The debate over commodity speculation is alive and well in Washington. In the past week, the U.S. Commodity Futures Trading Commission (CFTC) has set its sights on regulating speculative investment in America’s energy markets, with a third hearing in a series set to convene tomorrow, August 5.
Similar efforts are occurring across the globe. The Financial Services Authority -- CFTC’s counterpart in the UK – has organized a significant gathering of oil companies, banks and hedge funds in its effort to establish the influence of speculative investors on oil prices. And UK Prime Minister Gordon Brown and French President Nicolas Sarkozy have summoned the International Organization of Securities Commissions to help investigate these speculators, warning that since “volatility damages both consumers and producers … governments can no longer stand by.”
These hearings on regulating speculative positions in energy futures markets are a welcome sign for markets whose movements continue to puzzle businesses, consumers and governments alike. But isn’t it ironic that as the CFTC tries to curb speculation in energy futures, some members of Congress are trying to create a cap-and-trade system for climate change that would entails an exponentially larger speculative furor in greenhouse gas emissions futures?
Investment houses and others on Wall Street that contributed to our current financial and economic troubles would make billions trading and speculating in these emissions permits. And at least some lawmakers are aware of this risk. In fact, when Sen. Diane Feinstein (D-CA) joined Sen. Olympia Snowe (R-ME) to introduce the Carbon Market Oversight Act of 2009 (S. 1399) early last month, she cited experts who estimate that new carbon markets would generate “upwards of $100 billion to $370 billion in economic activity each year.” And while Wall Street speculators and traders get ready to exploit dubious financial tools in this new government-created market, the resulting market volatility -- on a national or even global scale -- could disrupt our economy and the livelihoods of tens of millions of people.
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Speculation is not the only cause for concern in this policy to create a trillion dollars or so in new financial assets (the carbon permits). Today, the Senate Finance Committee is holding a hearing to consider the issue of how to distribute the hundreds of billions of dollars in emission allowances outlined in the cap-and-trade legislation. Hopefully, the Senate will improve on the House’s dismal version. For example, the greatest producers of greenhouse gases in the United States are large utilities which use the cheapest and most carbon-intensive fuel, coal, to generate most of their electricity. Yet under the House-passed bill, electric utilities pay nothing for their permits, sharply reducing their incentives to reduce their emissions. In fact, the bond ratings of large U.S. coal companies improved when the bill was introduced, as investors concluded that it would not threaten their future profits.
As CFTC Chairman Gary Gensler and his fellow commissioners ponder “whether federal speculative limits should be set by the CFTC for commodities of finite supply,” they should also step back and consider the possible economic (and environmental) consequences of the gargantuan speculative cap-and-trade regime that some of their colleagues are contemplating.
A better way – for both the economy and the environment – would be a revenue neutral carbon-based tax, which taxes energy based on its carbon content, and recycle the revenues to American households. That’s a way to avoid the price volatility and financial speculation of cap-and-trade, address the threat of climate change, and save countless American jobs.