by Lisa Stiffler

Sen. Cantwell and others try to prevent manipulation in a cap-and-trade system.

A key concern raised over the creation of a carbon cap-and-trade system is that it'll be another market for unscrupulous players to manipulate and make heaps of cash. But that doesn't need to be the case. The carbon market can, and should, include plans for oversight and safeguards to prevent that from happening. 

(Reminder on cap-and-trade basics: Greenhouse gas polluters must hold permits equalling their carbon emissions, and can trade permits if they have too many or too few.)

Natural Resources Defense Council gives its recommendations on curbing manipulation in this policy two-pager out today. It advises:

• Limits on the amount of permits any trader can hold.
• Bans on "dark trading" or "over-the-counter" trades in whichtraders buy and sell permits out of the view of regulators or other market participants. Instead trades should take place in registered markets or with transparent reporting.

So what are lawmakers doing to get a steady hand at the helm of the carbon market?

Sens. Dianne Feinstein, D-Calif., and Olympia Snowe, R-Maine, are sponsoring the Carbon Market Oversight Act of 2009, which sets up controls for a carbon-trading system. The act puts the Commodity Futures Trading Commission in charge of the carbon market and establishes the Office of Carbon Market Oversight within it. It also outlines rules for derivatives trading. 

Washington's Sen. Maria Cantwell is working out the details of legislation that would prevent
market speculation in a number of ways, primarily by auctioning all permits (as opposed to giving them out freely to polluters) and instituting a government-run secondary market where permit holders can make trades.

As regards the NRDC's specific recommendations, the group says that the House-approved Waxman-Markey bill (a.k.a. American Clean Energy and Security Act, or ACES) sets permit limits and bans dark trading. The Feinstein-Snowe legislation also requires permit limits and, according to NRDC,  "pushes carbon markets towards exchange trading, but provides limited exemptions for emitters hedging their carbon risk." Cantwell's plan, based on our understanding, requires complete transparency of buyers and sellers on the secondary trading market.

For further explanation of the gaming challenge, we at Sightline Institute tackled the topic in our Cap and Trade 101 Primer (see pages 19-20).

And for more on the politics of market regulation -- including senators calling for no trading at all --  Climate Wire lays out the concerns and solutions in a great article here. Point Carbon is tracking the issue (subscription required), and quotes Sen. John Kerry, D-Mass., vowing the Senate legislation will have stronger controls than what passed the House, and there will not be "any untransparent, unaccountable, speculative kind of games." Aye aye capt'n.

This piece originally appeared in sightline.org