Chicago Climate Exchange (CCX) Marco Hickey November, 2008 A research paper on the Chicago Climate Exchange (CCX). The basics of what a carbon contract is, how it works, and where it is traded., Today, many people worldwide engage in making some additional income, or even a living from the financial markets. People buy and sell equities, the most common instruments being common shares of a company. People purchase these shares based on their expectation(s) of the company’s future. A more complex instrument to invest or speculate with, is the buying and selling of options. Each “standard” option contract is for 100 common shares, and gives the buyer the right but not the obligation to purchase the underlying shares for a set price (strike) within a specific time frame. Through the options world has evolved a new type of instrument, this is called a Chicago Climate Exchange (CCX) Carbon Financial Instrument (CFI) Contract. Each CFI contract is equivalent to 100 metric tons of CO2. The standard or target emissions level is set for Greenhouse Gas (GHG) emissions among all industries. The amount a company can emit or pollute into the environment depends on the size and product capabilities of that company. “CCX emitting Members make a voluntary but legally binding commitment to meet annual GHG emission reduction targets. Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument (CFI) contracts” [1]. By selling these contracts it allows for some companies, who chose to invest in technologies to reduce emissions, to offset the cost of the technologies. Through this system it creates additional incentives for companies to invest in technologies which reduce emissions, because they may be able to fetch descent premiums by selling their surplus emissions offsets to other companies. A recent article states that by registering these offsets through the Chicago Climate Exchange, it makes it possible for the state of Virginia to reach its goal of reducing emissions by 30% by 2025. CNX Gas announced today it has registered 8.4 million metric tons of emission offsets for trading on the CCX, a legally binding greenhouse gas reduction and trading exchange for emission sources and offset projects. CNX Gas' offsets arose out of CNX Gas' coalbed methane capture project in Buchanan County, Virginia, for the years 2003 through September 2007. Additional offsets are expected to be generated in the future. "This is a win-win-win situation for all parties involved here today," CNX Gas President and CEO Nicholas J. DeIuliis said about the significance of the relationship between CNX Gas, the Chicago Climate Exchange and the Commonwealth of Virginia. "Not only are we creating value for our shareholders through the registration of emission offsets on the Chicago Climate Exchange, we are furthering the goals of Governor Kaine's 2007 Virginia Energy Plan, making Virginia a leader in addressing one of the most important issues in the country today." Dr. Richard Sandor, Chairman and CEO of Chicago Climate Exchange, echoed Mr. DeIuliis' thoughts: "The Chicago Climate Exchange facilitates private sector approaches to addressing the climate change issue and we are very Original Research by Marco H. OptionMaestro.com pleased to partner with CNX Gas and to see the positive impact that our partnership is having on Virginia and the country." "CNX Gas' methane capture project in Buchanan County is exactly the type of private sector initiative that will enable Virginia to achieve our goal of reducing the Commonwealth's total greenhouse gas emissions by 30% by 2025,” remarked Governor Kaine. "Just to put it in perspective, the 8.4 million metric tons of CO2 equivalents being registered by CNX Gas today, is equivalent to the annual carbon emissions of 1.6 million automobiles. Moreover, because CNX Gas sells the methane it captures, we are simultaneously increasing the Commonwealth's indigenous energy production, which was one of the goals I laid out in my 2007 Virginia Energy Plan [2]. This article is one example of how the Chicago Climate Exchange has been very successful in getting companies to reduce emissions. The reason CNX would have the incentive to reduce emissions is because they want to create some additional revenue off of their saved or “banked” emissions. According to the market price (as of November 25, 2008), 2008 and 2009 sell for $1.35 per ton or $135 per contract, and 2010 sell for $1.40 per ton or $140 per contract, CNX could sell their offsets for a total of $11,340,000 for years 2008, and 2009, and $11,760,000 for the year 2010. This additional $11,000,000+ could certainly help CNX reinvest in technologies to even further reduce emissions, allowing them to sell even more future offsets, causing even greater future profits. Not to mention the state of Virginia is becoming less polluted through this system, which allows for other states to become more aware of the benefits of trading carbon offsets. Chicago Climate Exchange is growing at a phenomenal rate, starting with just 13 members in 2003, now has over 300, mainly due to increased concern over the environment and global warming. Some people may argue saying the growth of the CCX will not help the environment