| Emission Trading Scheme 101 |
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| 22/07/2007 | |
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Dr. Richard Sandor, Chairman and CEO of the Chicago Climate Exchange, answers this week's questions on the Emission Trading Scheme. 1. What is the Emission Trading Scheme (ETS) and how successful has it been? Cap-and-trade emissions trading systems are successful from both an environmental and economic viewpoint because they provide industry with the flexibility in method, location and timing of emission reductions. The entrepreneurial skills of industry are harnessed for pollution reduction. The system provides direct financial incentives for least cost solutions and technological innovation to reduce emissions. Programs like the U.S. Environmental Protection Agency's Acid Rain Program are based on the premise that trading can achieve significant emission reductions at a cost far below what it would have been under a command-and-control policy. The success of the Acid Rain Program to date has proven the practical outcome of this theory. All of these characteristics of a successful emissions trading program may be applied to greenhouse gases. Chicago Climate Exchange brings together over 325 organizations dedicated to building cost-effective, market-based systems for reducing greenhouse gas emissions. Members of CCX include leading international companies such as Ford, DuPont and IBM, cities such as Chicago and Portland, the States of New Mexico and Illinois, and major universities, traders and environmental professionals. CCX Members commit to reduce their greenhouse emissions by 6% by 2010. Chicago Climate Exchange Members that cannot reduce their own emissions can purchase credits from those who make extra emission cuts, or can buy offsets from individual mitigation projects, such as agricultural projects, including no- and low-till farming, grass and tree plantings and methane collection at livestock operations. The carbon market has the potential to become the largest commodity traded market in the world. We are witnessing the convergence of environmental and capital markets and this trend will only intensify. In fact, The World Bank just reported that the global carbon market tripled in size to $30 billion in 2006 from $10 billion the previous year. Many analysts believe this is an underestimate of the true market size because it is hard to quantify private transactions and the report does not include voluntary markets. The market for European carbon is growing at a much higher rate than in the early days of the financial derivatives market. 2. How many carbon alliances have been traded on the exchange? In CCX, we have experienced exponential growth in trading volume. We traded 1.5 million tons of CO2 in 2005, and the next year traded 10.3 million. In the first six months of 2007, we surpassed the 2006 volume and have so far traded over 13 million tons. In Europe, volumes have also been significant and we recently crossed the 1 billion ton mark in ECX. The European Climate Exchange represents about 85% of the exchange-traded volume in the EU ETS. Also, in the US we operate a futures exchange - Chicago Climate Futures Exchange (CCFE) – which offers standardized and cleared Sulfur Financial Instrument (SFI) futures and options and Nitrogen Financial Instrument (NFI-OS) futures contracts based on mandatory cap and trade programs created under the Clean Air Act Amendments of 1990. CCFE has traded over two million CO2 allowances in its futures market, making it the world's largest exchange for trading criteria pollutants. CCFE also offers a futures contract on WilderHill Clean Energy Index® (ECO), which is the first stock index futures contract to be listed on CCFE. 3. What advantages do emissions trading represent for institutional investors? There has been increased interest from private and public investment firms as evidenced by the growth of funds, hedge funds and proprietary trading desks specialised in emissions trading. Over twenty special funds have raised more than US$2 billion to invest in projects or new technologies that generate carbon credits as an investment strategy. Also, many companies directly involved in origination of environmental credits, such as Ecosecurities, and Econergy have seen very successful public offerings in recent months (Climate Exchange plc, the holding company of CCX and ECX is listed on the London Stock Exchange's AIM division). This is another sign of this market's growing maturity. We are now seeing these major players getting involved and they see the potential for emissions trading. They see that carbon is the new asset-class that corporations will need to hedge their exposure in a carbon-constrained world. A carbon-constrained world will bring in a lot of opportunities, but also many risks. Climate change risk creates new business opportunities and challenges resulting in significant and uneven financial impacts on industries and regions. These are physical, policy, competitive, legal and reputation risks. The bottom line is how a corporation manages its carbon exposure, which can create or destroy its shareholder value. So more and more shareholders and analysts are keeping an eye of what corporations are doing in the climate change and carbon area. Also, the CCFE-ECO Clean Energy index futures will allow the financial community interested in the clean energy space to diversify their risks by investing in renewable companies while tapping into the growing popularity of this sector. 4. How is the EU ETS built into the Kyoto Protocol? What are the key differences between the EU and US markets? The EU ETS is a mechanism that the EU countries are using to help them achieve their Kyoto targets. Some of the main differences between the EU ETS and the CCX is the fact that the former is mandatory, while the latter is voluntary (but legally binding). The EU system trades only CO2, while Chicago Climate Exchange trades all six greenhouse gases. CCX allows for ample use of project –based offsets into its system, such as reforestation or landfill methane capture and destruction. As an exchange official, I cannot comment on price movements, but I can tell you that the market is attracting growing attention from professional traders and institutional investors. Both in the US and Europe, traders are looking for weather events such as heating and cooling degree days, and price movements in coal, oil and natural gas. There is also a political component related to the public policy developments in places such as the United States, where potential legislation related to a national cap-and-trade system is currently being discussed by Congress. |
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Articles of the same Serie : 101 |
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