group—is not an actual company or trade association, but rather a lobbying vehicle for anonymous interests that operates out of the law firm Eversheds Sutherland. Adding to the confusion, it appears that at least some members of the group, such as Vitol, operate more as financial speculators than as commercial interests.

Fourth, the subcommittee should scrutinize the problematic role of offsets in emission reduction compliance, and seek to strengthen verification standards. Given the challenges that offsets have in delivering real emission reductions, the subcommittee should instead encourage mechanisms that produce direct emission avoidance from point- and mobile sources.

Fifth, the subcommittee should assess whether carbon markets’ intrinsic volatility limits the efficiency of emission reduction goals. While historic volatility in various carbon markets has complicated efforts to manage emission reductions, it provides ample opportunities for sophisticated traders to earn windfall profits. A mission of the subcommittee should be explore whether carbon markets should be considered a benefit or a barrier to effective emission mitigation.