at all, because the same amount of emissions will escape into the air, because firm 1 will just sell offsets to firm 2, therefore the same amount of pollution is released into the air. However that is not the case; take the law firm Sullivan and Cromwell for example. “In April, New York's Sullivan & Cromwell joined the Chicago Climate Exchange, becoming the first major law firm to formally commit to neutralizing its emissions of greenhouse gasses through the purchase and retirement of carbon credits and the purchase of offsets. The move is the "socially responsible" thing to do, according to the firm's chairman Rodgin Cohen” [3]. One can see that something can be done to reduce emissions altogether, by purchasing CFI contracts and letting them expire, or not using them for credit. This allows there to be less of the CFI contracts available for the use of emissions, and one less contract used for emissions credit is 100 metric tons less of CO2 released into the air. This article proves that something can be done by a company or an individual to help reduce emissions globally. One could sign up for an account on the CCX, and for just $135 could currently purchase a contract for 100 metric tons of CO2 and let it expire, this would account for 100 metric tons less of CO2 to be released into the air. Another company to become a member of the CCX is Bank of America. Bank of America is “doing well by doing good”, this is that they are working on a trading platform for companies to make it easier to engage in trading their offset contracts, and they are making it more known to the investor world, Bank of America also expects to create additional revenue and profits from Original Research by Marco H. OptionMaestro.com their partnership with the Chicago Climate Exchange. Bank of America, being one of the superior financial institutions will help build the reputation of the CCX in the financial realm. Bank of America will play an active role in the growing emission trading industry through our membership and investment in the exchange," said Richie Prager, head of global rates, currencies and commodities for Bank of America. "As we partner with CCX and launch our carbon emission credit trading platform and products later this year, we will ultimately do well by doing good. Helping individuals and corporations understand their carbon footprint, hedge against it and reduce emissions to reach carbon neutrality is of paramount importance in achieving an environmentally sustainable economy." Richard Sandor, Chairman of Climate Exchange PLC, said "Financial solutions promoting environmental sustainability lie at the heart of Climate Exchange. Our ability to succeed is about the quality and focus of our members and partners. In Bank of America we have a working, commercial relationship which takes our initiatives into the day to day financial activities of a great number of corporations and consumers. We are excited about the prospects presented by the agreement and look forward to working with the Bank of America team [4]. This is a leap in the right direction for the Chicago Climate Exchange. By partnering with one of the most popular financial institutions in the world, the CCX will be able to attract more business within the corporate world, which allows more people and businesses to become aware of their carbon footprint, and will reduce emissions altogether. The more companies that are aware of the opportunity to generate additional revenue by investing in technologies and selling their surplus carbon offsets, the better the world is, this is also in part because there will be more buyers aware who want to purchase offset contracts strictly to let them expire such as the Sullivan and Cromwell law firm, allowing these contracts to expire means that there are less pollutants emitted into the air meaning a cleaner world. “As part of its CCX membership, joint venture and minority investment stake, Bank of America has committed to: expand its greenhouse gas emission reduction target, provide liquidity on the CCX, ECX and CCFE, Join CCX's Offsets Committee, purchase a minimum of 500,000 tons of offsets over a three-year period of time, treat CLE exchanges as preferred providers for exchange traded environmental product execution, and develop and launch later this year, carbon-related products and services for Bank of America's retail and institutional customers who wish to reduce their own carbon footprint” [4]. With Bank of America providing liquidity, this partnership makes it possible for the CCX to grow larger much easier. Also Bank of America is setting an example among all financial institutions by agreeing to purchase 500,000 metric tons of CO2 over a three year period. If one firm is doing something that is adored by the public eye, chances are that there will be other firms soon to follow to get the same admiration. This would create an even higher demand for the offset contracts, which causes the price per contract to increase, which in turn makes it more attractive for firms to invest in technologies, causing a surplus of emissions contracts which they will be able to sell them for additional revenue. In theory, this will cause an even greater