The New Energy Bill May Create a 'Super Lobby' of Powerful Opposition
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The recent passage of the American Clean Energy & Security Act (ACES) through the U.S. House of Representatives drew different reactions from climate and environmental advocates. But one key perspective shared by most advocates is that, despite its weaknesses, the bill is a good first step. ACES builds a solid foundation for future progress on U.S. climate mitigation, the argument goes, and climate advocates will be well-positioned to strengthen the legislation in years ahead.
But what are the prospects for strengthening ACES in future years? This question is subject to many uncertainties, depending on the vagaries of the political climate. But a closer examination reveals that ACES could create a "super-lobby" of interest groups that will significantly diminish the possibility of achieving future reforms.
The newest climate lobby -- and potentially one of the most powerful in years to come -- is the financial industry. If ACES is signed into law, the global carbon market could become the largest commodity market in the world. According to Bart Chilton, Commissioner of the U.S. Commodities Futures Trading Commission (CFTC), "The potential size and scope of a structured carbon emissions market in the US is unequivocally vast. It is certainly possible that the emissions markets could overtake all other commodity markets."
A growing number of analysts are expressing concerns about the emergence of a new financial climate lobby and the potential for gaming in a new U.S. carbon market. A recent report by Friends of Earth (FOE), " Subprime Carbon," argued that cap and trade proposals like ACES could create a system with similar financial and political interests to the housing market bubble. Just as financial practices during the housing bubble caused deteriorating standards in mortgages, cap and trade could create "subprime" carbon offsets -- offsets that do not represent actual emission reductions and carbon derivatives based on future carbon reductions with high risk of not being fulfilled.
"We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market," says Robert Shapiro, former undersecretary of commerce in the Clinton administration and a cofounder of the U.S. Climate Task Force.
The best projections on the size of the U.S. carbon market that would be created by ACES range between one and two trillion dollars by 2020. The CFTC estimates a $2 trillion carbon futures market within five years, with up to 180 million private contracts per year -- larger than the sweet crude oil and natural gas markets combined. This estimate was echoed by a Point Carbon report in 2008 on the potential impacts of the Lieberman-Warner Climate Security Act, and a recent report by New Energy Finance projects ACES will create a $1.2 trillion carbon market in the U.S. by 2020.
Wall Street firms recognize the lucrative potential of the carbon market and have already stepped up their lobbying efforts. According to Public Integrity, "Wall Street banks like Goldman Sachs and JP Morgan Chase, insurance companies like AIG and private equity firms had virtually no reps on Capitol Hill working on global warming policy in 2003; by last year, they had about 130 climate lobbyists, the Center for Public Integrity's analysis of Senate lobbying disclosure forms shows. About 20 additional lobbyists worked for firms and organizations wholly dedicated to carbon marketing last year."
The policy demands of these financial firms may vary, but most will push for weaker regulatory standards on carbon markets, larger volumes of carbon offset authorization, and provisions to increase the volatility of carbon prices, all of which would hinder progress on reducing U.S. emissions. For example, the financial industry will continually call for carbon allowance trading to be allowed OTC (over-the-counter), a form of derivatives trading that gives firms and traders the most leeway to leverage, speculate, arbitrage, and maximize profit by avoiding regulations. And the greater the volatility in the carbon allowance and offset market - and the larger the volume of offsets allowed - the more trading, arbitrage, and speculation these firms can benefit from.