Emissions trading – Big boys dealing on Chicago’s green exchange

Although US president George Bush’s latest climate change initiative announced in late May continues to exclude mandatory carbon cap-and-trade approaches, many US businesses believe limits on greenhouse gas emissions are simply a matter of time.

While the administration fiddles, five different bills that would create cap-and-trade systems are under consideration and receiving bipartisan support in Congress. Some of the nation’s largest corporations, including GE, Alcoa, DuPont and BP, have joined together as participants in the Climate Action Partnership to call for mandatory national legislation.

In the meantime, companies are trying to get a leg up on what is to come by delving into reducing and offsetting their own carbon emissions through voluntary market approaches like the Chicago Climate Exchange (CCX).

CCX participants measure their greenhouse gas emissions against agreed limits – a 6% reduction below the baseline period of 1998-2001 by 2010. Those who reduce their emissions below the cap can sell surplus credits to those who release more than their limit.

Although participation is voluntary, companies involved are legally bound to observe their emissions agreements and the rules of the exchange.

Volume booming

CCX began in 2003 with just 13 companies and the City of Chicago as members, but has grown to more than 250 members today.

In 2006, CCX contracts covering 10 million (metric) tonnes of emissions were traded, up from just 1.5 million in 2005. And volumes continue to rise. In the first two months of 2007, more than five million metric tonnes were traded.

Market forces drive the price of the credits, called Carbon Financial Instruments, which are equal to 100 tonnes of carbon dioxide. Prices range from four to eight dollars a tonne, and experts say mandatory restrictions on emissions could drive the price to $12 or higher.

Even without legislation, Clifford Chance, a London-based law and consulting firm, estimates that the value of voluntary markets like CCX will increase 16-fold to $400 million in 2007 and reach $3 trillion by 2010.

All welcome

The exchange is popular with utilities, including American Electric Power, the single largest emitter of greenhouse gases in the US. Smaller regional electric providers are also fans, such as Tampa Electric, for whom management of emissions is vital thanks to close scrutiny by regulators.

CCX has attracted leading corporations like Ford, Motorola and IBM and small enterprises, including a ski company in Colorado. In addition, state and city governments, universities, farmers and native Indian tribes are getting into the act.

CCX trades are anonymous and many are transacted by hedge fund brokers and aggregators. This makes it difficult to assess exactly who is responsible for the volumes traded on the exchange. Some general patterns are evident, however.

While most companies selling credits do not trade a large enough volume to have a real financial impact on their bottom line, revenues at least partially offset the cost of enhanced pollution controls, they say.

Paying for pollution

There are, by the exchange’s own admission, more sellers than buyers. But companies and other entities buying “right to pollute” credits include those having trouble meeting their legally binding reduction targets, such as the state of New Mexico, and carbon offsetters that sell to consumers, like TerraPass and DriveNeutral.

Joe Kruger, policy director for the Bipartisan Policy Center at the National Commission on Energy Policy, says that although the buying and selling is real, few participants are making any real money trading on the exchange in these early, experimental days.


"Clifford Chance estimates that the value of voluntary markets like CCX will reach $3 trillion by 2010"


The reasons for joining and trading on the exchange, he says, are as varied as its members.

Many, like Green Mountain Energy, a green energy and offset provider, say they are seeking to gain experience in carbon trading markets in anticipation of mandatory caps, while prices are low and trades are less risky.

Some, like DuPont and IBM, are more concerned with documenting reductions they are making in hopes of getting credit for them when caps do become mandatory.

Others, including American Electric Power, also want to show their shareholders and consumers that they are being proactive on climate change to polish their image.

Richard Sandor, chief executive and founder of CCX, says companies that have already started monitoring carbon emissions will have a “first mover” advantage when mandatory regulation does come. Others jump in, he suggests, in hopes of influencing US climate change policy.

Savvy sellers

In the meantime, some academic institutions are reaping noteworthy financial rewards. The University of Minnesota is reducing emissions from a coal burning boiler by blending in wood chips and oat hulls. It has been able to reduce the boiler’s greenhouse gas emissions by about 25%.

The university has traded reduction credits through CCX since 2003 earning more than $1 million. The University of Iowa has used a similar approach to reduce coal consumption by 30,000 tonnes, saving roughly $500,000 a year and reducing its emission by 4% to earn credits worth $125,000.

Farmers and native tribes, who are selling carbon sequestration credits on the exchange, are also seeing modest financial gains.

Credits linked to forests, rangeland and no-till agricultural fields are eligible for sale on the CCX. The credits are often sold by aggregators, like the Offset Coalition or the Climate Trust in portfolios much like a mutual fund.

According to CCX, more than 1.2 million acres were enrolled in the US from 2005 to 2006 for carbon sequestration credits, earning producers more than $3 million on the exchange.

The Iowa Farm Bureau, one of 23 aggregators on the exchange, has packaged and sold 500,000 tonnes of carbon emissions credits. The credits equal a month’s output from a 1,000-megawatt coal plant.

The North Dakota Farmers Union says about 600 farmers in its group earned more than $2 million combined for credits from 800,000 acres sold on the exchange in March 2007.

Too much credit?

Planting trees can be even more lucrative, yielding as much as $25-$35 per acre in carbon credits.

The Natural Resources Defense Council and other environmental groups, however, question the protocols used by CCX to determine the value of sequestration acreage on the exchange and whether it is realistic to think the lands will never be disturbed, allowing the carbon to eventually be released.

They also worry that the money being paid to farmers is often for activities they would already be participating in and which do little to lower total emissions.

Because of such concerns, European markets do not accept sequestration credits, opting instead to focus on clean development project credits in developing nations.

Real money

Shares of CCX’s parent company Climate Exchange plc, which also owns the European Climate Exchange market in Amsterdam, have risen 33% in London trading this year, bringing the company’s market value to nearly $551 million.

Sandor owns almost 17% of the company. Other major shareholders include Goldman Sachs and Amvescap, manager of the Aim and Invesco mutual funds.

However, until mandatory cap-and-trade regulations are adopted in the US, Joe Kruger says, the real value of CCX is speculative.

Investors, he says, are betting on the future value of what promises to be a huge commodity market. At the same time, the US continues to inch closer to mandatory caps on carbon emissions.


Useful links:
www.chicagoclimatex.com
www.europeanclimateexchange.com