Chicago Climate Exchange® Managing Natural Resources through Innovative Market Solutions: The Case...

Chicago Climate Exchange®www.chicagoclimateexchange.com

Managing Natural Resources through Innovative Market Solutions: The Case of the Chicago Climate Exchange

Dr. Richard L. SandorChairman and CEOChicago Climate Exchange


"Chance favors the prepared mind.” - Louis Pasteur


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.

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



Liquidity Providers (cont’d.)

Refco LLC Serrino Trading Co. C. Richard Stark, Jr Jeffrey B. Stern Lee B. Stern Tradelink LLC Tradition Financial Transmarket Group FCT Europe The League Corporation Municipalities City of Chicago Offset Aggregator Iowa Farm Bureau Offset Provider Klabin S.A. Resources Technology Corporation Restoration Soil &

Non-Governmental Organization World Resources Institute American Coal Ash Association American Council on Renewable Energy Houston Advanced Research Center Pharmaceuticals Baxter Healthcare Private University Tufts University Public University University of Oklahoma University of Iowa Semiconductors STMicroelectronics Steel Roanoke Electric Steel

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



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® (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 ® (CCX ®)


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


Seven Stages of Market Evolution1. Structural change - demand for capital2. Uniform commodity/security standards3. Legal instrument providing evidence of ownership4. Informal spot and forward markets5. Emergence of exchanges6. 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


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)


Evolution of Markets - CO2: A Comparable Story

Structural Change Population growth, increased fossil fuel use

Uniform Commodity CO2e

Property Rights, Regulation and Evidences of Ownership

CTOs in Costa Rica

Private sector activity (i.e. ZAPCO-OPG)

CCX mutual agreement

Informal Markets OTC - $50-$100 million, not uniform

Exchanges, Futures and Options

CCX and NASD (2003)


• 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

CCX® Key Features


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

92%

93%

94%

95%

96%97%

98%

99%

100%

98-01 2003 2004 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.


CCX® External Advisory BoardHonorary Chairman

The Honorable Richard M. Daley, Mayor, City of Chicago

Ernst Brugger, President, Brugger, Hanser & PartnerElizabeth Dowdeswell, former Executive Director, UN Environment ProgramJeffrey Garten, Dean, Yale School of ManagementLucien Bronicki, Chairman, ORMAT InternationalDonald 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 DevelopmentBill Kurtis, Journalist and television producerThomas Lovejoy, President, Heinz Center; former Chief Biodiversity Advisor, the World BankDavid Moran, President, Dow Jones IndexesR.K. Pachauri, Chairman, Intergovernmental Panel on Climate ChangeMichael Polsky, President and CEO of InvenergyDonna Redel, former Executive Director, World Economic ForumSir 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 ClubMichael Zammit Cutajar, former Executive Secretary, UNFCCC


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 BattsProfessor, University of Chicago Graduate School of Business, former CEO of Tupperware

Governor James R. ThompsonChairman, Winston & Strawn, former four-term Governor of Illinois


• 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

CCX® Trading Highlights to Date

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 + 0Price: per metric ton of CO2

Volume: metric tons CO2

* based on 345 trading days, from Dec. 12 – April 21, 2005


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


Recent Developments

European Climate Exchange (ECX)

Chicago Climate Futures Exchange (CCFE)

Other Markets• Water - Quality and Quantity• Non-GHG Pollutants

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.

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.


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


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: CERES

Importance of Climate Change to the Public and Corporate Sustainability


Water Markets

Issues: Quantity and Quality

Fragmented, non-transparent

Need for price discovery, transparency

Emergence of Exchanges Western U.S. – quantity NutrientNet – quality


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


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.


http://www.theccfe.comChicago Climate Futures Exchange

Chicago Climate Exchangehttp://www.chicagoclimateexchange.com

European Climate Exchangehttp://www.europeanclimateexchange.com

Chicago Climate Exchange® Managing Natural Resources through Innovative Market Solutions: The Case...

Documents

Transcript of Chicago Climate Exchange® Managing Natural Resources through Innovative Market Solutions: The Case...