Transcript Document

Managing Natural Resources through
Innovative Market Solutions:
The Case of the Chicago Climate
Exchange
Dr. Richard L. Sandor
Chairman and CEO
Chicago Climate Exchange
Chicago Climate Exchange®
www.chicagoclimateexchange.com
"Chance favors the prepared mind.”
- Louis Pasteur
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Members of Chicago Climate Exchange
Aerospace
Rolls Royce
Automotive
Ford Motor Co.
Chemicals
Dow Corning
DuPont
Diversified
Manufacturing
Bayer Corporation
Interface, Inc.
Electronics
Motorola, Inc
Energy Services
Sieben Energy
Associates
Electric Power Generation
American Electric Power
Manitoba Hydro
TECO Energy
Green Mountain Power
Environmental Services
Waste Management
Food Processing
Premium Standard Farms
Legal Services
Foley & Lardner
Forest Products
International Paper
MeadWestvaco Corp.
Stora Enso NA
Temple-Inland, Inc.
Chicago Climate Exchange®
www.chicagoclimateexchange.com
®
Information Technology
IBM
Open Finance LLC
The Inter contienental
Exchange
Liquidity Providers
AGS Specialists
Michael R. Anderson
Breakwater trading LLC
Raymond S. Cahnman
Amerex Energy Ltd.
Calyon Financial Inc.
Eagle Market Makers, Inc
First New York Securities
Goldenberg, Hehmeyer.
ICAP Energy LLC
Christopher J. Johnson
Kingstree Trading
Kottke Associates LLC
Marquette Partners LP
Douglas M. Monieson
Natsource LLC
Members of Chicago Climate Exchange
Liquidity Providers
(cont’d.)
Non-Governmental
Organization
World Resources Institute
American Coal Ash Association
American Council on Renewable
Energy
Houston Advanced Research
Center
Refco LLC
Serrino Trading Co.
C. Richard Stark, Jr
Jeffrey B. Stern
Lee B. Stern
Tradelink LLC
Tradition Financial
Pharmaceuticals
Transmarket Group
Baxter Healthcare
FCT Europe
The League Corporation
Private University
Tufts University
Municipalities
City of Chicago
Public University
University of Oklahoma
Offset Aggregator
University of Iowa
Iowa Farm Bureau
Offset Provider
Klabin S.A.
Resources Technology
Corporation
Restoration Soil &
Semiconductors
STMicroelectronics
Steel
Roanoke Electric Steel
Chicago Climate Exchange®
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®
Technology
Ecoenergetics srl
Millennium Cell
Transportation
Amtrak
Engineering
Vanasse Hangen
Brustlin, Inc
Financial Services
Access Industries, Inc.
Consulting
Domani LLC
Global Change
Associates
Natural Capitalism, Inc
Rocky Mountain Institute
Members of Chicago Climate Exchange
Professional Associations
The Professional Risk Manager’s
International Association
Religious Organizations
Jesuit Community of Santa Clara
University
Retiring/Offsets
Carbonfund.org
®
SRI Fund
PAX World
Technology
BenVen LLC
Ecoenergetics
Srl
Millennium
Cell
Polar
Technologies
CCX total emission baseline of ~250 million metric tons CO2
would make CCX one of the largest “countries” in EU CO2
Market
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Chicago Climate Exchange ® (CCX ®)
 Chicago Climate Exchange® (CCX® ) is a voluntary, legally
binding pilot greenhouse gas reduction & trading program for
emission sources and offset projects in North America and
offset projects in Brazil
 CCX® is the world's first multi-national and multi-sector
market for reducing and trading greenhouse gas emissions
 An unprecedented demonstration that a cross-section of
North American private and public entities can design and
implement a voluntary, legally binding market-based GHG
emissions reduction program
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Goals of CCX®
• Proof of concept: establish the viability of a multi-sector GHG
emissions cap-and-trade program, supplemented by offsets, to
reduce GHG emissions cost-effectively
• Price discovery and dissemination of market information
• Standardization of the commodity and building of market
infrastructure and institutions— e.g. registry, clearing,
settlement
• Facilitation of trading with low transactions costs
• Harmonization and integration with other trading regimes
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Seven Stages of Market Evolution
1. Structural change - demand for capital
2. Uniform commodity/security standards
3. Legal instrument providing evidence of ownership
4. Informal spot and forward markets
5. Emergence of exchanges
6. Organized futures and options markets
• Homogeneity
• Price Variability
• Competitive Determination of Prices
• Viable Cash Markets
• Patterns of Forward Contracting
• Contract Design
• Legal and tax
7. Proliferation of OTC markets, deconstruction
Chicago Climate Exchange®
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Examples of the Seven-Stage Market
Evolution Process
Historical:
• Dutch East India Company (1605)
• Wheat (1848)
Contemporary:
• Collateralized mortgage obligations (1970)
• U.S. Sulfur dioxide emissions allowances (1990)
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Evolution of Markets - CO2: A Comparable Story
Structural Change
Population growth, increased
fossil fuel use
Uniform Commodity
Property Rights,
Regulation and Evidences
of Ownership
Informal Markets
CO2e
CTOs in Costa Rica
Private sector activity (i.e.
ZAPCO-OPG)
CCX mutual agreement
OTC - $50-$100 million, not
uniform
Exchanges, Futures and
Options
Chicago Climate Exchange®
www.chicagoclimateexchange.com
CCX and NASD (2003)
CCX® Key Features
• Voluntary cap and allowances for emitters
• Project-based offsets: farm and forest sinks, methane
