Who Will Administer the Greenhouse Gas Market?

by Dan Watkiss, Bracewell & Giuliani

The effectiveness of legislation to cap and trade greenhouse gases (GHGs) might depend on the choice of program administrator.

Thoughtful assessment of regulatory competencies and experience and not jurisdictional turf battles should guide lawmakers in selecting which part of the federal government administers the long-overdue U.S. response to global warming.

The importance of an effective program cannot be overstated. The GHG allowance program, according to The Energy Information Administration, will reduce the rate of potentially catastrophic climate change and affect significantly the economy by increasing energy usage cost and generating revenues as high as $500 billion per year, according to estimates of the MIT Joint Program on the Science and Policy of Global Change. Varying proposals distribute those revenues to offset increased energy costs to households, reduce labor or capital taxes, or for other applications such as energy efficiency, renewable energy and related research and development. A program so consequential to the nation’s well-being requires the best leadership.

In the annals of Washington bureaucracy—replete with jurisdictional jealousies—few are the precedents for the response of the newly coronated leader of the Federal Energy Regulatory Commission (FERC) to news that his agency might be chosen to administer the cap-and-trade program.

“I have a little trepidation about a carbon market,” Chairman Jon Wellinghoff said. “It really goes beyond the traditional boundaries of what FERC has regulated in the past. There’s a number of other federal agencies that may be in a better position to oversee that.”

President Barack Obama’s nominee to head the Commodity Futures Trading Commission (CFTC), Gary Gensler, suffered no trepidation and testified at his recent Senate confirmation hearing that the agency charged with regulating trade in commodity futures and options would welcome the job of carbon czar.

The co-sponsor of the cap-and-trade bill, Democratic Rep. Ed Markey of Massachusetts, who favors FERC, is the head of a subcommittee that oversees FERC. And the proponent of the CFTC is Democratic Rep. Collin Peterson of Minnesota, chairman of the House Agriculture Committee, which oversees the CFTC.

Other contenders for administering the carbon auction are Environmental Protection Agency (EPA) Administrator Lisa Jackson and Treasury Department Secretary Tim Geithner. But neither the EPA nor the Treasury has found a congressional patron that holds a bill-writing pen.

There also likely will be a role for State Department Secretary Hillary Clinton as the nation’s domestic cap-and-trade program becomes part of a post-Kyoto international GHG program to be negotiated later this year in Copenhagen.

Given the environmental and economic importance of an effective federal GHG program, who should be its principal administrator? The answer is not obvious and might involve a combination of federal departments. Nevertheless, there are core cap-and-trade characteristics that should factor into Congress’ choice of principal administrator.

As currently working its way through the U.S. House of Representatives, the GHG cap-and-trade program would become the largest-scale domestic use of property or quasi-property rights to regulate pollution. In this respect, it is likely to be more driven by finance than by technological or legal standards. This argues for an administrator that is familiar with units of exchange and capable of protecting those units from dilution. Further, because it appears that some significant portion of those units in the form of 1-ton carbon allowances will be offered to the market in periodic auctions—likely an English or ascending-price auction—an administrator should possess familiarity with auctions and have experience in protecting the integrity of the auction processes.

Rigorous enforcement also will be essential to the cap-and-trade program’s effectiveness. Covered sources of GHG emissions that trade allowances for their own account must be audited to ensure that valid allowances match their emissions. Likewise, to police those who trade allowances speculatively as well as institutions that develop to bank and hold allowances for future use will require an administrator skilled in auditing and enforcement.

Selection of the cap-and-trade administrator should be influenced also by Congress’ understanding that GHG emission is a global, not a domestic or local, problem.

An administrator will need to integrate our domestic program into an international system of GHG-emission reductions, and he or she should be capable of helping other nations design and implement the necessary international controls that complement our own. An administrator will need to work with other countries to create incentive to buy into the program and prevent an international race to the bottom in which emission sources relocate where enforcement is low or nonexistent.

These requirements promise to be heavy lifting for the cap-and-trade administrator. Congress should be discriminating in its choice.


Dan Watkiss is a partner with Bracewell & Giuliani in Washington, D.C., representing power companies, exploration and production and midmarket companies, natural gas pipelines, power and liquefied natural gas project developers and lenders, as well as government agencies and regulators. You may reach him at Dan.Watkiss@bgllp.com.

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