Trading Greenhouse Gases and Carbon on the Internet, Part 1
It's taken decades and international cooperation among governments, agencies in the private sector, and a variety of multinational and local organizations, but a multibillion dollar global market has grown up around the issuance, verification and trading of CO2 (carbon dioxide) and GHG (greenhouse gas) emissions reduction credits.
With the ongoing development of the Kyoto Protocol's Clean Development Mechanism (CDM) and the establishment of the European Union's Emissions Trading Scheme, state governments across the U.S. are now moving with some urgency to introduce state and regional carbon and GHG emissions reduction credit and trading systems.
"Our latest forecast is that the global carbon market will grow to 23 billion euros (US$29.78 billion) by 2010," said Abyd Karmali, director of European climate strategy services at environmental and technology risk management consultants ICF International. "The carbon market faces a significant imbalance between the supply and demand of credits, and the challenge for market participants is to source high-quality, low-risk carbon credits from financially stable counterparties."
The Chicago Climate Exchange (CCX) and the InterContinental Exchange (ICE) are already in the thick of it. The two publicly listed exchanges have been at the forefront of developing electronic and Internet-based carbon and GHG reduction contracts and trading platforms.
ICE announced earlier this month that a ninth consecutive annual volume record was set for ICE futures in 2006, which includes a jointly managed series of ICE-ECX carbon financial instrument (CFI) futures contracts. The European Carbon Exchange (ECX) is a wholly owned subsidiary of the CCX.
Energy and Carbon Market Nexus
ICE Futures' 2006 traded contract volume exceeded 2005's previous record by more than 120 percent. In addition, average daily commissions in its OTC (over the counter) business segment increased 89.1 percent. Cleared OTC volume rose 131.2 percent to a new record. In December, 2006 ICE Futures' average daily volume rose 128.4 percent and average daily OTC commissions increased 78.0 percent over December 2005, according to company statistics.
"Our commitment to serving our customers and to providing leadership and innovation in electronic markets produced strong growth across our futures and OTC businesses," said Chairman and CEO Jeffrey C. Sprecher.
"This was a defining year, with significant accomplishments amid rapid growth. We are well-positioned to expand our core energy business, as well as participate more broadly in the commodities sector in 2007 and beyond, including through our planned acquisition of the New York Board of Trade."
ICE announced earlier this month that it expects to close on its planned merger with the New York Board of Trade in mid-January and launch side-by-side trading of the NYBOT's benchmark agricultural commodities on ICE's electronic trading platform for a Jan. 19 trade date.
With the introduction of the ICE-ECX CFI futures contracts, the two exchanges have joined to provide what has become the predominant centralized marketplace for risk management and trading of EU Emissions Trading System (ETS) allowances.
"The EU has established an allowances trading system within 25 countries; there's been debate over the number of allowances and the rules for the market, but it's extremely successful -- by volume of transactions, it's by far the largest market in the world today," Ecosecurities CEO Bruce Usher told the E-Commerce Times. Ecosecurities develops and finances carbon and GHG emissions reduction projects around the world.
Open interest for ECX's CFIs on Nov. 16 surpassed the 100 million metric ton mark. More than 59 million metric tons were transacted during the month of November with Nov. 29 closing prices ranging from 9 euros ($11.67) per metric ton for the Dec. 2006 contract to 20.65 euros ($26.78) per metric ton for the Dec. 2012 contract.
Ahead of the Curve
Formed in May 2000 with an aim to bring greater efficiency, transparency and liquidity to the international OTC commodities and energy markets, ICE capitalized on the rapid development and growth of large-scale electronic trading systems platforms during the 1990s. Focusing on commodities and energy contracts before the latest boom in prices has put the exchange in an enviable market position.
"The ICE platform is the only derivatives platform to host integrated futures and over-the-counter markets, including trade execution, credit management, trade capture and confirmation," Mark Woodward, ICE Futures' regulation and compliance policy and emissions project manager, told the E-Commerce Times.
"We develop and maintain our trading platform and the global infrastructure that supports our electronic markets. Speed, reliability, scalability and capacity are critical performance criteria for electronic trading platforms. ICE's platform was designed from the outset to be highly scalable, enabling us to meet anticipated user growth as demand increases."
For its part, the CCX has moved quickly to establish a presence in Canada with the formation of The Montreal Exchange (MCeX), putting itself in excellent position to facilitate the needs of businesses and government as Canada moves forward with plans to adopt nationwide greenhouse gas (GHG) emissions reduction and renewable energy legislation.