destruction and eligible offset projects in the U.S. and Brazil
• Include all GHGs, use IPCC global warming potentials
• Registry, Electronic Trading Platform, Financial Clearinghouse
• NASD market oversight
• Self-regulatory organization overseen by Committees of
Members, directors and staff
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Standardized Reduction Timetable
2003: Reduce emissions to 1% below 1998-2001 levels
2004-2006: target falls additional 1% per year (from 1998-2001)
®
CCX Emission Reduction Schedule
100%
99%
98%
97%
96%
95%
94%
93%
92%
98-01
2003
2004
Chicago Climate Exchange®
www.chicagoclimateexchange.com
2005
2006
The Role of NASD
• As the official CCX Provider of Regulatory Services, NASD:
• Conducts third-party verification of Members’ Emission
Baselines and Annual Emission Reports
• Oversees Offset Project verification
• Provides market oversight
•NASD’s role ensures the integrity of the commodity traded on
CCX and of the emission reduction targets of CCX Members.
•Development of the GHG emissions verification function is
critical to the credibility and success of the global carbon market.
Chicago Climate Exchange®
www.chicagoclimateexchange.com
CCX® External Advisory Board
Honorary Chairman
The Honorable Richard M. Daley, Mayor, City of Chicago
Ernst Brugger, President, Brugger, Hanser & Partner
Elizabeth Dowdeswell, former Executive Director, UN Environment Program
Jeffrey Garten, Dean, Yale School of Management
Lucien Bronicki, Chairman, ORMAT International
Donald Jacobs, Dean Emeritus, Kellogg Graduate School of Management, Northwestern
Joseph Kennedy II, Chairman, Citizens Energy Group; former U.S. Representative (MA)
Israel Klabin, President, Brazilian Foundation for Sustainable Development
Bill Kurtis, Journalist and television producer
Thomas Lovejoy, President, Heinz Center; former Chief Biodiversity Advisor, the World Bank
David Moran, President, Dow Jones Indexes
R.K. Pachauri, Chairman, Intergovernmental Panel on Climate Change
Michael Polsky, President and CEO of Invenergy
Donna Redel, former Executive Director, World Economic Forum
Sir Brian Williamson, former Chairman, London International Financial Futures Exchange
Robert Wilmouth, President and CEO, National Futures Association
Klaus Woltron, Austrian entrepreneur and Vice President of the Vienna Club
Michael Zammit Cutajar, former Executive Secretary, UNFCCC
Chicago Climate Exchange®
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CCX® Public Directors
Maurice Strong (Vice-Chairman)
Chairman, Earth Council and former Undersecretary-General of the UN
Les Rosenthal (Vice-Chairman)
Principal, Rosenthal Collins and former Chairman, Chicago Board of Trade
Warren Batts
Professor, University of Chicago Graduate School of Business, former CEO of
Tupperware
Governor James R. Thompson
Chairman, Winston & Strawn, former four-term Governor of Illinois
Chicago Climate Exchange®
www.chicagoclimateexchange.com
CCX® Trading Highlights to Date
•
Total trades: ~700
•
Average daily trading volume: 7,264 metric tons carbon dioxide.*
•
Total allowances transferred: 2.6 million metric tons carbon dioxide.
Select Cumulative Market Summary CCX Carbon Financial
Instruments
Vintage High
Low Last
Traded Volume + Auction Volume
2003
$2.00
$0.73 $1.36
309,200
+
100,000
2004
$2.03
$0.77 $1.34
694,100
+
0
2005
$2.06
$0.71 $1.20
861,800
+
25,000
2006
$2.04
$0.80 $1.27
640,400
+
0
Price: per metric ton of CO2
Volume: metric tons CO2
* based on 345 trading days, from Dec. 12 – April 21, 2005
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Initial Results from CCX® Year One
• Member’s Baselines and 2003 Emissions Audited
• Program-wide emission reductions achieved
• Complete operation implemented: rulebook, trading,
clearing, registry, market oversight, governance
• Trading active:
• >600 trades (2.3 million tons)
• Prices range from under $1/ton to over $2/ton
• Members gaining broad practical experience, better
understanding energy usage, positioning for policy
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Recent Developments
European Climate Exchange (ECX)
ECX products will trade on the London-based
International Petroleum Exchange, and will provide a
central, cleared exchange platform for trading of carbon
dioxide emission allowances issued by EU member
states under the EU Emissions Trading Scheme.
Chicago Climate Futures Exchange (CCFE)
CCFE is a CFTC-regulated futures markets, and is
currently trading two variations on a Sulfur Financial
Instrument (SFI) contract. CCFE will serve as the futures
exchange for pollution and environmental commodities.
Other Markets
• Water - Quality and Quantity
• Non-GHG Pollutants
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Why Join Chicago Climate Exchange
®
CCX® provides you with the opportunity to Engage with all
relevant stakeholders, Disclose publicly your commitment to
climate change and Act by making a specific reduction
commitment and thereby Participate in seeking a constructive
public policy solution to a global problem
Become a leader in addressing climate change and reducing
GHG emissions
Implications of leadership:
• Create shareholder value
• Limit threats to shareholder liability
• Demonstrate corporate and environmental transparency
• Obtain first-mover advantage in emissions trading
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Importance of Climate Change to the Public
and Corporate Sustainability




