Wednesday, January 5, 2011

Evaluating Limits on Participation and Transactions in Markets for Emissions Allowances -- CBO

This report from the Congressional Budget Office dated December 2010 finds that various types of participants would probably be active in allowance markets, including covered entities (emitters that must comply with the cap); other entities that would receive allowances from the government and want to sell them; and numerous banks, investors, and other parties that would buy allowances from, and sell them to, the first two types of participants.

Transactions in allowance markets would most likely include allowance derivatives (financial contracts whose value would depend on the future price of allowances). Although broad participation and derivatives transactions are common in many markets—such as those for agricultural and energy commodities—some observers have proposed excluding certain market participants or transactions under a potential cap-and-trade program to protect allowance markets and the broader economy from unwanted risks.

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