Canada's Environment Minister Rona Ambrose in December announced the government's intention to develop a market for trading GHG emission reduction credits by spring and added that the MCeX's platform may serve as a key element in its establishment.
Strength in Diversity
At first glance, the membership rosters at the CCX and ICE span what seems an odd and eclectic mix of trading counterparties. Members run the gamut from aerospace, automotive equipment, chemicals, electronics and semiconductor manufacturers -- such as Rolls-Royce, Ford Motor, Dupont, Motorola and Freescale Semiconductor -- to electric power generators and technology providers such as American Electric, Duquesne Light and IBM.
Retailers such as Safeway have joined the CCX, as have forest products and renewable energy companies such as International Paper and American Renewable Energy. Environmental services organizations, municipalities and NGOs (non-governmental organizations) are also market participants, including Layton, Utah's Wasatch Integrated Waste Management District; the cities of Aspen, Berkeley, Boulder, Chicago, Oakland and Portland; the American Council on Renewable Energy; and the Midwest Energy Efficiency Alliance.
A range of specialized, boutique and diversified financial services companies have also joined the exchange as liquidity providers and offset aggregators, including the Beijing Shenwu Thermal Energy Trading Co., CO2 Australia, Cargill Power Markets, Shatkin Arbor, Swiss Re Financial Products and the Greenoxx Global Environmental Program.
"Our participant base has expanded and diversified with new participants entering the energy commodities markets -- largely due to the access provided by electronic trading," ICE Future's Woodward noted. "The new participants include producers and consumers of commodities [and] financial services companies such as investment banks, hedge funds, proprietary trading firms and asset managers that are increasingly seeking to engage in hedging, trading and risk management strategies within the energy sector."
From Waste to Power
Wasatch Integrated Waste Management on Dec. 19 became the first organization in Utah to join the Chicago-based CCX. Wasatch "operates an integrated solid waste management system, the two major components of which are a waste-to-energy facility (combustor) and a landfill. Our mission is environmentally sound waste management, and we have always felt that there are better solutions than just the short-term, low cost landfill," explained Nathan Rich, Wasatch's executive director.
"When we found we had some methane migration issues with our old closed landfill in 2000, we installed an active landfill gas extraction system to control gas migration and odors from the landfill," he told the E-Commerce Times. "Once that system was operational, we started looking for ways to take advantage of the energy we were capturing. [We were] looking for something better than just flaring the gas."
In 2002, Wasatch completed Utah's first landfill gas-to-energy project, as well as the first landfill gas-to-energy project completed under a DOE (Department of Energy) Biomass super ESPC (energy saving performance contracting) agreement in partnership with Hill Air Force Base, which is also a Wasatch energy customer.
Wasatch captures methane, generated by waste decaying in the landfill, and either destroys the methane in a flare or ships it to HAFB, where it is used as fuel to run two generators that produce about 1.4 megawatts of electricity.
"This has been a great project environmentally and from a public relation standpoint but is not a money maker," Rich pointed out.
"Landfill gas sales net us about $30,000 annually while the project cost to Wasatch was about $600,000. We undertook this project because it was the environmentally responsible thing to do," he continued.
"The prime motivating factor for joining the CCX is to reap some financial benefit of having put an environmentally great project online," maintained Rich. "A lot more businesses will be able to justify environmentally correct decisions if they carry a financial incentive."
Monetizing Emissions Reductions
Wasatch first looked at joining the CCX as an offset provider, which would enable it to originate and list CCX CFI contracts, but eventually joined as a full member due to the fact that its CO2 emissions company-wide total about 65,000 tons -- most coming from the waste-to-energy facility.
The company can originate carbon reduction credits as it eliminates methane from the landfill. GHG emission reductions in excess of the 6 percent commitment and additional offsets can be sold to other CCX members on the CCX emissions trading platform. The company is now moving forward to complete its baseline and annual emission inventories and will then need to have the reductions verified in order to list and trade credits on the CCX.
"Rough estimates indicate we could originate about 50,000 tons CO2 equivalent annually. ... Financially, we hope to add between $100,000 and $200,000 annually to our bottom line," Rich noted.
"Membership fits right in with our goals for environmentally better solid waste management, and making the commitment to reduce GHG emissions is part of what we want to do as a member of our local and global community."