Climate Change and Financial Markets: Regulating the Trade Side of Cap and Trade

15 Pages Posted: 17 Feb 2014

Date Written: February 16, 2014


An economy-wide cap-and-trade system to limit the nation’s greenhouse gas emissions (GHGs) would create a large new financial market. Unlike other markets that typically evolve over time, a national GHG cap-and-trade system would be worth hundreds of billions of dollars at the outset. A market of this size requires attention to both the market risks and the political risks associated with the design and operation of a new financial market. Congress has the opportunity to guide the development of the market, incorporating best practices in market regulation and building on lessons learned from recent market failures. The paper provides an overview of the key issues in the current carbon market debate and the larger market reform measures, describes the evolution of securities and commodities market regulation, identifies aspects of a carbon market that may require unique regulatory approaches, and discusses the three approaches to carbon market oversight, including:

1. Designing a market structure specifically tailored to the carbon market;

2. Using the existing CEA but creating specific tweaks for carbon; and

3. Defining carbon allowances as commodities under the CEA without specific provisions for carbon trading.

Keywords: climate change, carbon market, emissions trading

Suggested Citation

Monast, Jonas, Climate Change and Financial Markets: Regulating the Trade Side of Cap and Trade (February 16, 2014). Environmental Law Reporter, Vol. 40, No. 1, 2010, Available at SSRN:

Jonas Monast (Contact Author)

UNC School of Law ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

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