Goldman Faces Carbon Market Curbs in Senate Proposals (Update1)

Aug. 13 (Bloomberg) -- Goldman Sachs Group Inc. and JPMorgan Chase & Co.would be barred from a planned U.S. carbon- emissions market or face trading restrictions under proposals by Democratic senators crafting climate change legislation.

At least nine members of the majority party say speculation by Wall Street banks may cause excessive price swings in the cap-and-trade system of pollution allowances at the center of President Barack Obama’s plan to curb global warming.

The senators say they may limit participation to polluters needing permits, ban derivatives or impose stricter regulations than exist in today’s energy markets.

“The volatility that has existed in the oil market is exactly what we don’t want to happen in carbon markets,” said Senator Maria Cantwell, a Democrat from Washington state who wants to exclude financial companies from the carbon market. “The banks contributed to that, and the banks continue to contribute to it.”

Debate over the banks’ role may thwart Obama’s efforts to get the 60 votes needed in the 100-member Senate to approve climate legislation. There are 60 Democrats in the Senate, and Republicans largely oppose a similar House bill passed in June.

Most senators favor letting financial companies trade carbon-dioxide permits, said Kevin Book, a Washington-based managing director for ClearView Energy Partners LLC, which does energy analysis.

House Bill

“If you take away the financial market component, you’ve stolen somewhere between four and six votes,” Book said in an interview.

Senate Majority Leader Harry Reid, a Nevada Democrat, has said committees should finish work on their portions of the legislation by Sept. 28.

House Democrats won passage of a climate bill by giving away 85 percent of the initial pollution allowances to energy producers and users.

The House version would add controls over derivatives both in the new carbon market and in existing trading of energy commodities, such as limiting trading positions and increasing reporting requirements. The bill would let banks trade in carbon markets.

The Commodity Futures Trading Commission is considering new restrictions on dealers in existing energy markets that may also apply to carbon trading. The commission’s general counsel maintains it can act to limit speculation without action by Congress. The Obama administration this week sent Congress draft legislation that would place new limits on derivatives trading.

Markets ‘Will Die’

Goldman Sachs spokesman Michael Duvally said the company had no comment. The bank “will continue to act as a market maker in emissions trading,” including carbon dioxide, according to an environmental policy paper it issued.

Curbs would apply to any bank that wanted to participate in the U.S. market, including some of Europe’s largest carbon traders such as Britain’s Barclays Plc, Societe Generale SA of France and Deutsche Bank AG of Germany.

Markets will have inadequate liquidity without bank participation, Bill Winters, co-chief executive officer of JPMorgan’s investment bank, said at a July 23 press conference in New York.

Carbon markets “will die, and the temperature on the planet will go up by a couple of degrees, more than it would have otherwise, and we’ll be really sorry about it,” Winters said.

Lawmakers seeking restrictions on carbon markets say speculators contributed to a rise in energy prices last year, when crude oil futures reached a record $147.27 a barrel.

‘No Derivatives, Swaps’

“There will be no derivatives, there will be no credit swaps,” said Senator John Kerry, a Massachusetts Democrat, in a July 29 speech at the National Press Club in Washington. “There will be a tighter regulatory control on this so that it will be impossible to play any of those kinds of games.”

Derivatives are financial contracts used to hedge against changes in the price of underlying assets such as stocks and commodities. Credit-default swaps are derivatives created primarily to protect lenders and bondholders from company defaults.

Attitudes in Congress have been shaped by banks’ role in the financial crisis and the Treasury bailouts they received, said Senator Amy Klobuchar.

“We always have skepticism of the investment banks and what happened on Wall Street, and that’s why we need to have strong oversight,” said Klobuchar, a Minnesota Democrat who favors tighter supervision of banks.

Goldman’s Earnings

Goldman Sachs, the bank that makes the most money from commodities, fixed-income and currency trading, said last month it earned a record $3.44 billion in the second quarter. It set aside $11.4 billion to pay salaries, bonuses and benefits in the first six months of the year, enough to pay each employee $386,429 for that period.

The company, JPMorgan and other banks returned billions of dollars in U.S. aid in June.

Limiting the market would make it more difficult for utilities and other fossil-fuel users to find trading partners, said Abyd Karmali, the global head of carbon markets at Bank of America Merrill Lynch.

“The worst possible outcome is a cap-and-trade bill which is cap-and-trade in name only,” Karmali said in a phone interview from London. “What those of us in the carbon market are hoping is that some of the excessive and burdensome market restrictions that are being proposed will fall away.”

Off-Exchange Trading

Cantwell, the Washington senator, would require all trading to be executed through exchanges rather than over the counter and would allow only polluters to trade emissions allowances.

Over-the-counter trades accounted for 46 percent of the European Union’s emissions trading market in the three months through June, according to data by New Energy Finance, a London- based research group.

Senator Byron Dorgan, a North Dakota Democrat, said he will oppose creating any carbon-trading market.

“It won’t be very long before we have derivatives, we’ll have swaps, we’ll have synthetic swaps, you name it, we’ll have all of them and it’ll be a field day for speculation,” Dorgan said July 17 on the Senate floor.

“There is a growing faction of senators demonizing the potential role Wall Street will have in pollution derivatives markets, and with good reason,” saidTyson Slocum, energy program director for Public Citizen, a Washington-based advocacy group. “The odds are that the Senate simply has too many hurdles to overcome to get this bill done this year.”