House Agriculture Committee Chairman Collin Peterson (D-Minn.) has proposed legislation that would require the Commodity Futures Trading Commission ("CFTC") to substantially increase its oversight of carbon allowances and offset credits. The draft bill language, as part of a larger measure on derivatives regulation, would require the CFTC to promulgate regulations that would establish additional trading position limits; establish a clearing mechanism that will be required for most trades; increase position data reporting, including previously exempt commodities and disaggregated data on index funds and speculative positions versus "bona fide hedge positions"; and only give foreign boards of trade direct access to traders in the United States if such foreign boards adopt similar oversight, trading data requirements and position limits.

The draft bill has already received publicity for its severe restrictions on trading credit default swaps, but it also holds interest for the growing business surrounding greenhouse gas emissions and carbon offset credits. The bill defines greenhouse gas allowances and carbon offsets or credits for carbon sequestration as commodities and places them under the CFTC's regulatory purview. Like other regulated commodities, all trades for greenhouse gas allowances, carbon offset credits or credits for carbon sequestration would have to be made on a regulated exchange, unless exempted by the CFTC. Generally, exemptions would only be permitted for transactions that are "highly customized, transacted infrequently" and do not strongly influence final delivery prices for the physical commodity, referred to as the "discovery price." Furthermore, the CFTC is directed to establish an agreement with the Department of Agriculture on procedures and protocols for market-based greenhouse gas programs, and require that such programs be designed to maximize credits for carbon sequestration.

Speaking at last year's Carbon Trading Finance Conference in New York City, CFTC Commissioner Bart Chilton provided background on this approach. Commissioner Chilton forecasts the marketplace of carbon credits to become the largest contract traded in the futures markets, likely totaling $2 trillion a year within the next five years. He remarked that other environmental futures commodities were already regulated by the CFTC and that provided a basis for taking appropriate measures - neither too strict, nor too lenient - on carbon credit assets. Among the items mentioned were the interest of the CFTC in receiving reports on all transactions, including over-the-counter transactions above a certain size.

The bill is consistent with the efforts of the Department of Agriculture to ramp up their presence for the next round of climate legislation this year and to give U.S. farmers a seat at the table in designing any cap-and-trade system. The Lieberman-Warner-Boxer bill would have given them very little, and the Dingell-Boucher discussion draft would have put the Federal Energy Regulatory Commission in charge of regulating carbon allowance trading. The House Committee on Energy and Commerce and the Senate Committee on Environment and Public Works have long been seen as starting points for the major regulatory components of a cap-and-trade bill.