London-based holding company Climate Exchange, which owns both the Chicago Climate Exchange (CCX) and the European Climate Exchange (ECX), lost 10 times its revenue in 2006 but things are looking up in 2007. The Climate Exchange posted a loss of £10.51 million ($21 million) last year on revenues of just £1.09 million
($2.1 million), but may have turned a profit in the first quarter of this year, announced CEO Neil Eckert in April.
The news came just as the World Bank announced that more than $30 billion in Greenhouse Gas (GHG) allowances traded worldwide in 2006, the vast bulk of them in the European Union Emissions Trading Scheme (EU ETS). Of that, roughly $5 billion was funneled into clean development
“offset” projects in the developing world, helping to build wind parks, solar energy plants and other projects developers hope will reduce global warming for decades to come.
Average daily volume on the CCX’s Chicago Climate Futures Exchange (CCFE) surged in percentage terms from 95 tons in 2005 to 3,332 in 2006, but those figures pale in comparison to the ECX’s average daily volume of 1.78 million metric tons in 2006 — a 233% increase over 2005.
A key driver: the “coastal squeeze” in the United States, where states on both coasts have begun putting together mandatory cap-and-trade regimes on GHG emissions, and the consensus is that the U.S. will participate in whatever mandatory global cap-and-trade regime comes into existence when the Kyoto Protocol expires in 2012.
Perhaps more encouraging is financial commitments from big business to support carbon emission reduction. In May, Citigroup Inc. announced it would commit $50 billion over 10 years to address global climate change through investments, financings and other activities.
While being a good corporate citizen is its own reward, that kind of commitment is made with the long-term bottom line in mind.
By far, the most successful trading regime has been the E.U. ETS, but it has several problems that need to be addressed for the global regime to achieve economic benefits — beginning with the allocation process itself.
Louis Redshaw, head of environmental markets at Barclays Capital, says prices on the E.U. ETS failed to reflect underlying economic realities throughout the three-year test phase, which ends Dec. 31, 2007.
“As gas prices go up, then theoretically the reward from the carbon market as an incentive for burning gas instead of coal needs to be higher, and if gas prices go down, then companies will be happy to switch from coal to gas and sell carbon emissions certificates at a profit,” he says. “This is the basis on which the carbon trading mechanism is to ensure that the price of emitting is factored into the cost of energy.”
But the correlations failed to materialize in Europe, because the price of carbon emissions never exceeded the cost of switchover. More disturbingly, the correlations are not showing up in the second phase of E.U. ETS, either. That runs from 2008 through 2010.
The culprit: a huge oversupply of carbon emissions, the result of the E.U. issuing free allowances based on sectors and baselines, as opposed to following the cap-and-trade model that was used in the U.S. to slash sulphur dioxide emissions throughout the 1990s.
“The E.U. trading system is failing for structural reasons,” says Eric Bettelheim, chairman of Sustainable Forestry Management Ltd., “not least the failure to follow the American model and issue permits in a transparent manner instead of using the typical E.U. political process of bargaining behind closed doors, which causes them to issue more emissions permits than there are emissions — a brilliant outcome if I might say so.”
