See what happens when an issue is cast as environmental instead of financial. That appears to be the case with cap and trade.

What is Cap & Trade?

The trade: It will be relatively cheaper or easier for some companies to reduce their emissions below their required limit than others. These more efficient companies, who emit less than their allowance, can sell their extra permits to companies that are not able to make reductions as easily. This creates a system that guarantees a set level of overall reductions, while rewarding the most efficient companies and ensuring that the cap can be met at the lowest possible cost to the economy.

The profits: If the federal government auctions the emissions permits to the companies required to reduce their emissions, it would create a large and dependable revenue stream. These financial resources could be used to achieve critical public policy objectives related to climate change mitigation and economic development. The federal government can also choose to “grandfather” allowances to the polluting firms by handing them out free based on historic or projected emissions. This would give the most benefits to those companies with higher baseline emissions that have historically done the least to reduce their pollution.

What is in the bill that just passed the house?

The bill is even presented as different titles. One is Waxman-Markey cap-and-trade carbon emissions control act. But the official bill, so you can actually find the legislation and read it for yourself is American Clean Energy and Security Act, ACES, H.R. 2454 and is on Open Congress as well as in Congressional record.

Grist poured through the bill, but little focus on the creation of a new derivatives market

Some rules on credit default swaps are:

(a) In General- Section 4c of the Commodity Exchange Act (7 U.S.C. 6c) is amended by adding at the end the following:

`(h) Limitation on Eligibility to Purchase a Credit Default Swap- It shall be unlawful for any person to enter into a credit default swap unless the person--

`(1) owns a credit instrument which is insured by the credit default swap;

`(2) would experience financial loss if an event that is the subject of the credit default swap occurs with respect to the credit instrument; and

`(3) meets such minimum capital adequacy standards as may be established by the Commission, in consultation with the Board of Governors of the Federal Reserve System, or such more stringent minimum capital adequacy standards as may be established by or under the law of any State in which the swap is originated or entered into, or in which possession of the contract involved takes place.'.

(b) Elimination of Preemption of State Bucketing Laws Regarding Naked Credit Default Swaps- Section 12(e)(2)(B) of such Act (7 U.S.C. 16(e)(2)(B)) is amended by inserting `(other than a credit default swap in which the purchaser of the swap would not experience financial loss if an event that is the subject of the swap occurred)' before `that is excluded'.

(c) Definition of Credit Default Swap- Section 1a of such Act (7 U.S.C. 1a), as amended by section 351(a) of this Act, is amended by adding at the end the following:

`(37) CREDIT DEFAULT SWAP- The term `credit default swap' means a contract which insures a party to the contract against the risk that an entity may experience a loss of value as a result of an event specified in the contract, such as a default or credit downgrade. A credit default swap that is traded on or cleared by a registered entity shall be excluded from the definition of a security as defined in this Act and in section 2(a)(1) of the Securities Act of 1933 or section 3(a)(10) of the Securities Exchange Act of 1934, except it shall be deemed a security solely for purpose of enforcing prohibitions against insider trading in sections 10 and 16 of the Securities Exchange Act of 1934.'.

(d) Effective Date- The amendments made by this section shall be effective for credit default swaps (as defined in section 1a(37) of the Commodity Exchange Act) entered into after 60 days after the date of the enactment of this section.

So,unless I am mistaken, these are limited from the current CDS practices.

Yet it's quite clear this bill does create a carbon derivatives market:

(a) In General-

(1) APPLICATION TO EXCLUDED DERIVATIVE TRANSACTIONS-

(A) Section 2(d)(1) of the Commodity Exchange Act (7 U.S.C. 2(d)(1)) is amended--

(i) by striking `and' at the end of subparagraph (A);

(ii) by striking the period at the end of subparagraph (B) and inserting `; and'; and

(iii) by adding at the end the following:

`(C) except as provided in section 4(f), the agreement, contract, or transaction is settled and cleared through a derivatives clearing organization registered with the Commission.'

What's the issue?

Mother Jones asks Could Cap and Trade Cause Another Market Meltdown?:

You've heard of credit default swaps and subprime mortgages. Are carbon default swaps and subprime offsets next?

If the Waxman-Markey climate bill is signed into law, it will generate, almost as an afterthought, a new market for carbon derivatives.

That market will be vast, complicated, and dauntingly difficult to monitor. And if Washington doesn't get the rules right, it will be vulnerable to speculation and manipulation by the very same players who brought us the financial meltdown.

Cap and trade would create what Commodity Futures Trading commissioner Bart Chilton anticipates as a $2 trillion market, "the biggest of any [commodities] derivatives product in the next five years." That derivatives market will be based on two main instruments. First, there are the carbon allowance permits that form the nuts and bolts of any cap-and-trade scheme.

Under cap and trade, the government would issue permits that allow companies to emit a certain amount of greenhouse gases. Companies that emit too much can buy allowances from companies that produce less than their limit. Then there are carbon offsets, which allow companies to emit greenhouse gases in excess of a federally mandated cap if they invest in a project that cuts emissions somewhere else—usually in developing countries. Polluters can pay Brazilian villagers to not cut down trees, for instance, or Filipino farmers to trap methane in pig manure.

A detailed Duke University analysis shows once again one could have a derivatives trading scheme larger in value than the original underlying assets (sound familiar?).

Public Citizen's Press release on current legislation:

The Senate should do the following:

1. Listen to the scientists, not the lobbyists, and cut global warming emissions by 80 percent below 1990 levels by 2050.

2. Require polluters to pay for emissions credits - don't hand them out for free, thereby providing financial windfalls to coal and oil power plant owners. The nuclear utility Exelon bragged this week to investors that the climate bill will provide it $1 billion in extra profit per year. In addition, giving away allowances deprives the government of money needed to invest in clean technologies.

3. Don't rely on Wall Street to get climate change right. Under the bill, the price of pollution would be determined by a trillion-dollar derivatives market that could be similar to the one that helped sink our economy into its current depressed state.

4. Boost the amount of renewable energy utilities must use. The first draft of the bill would have required utilities to produce 25 percent of their power from renewable energy by 2025; that figure has shrunk to 20 percent, and additional loopholes prompted the American Wind Energy Association to conclude that the renewable standard will result in "effectively zero" new renewables.

5. Remove the "carbon tax" that households would have to pay. This pot of money would be controlled by the utilities and used to fund only carbon capture projects by coal utilities. The bill doesn't, but should, provide money to help homeowners pay for such as things as weatherization or to receive rebates for rooftop solar.

6. Protect consumers - not utility profits. The legislation's primary "consumer protection" provision distributes free pollution allowances to electric and natural gas utilities with the assumption that the 50 different state utility commissions will redirect all that money back to consumers. But there's a reason corporate utilities have called this provision "critical": they understand that they will be able to direct a portion of that money to their shareholders instead. Public Citizen supports directing money directly to households as President Obama proposed earlier this year.

In Rolling Stone's major blast of Goldman Sachs as the ultimate global bubble manipulator, Taibbi notes:

As envisioned by Goldman, the fight to stop global warming will become a "carbon market" worth $1 trillion a year.

Now President Obama claims forcing emerging economies to stop polluting is protectionist. Remember, the keyword protectionist is just code for corporate lobbyists don't want it. What happened to putting environmental standards into all trade agreements?

“At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

Conclusion

To sum, while the general public believed all of this was about global warming and climate change, instead we discover the creation of a multi-trillion dollar exchange, fees, trades, all creating profits out of polluted air. Obviously we need more analysis on what is really going on here but considering we cannot get the current shadow banking system regulated to date, it seems very odd to be creating yet another system for derivatives under the guise of protecting the environment.