Sept. 28 (Bloomberg) -- The rules for buying and selling pollution credits under a proposed U.S. “cap-and- trade” program shouldn’t be tougher than those being debated in Congress for other markets, the International Emissions Trading Association said today.

Geneva-based IETA, whose members include Chevron Corp.,American Electric Power Co. and Goldman Sachs Group Inc., said in a report that “future financial services reform legislation should supersede the carbon market oversight provisions” of any cap-and-trade legislation that passes Congress.

The U.S. House passed a cap-and-trade bill in June. Senate Democrats plan to unveil a proposal for limiting U.S. greenhouse gas emissions Sept. 30.

Lawmakers are debating how best to regulate the market for carbon-dioxide permits created by a cap-and-trade program as President Barack Obama asks Congress to approve new limits on over-the-counter, or privately negotiated, derivatives that are traded across the financial sector.

Some lawmakers have expressed concern that a new U.S. carbon market may be more vulnerable than others to manipulation and fraud. They are considering special rules for the cap-and- trade program that would restrict OTC dealing in futures and other derivatives contracts, block the involvement of banks and impose price controls.

‘Out of Step’

These proposals are “out of step” with the new regulations being considered for other markets, IETA said. The group said concerns over manipulation and fraud can be dealt with through “stringent disclosure requirements of all OTC transactions” to the Commodity Futures Trading Commission.

The group said while lax oversight can enable fraud, “overly cumbersome oversight rules can discourage market participation, stifle investment, raise compliance costs, and threaten the program’s environmental performance.”

Carbon dioxide permits already trade in Europe and a 10- state cap-and-trade program in the U.S. Northeast. Firms that trade in pollution rights are often active in energy commodities and the same regulations should apply to both markets, Dirk Forrister, managing director of New York-based environmental asset management firm Natsource LLC, said by phone.

“They don’t need to be different,” he said. “The same underlying concerns drive the trading rules for both.”

$2 Trillion Market

The global derivatives market for carbon dioxide allowances may grow to $2 trillion within the first five years of trading under a U.S. cap-and-trade program, CFTC Commissioner Bart Chilton said in a Sept. 15 speech.

The rapid growth in carbon markets that may follow the passage of U.S. cap-and-trade legislation may justify tougher rules for derivatives trading in emissions than in other commodities, Michael Wara, a professor at Stanford Law School, said in a phone interview.

Extra requirements for carbon, such as the execution of all trades on regulated exchanges, should be relaxed once the CFTC determines the new market is “mature enough to ease off,” Wara said.

The underlying goods in a carbon market are emission allowances that don’t yet exist because Congress hasn’t passed a cap-and-trade bill, he said. For carbon, there will be a “spin- up issue that most commodities don’t face” and regulators should be cautious until the cap-and-trade market is properly understood.

Early trading in a U.S. carbon market is likely to suffer from “so much uncertainty” and there is “the potential to exploit all of that uncertainty,” Wara said.

To contact the reporter on this story: Simon Lomax in Washington at slomax@bloomberg.net.

Last Updated: September 28, 2009 17:22 EDT