Carbon Trading: Current Situation and Oversight Considerations for Policymakers Page: 2 of 46
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Various carbon products are traded in the United States, but volumes have been small
compared to other commodity markets. The products traded include carbon allowances,
which entitle the holder to emit a specific amount of a greenhouse gas, and carbon offsets,
which are measurable reductions of greenhouse gas emissions from an activity or project in
one location that are used to compensate for emissions occurring elsewhere.' Derivatives on
carbon products are also traded in the United States, including primarily futures contracts.2
Although no official measure of volume of trading exists, various sources estimated that from
$2.4 billion to $2.7 billion of carbon products traded in United States in 2009, with offsets
accounting for around $74 million.3 U.S. carbon trading volumes appear to have fallen
sharply in 2010, with volumes of RGGI allowances trading at around 15 percent of their 2009
levels as of June 2010.
Carbon product trading poses various risks and challenges that were similar to those found in
other commodity markets. For example, carbon products pose market risk, which is the
exposure to losses from changes in product prices. Similarly, carbon product markets face the
risk of potential manipulation and fraud. Although no fraud involving carbon products has been
identified in the United States since 2001, carbon products traded in Europe have been part of
several fraudulent activities, including those involving value-added tax violations. Carbon
markets could be significantly affected by political or regulatory changes after implementation of
any U.S. cap-and-trade program, but market observers noted that this risk could be mitigated by
including elements in the program that increased certainty of its duration and features.
Under the Commodity Exchange Act (CEA) carbon emissions are considered to be an
"exempt commodity." Before Congress amended the CEA in the recently enacted Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act, Pub. L. No. 111-203),
derivatives on exempt commodities were eligible for limited oversight by the primary U.S.
commodities regulator, CFTC. They could be traded between qualified parties on an over-the-
counter (OTC) basis generally free from CFTC regulation.4 CFTC's authority over such
trading was limited to instances in which CFTC suspected fraud or manipulation. Although
typical transactions in carbon emissions qualified for OTC trading, to date market
participants have traded carbon products mostly on exchanges subject to CFTC's full
authority. The Dodd-Frank amendments, which are not yet in effect, replaced this regime
with clearing requirements and other requirements intended to increase transparency of the
OTC derivatives market and reduce the potential for counterparty and systemic risk. The
amendments provide an exemption from clearing, exchange trading, and other requirements
for counterparties that qualify as end users.
The market participants, academics, regulators, and other market observers that we spoke
with identified several issues for policymakers' consideration in the event that the United
States implements a national cap-and-trade program. Some noted that the design of the
primary carbon market can significantly affect the secondary carbon market. For example,
'Offsets are typically quantified in metric tons-2,205 pounds-of carbon dioxide equivalent. An example of an
offset project is a system at a waste disposal plant that captures the plant's methane-a greenhouse gas.
2Futures are agreements to purchase or sell a commodity for delivery in the future. Like other types of derivatives,
their prices are based on the value of an underlying commodity.
3These estimates included those by the World Bank and Point Carbon, an industry consulting firm.
4Exempt commodities include all commodities other than those specifically designated in law as agricultural (such
as corn or wheat) or as excluded (such as interest rates or currencies).
GAO-10-851R Carbon Trading
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United States. Government Accountability Office. Carbon Trading: Current Situation and Oversight Considerations for Policymakers, text, August 19, 2010; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc298912/m1/2/: accessed January 17, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.