The Green Advisor: Cleaner Air and Cash

Although the climate bill that passed the House of Representatives in June went through many changes on its way to securing a majority of support, the final version still included a carbon emission cap and trade program as a key component. Although just what compromises will be required to get passage in the Senate remain to be seen, most observers are confident that whatever legislation ultimately reaches President Obama’s desk will include cap and trade.

Last month we looked briefly at how a cap and trade program initiated in the 1990s has successfully reduced the levels of sulfur dioxide. That program certainly gave the lie to those who claimed that the program amounted to a new level of crippling taxation that would surely destroy the economy. Those same arguments are being bandied about in the current debate, but it appears that many of the critics have failed to look at the carbon cap and trade market that is already functioning in this country on a voluntary basis.

Cap and Trade Is Real

“You may be surprised to know that the biggest cap and trade market in the world is here in the United States and in Chicago,” Dr. Richard Sandor told an audience at the Gabelli Cap and Trade Symposium in New York in June. He was referring to the Chicago Climate Exchange (CCX), which launched trading operations in 2003 with 13 charter members including American Electric Power, DuPont, Ford Motor Company, and International Paper. That number has since grown to more than 300 members in several different categories from all sectors and offset projects worldwide.

CCX emitting members make a voluntary, but legally binding, commitment to meet annual greenhouse gas (GHG) emission reduction targets. Those who reduce below the targets can bank or sell their surplus allowances and those who fail to reach the targets reach compliance by purchasing CCX Carbon Financial Instrument (CFI) contracts. Each contract represents 100 metric tons (110 U.S. tons) of CO₂ equivalent emissions is composed of Exchange Allowances, which are issued to emitting members according to their emission baselines, and Exchange Offsets, which are generated by qualifying offset projects. The price of the CFI contracts is set by the market and the more members there are looking to buy credits, the higher the cost of each contract.

All members with exchange allowances and exchange offsets are monitored continuously and report their emissions each year via procedures set up by the CCX and by the World Resources Institute/World Business Council for Sustainable Development initiative. Another layer of monitoring happens through the Financial Industry Regulatory Authority (FINRA). FINRA also verifies offset projects proposed and registered by members and offset providers and aggregators.

CCX emitting members directly generate and emit GHG through activities such as energy production, manufacturing, or travel. Associate members do not directly create GHG emissions, but agree to a 100% offset of the indirect emissions for which they are responsible, such as use of electricity and other energy and business travel. The third category–participant members–includes offset providers and aggregators who own projects that offset GHG emissions by storing, eliminating, or reducing those emissions.

These projects can generate exchange offsets that can be traded. Liquidity providers are companies and individuals who join because they want to trade on the CCX Market Exchange. These include hedge funds, professional traders, and proprietary trading groups. Lastly, there are exchange participants, such as the Clean Air Conservancy, who do not have GHG emission reduction commitments of their own, but who buy carbon financial instruments with the sole purpose of reducing emissions by retiring the contracts.