Climate change is an issue that we have to deal with in the future
Climate change risk creates new business opportunities and
challenges resulting in significant and uneven financial impacts on
industries and regions:
 physical risk
 policy risk
 competitive risk
 legal risk
 reputation risk
Bottom line is that how a corporation manages its carbon exposure
can create or destroy its shareholder value.
Once markets open, then financial tools can be used to minimize
compliance risk.
Source: CERE
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Water Markets
 Issues: Quantity and Quality
 Fragmented, non-transparent
 Need for price discovery, transparency
 Emergence of Exchanges
 Western U.S. – quantity
 NutrientNet – quality
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Fisheries Markets

Overharvesting around the globe has led to decimated and
unstable commercial fishery populations, glutted fish
markets and bankrupt fishermen.

Fragmented command & control policies have created
perverse and destructive incentives in many instances.

Well-designed systems that distribute scarcity using Total
Allowable Catch (TAC) caps divided into Individual Transfer
Quotas (ITQs) or Individual Fishing Quotas (IFQs) have
proven sustainable for fisheries and profitable for individual
fishermen.

New Zealand has used a cap-and-trade system since 1986

Alaska’s North Pacific Fishery Management Council has
been in operation since 1995
Chicago Climate Exchange®
www.chicagoclimateexchange.com

Innovative Market based solutions may hold the Key
 Well-designed systems that distribute scarcity using Total
Allowable Catch (TAC) caps divided into Individual Transfer
Quotas (ITQs) or Individual Fishing Quotas (IFQs) have
proven sustainable for fisheries and profitable for individual
fishermen.


New Zealand has used a cap-and-trade system since 1986.
Alaska’s North Pacific Fishery Management Council has been
in operation since 1995.
Chicago Climate Exchange®
www.chicagoclimateexchange.com
Chicago Climate Exchange
http://www.chicagoclimateexchange.com
Chicago Climate Futures Exchange
http://www.theccfe.com
European Climate Exchange
http://www.europeanclimateexchange.com
Chicago Climate Exchange®
www.chicagoclimateexchange.com