The story really started in 1991. Richard Sandor, chairman of Climate Exchange, attended the Earth Summit at Rio. Scientists and environmentalists laid out the issue of climate change.
The world wasn’t ready for the message, but some 15 years later they have been proven depressingly accurate! The next key event was the launch of the US SO2 cap and trade scheme in 1995. This is the ‘poster child’ of emission reduction schemes and has lead to a 50% reduction in SO2 emission and stopped acid rain in the US. Once again, Richard Sandor was pivotal in launching the programme.
The next watershed was Kyoto in 1997. The US delegation, led by Al Gore, was successful in putting cap and trade into the protocol, only then for the US to withdraw from the process.
The EU Emissions Trading Scheme (EU-ETS) came to pass and encompasses 2.2 billion tons of emissions from 5000 companies at 12,000 installation.
The system has got off to an incredibly successful start. The European Climate Exchange has already traded 285 million tons in the first 14 months, with May 2006 being a record month, trading 53 million tons.
The major traders include Europe’s leading industrial companies alongside most of the major financial players in the commodity markets. The futures market trades all vintages up to 2012. More than half of all EU-ETS permits are traded ‘over the counter’, but there are also eight exchanges in operation.
One of the key features of the European system is that companies and governments can purchase offsets from developing and third world countries. This means that facilities that generate power from clean sources such as wind or hydro are awarded permits that can be sold into the EU system. The funds generated are used to finance the projects. There are also other types of projects, such as methane trapping and HFC-reduction projects. This has generated great interest in financial markets and already several billion euros have been raised to invest in these ‘certified emission reduction’ projects. This is one of the best demonstrations of cap and trade having a physical impact in reducing greenhouse gas emissions. This gives the scheme global reach and there is an ever growing slate of projects, especially in China, India and Latin America.
One of the most exciting developments has been in North America.
It would appear that in spite of the lack of a federal system, the US is starting to engage ahead of the next presidential election. The US has a legally binding voluntary CO2 reduction scheme which is run and administered by the Chicago Climate Exchange (CCX). CCX is the brainchild of Richard Sandor, who is its chairman and CEO. It has done an incredible job and now has more than 200 members and a baseline equivalent to 8% of US land-based emissions. It has seen record trading volumes in the past three months and their membership has out cut Kyoto targets since the Exchange launch in 2003. The arrival of the US into the carbon market will be a vital step forward that will give the whole climate change initiative positive momentum.
As we approach another US hurricane season, there appears to be growing political awareness with notable promoters such as Al Gore and several Republican-led initiatives in north-eastern US and California. Once again, the CCX system admits credits and members from outside the US.
In conclusion, we have a new asset class that has the potential to be one of the largest commodity markets in the world. It is a fantastic opportunity to address one of the world’s most pressing issues. As Richard Sandor often quotes: “Doing well by doing good”.
Neil Eckert Director Climate Exchange PLC Email:neil.eckert@ecxeurope.com Tel: 0207 382 7807