benefit to the environment, because there are large financial institutions purchasing large sums of offsets, just to let them expire, and more firms striving to cut back emissions to generate revenue from selling their offsets. Original Research by Marco H. OptionMaestro.com However, due to the recent global economic crisis it has caused the prices of carbon units traded on the Chicago Climate Exchange to decline in value from almost $7.50 over the summer (2008) to nearly $2 per contract in November (2008). This is mainly due to investors seeing an economic downturn, which would result in fewer emissions because production will decline. However a recent economic study suggest that the carbon trading market has “legs”, or that it will not decline any further, because investors are starting to see value in investing in the carbon emissions contracts. “On the financing side of the emerging carbon market in the United States, a number of financial institutions and private equity players have begun to invest. Some investment banks have set up carbon-credit trading shops on their commodity desks in anticipation of the rising value of these speculative investments” [5]. This implies that when the price has declined so rapidly investors start to see value in future contracts for carbon emissions and will speculate to make a profit on the trading of these instruments. Some big investment banks have added carbon contracts to their portfolios in the hopes that they will be able to sell them for a higher price in the future. One reason they could be speculating is likely because they are estimating a set date when the economic downturn will be over, and they will be able to sell their carbon traded instruments for more than they bought them for at that set date in the future. Many private investors are also speculating with these instruments as a way of diversifying, by getting alternate investments outside stocks and bonds, so they will have a chance to make capital gains from these when the economy starts to grow in the future. Due to the recent economic turmoil, it may be worth it for companies such as CNX to wait until the economy starts to expand before they sell their banked emissions, this would allow them to get an even greater premium. As one can see from the chart below the CFI contracts have traded above $7 per ton or $700 per contract in May of 2008, before plummeting to recent levels of the $100-$200 per contract range. (Chart from Chicago Climate Exchange website, Market-Chart) Original Research by Marco H. OptionMaestro.com The reason these CFI contracts have decreased in value so drastically is because the uncertainty of the future of the United States’ economy, and the chances of a pro-longed recession. During recessions manufacturing is reduced, which causes less emissions, which causes less demand for CFI offset contracts, thus the price has been reduced. Based on historical data recessions typically last twenty months, this would assume manufacturing to increase within a year or two (or a much greater premium for the 2010 offset contracts versus the 2008 and 2009 contracts), but these contracts suggest a pro-longed recession due to a measly five cent spread between the2009 and 2010 contracts. If CNX were to hold and “bank” their current and near future emissions, and the United States’ economy starts to grow rather than shrink, the demand for the CFI contracts will most likely increase back to $700 or more, meaning that CNX could get nearly $58,800,000 for these same 8.4 million emissions offset contracts. This could act as a huge benefit to the company in the future. However this is a very tricky game, and CNX may be forced to sell these contracts for less assuming they would not be able to use them for emissions credits due to decreased production, and that they would not let them expire getting absolutely no revenue from them. All of this trading has caused these instruments to become very volatile as noted in a recent article: “Prices in the emerging carbon market have been highly volatile, due to influences as divergent as politics and weather. EU emission allowances and Kyoto trading instruments are currently trading around 20 units per metric ton of carbon dioxide. Prices for units traded on the Chicago Climate Exchange were as high as $7.50 per ton of carbon dioxide (approximately 5.57 units) over the summer, but have collapsed to around $2 per ton currently” [5]. This implies that these instruments are extremely volatile ranging from $7.50 to $2 in a span less than 6 months. This article also shows that some of these contracts called “voluntary carbon credits”, or carbon offsets bought not necessarily by investors but those who strictly want to reduce their carbon footprint, are trading at higher premiums. Some of the recent individuals and companies who are reducing their carbon footprints vary from rock bands to fortune five-hundred companies as noted from a recent article: “Asked five years ago what we did for a living, we got blank stares when we responded "carbon trading" and "carbon investing." Now, with everyone from PepsiCo to Google to Pearl Jam striving to offset their carbon footprints, placing a value on carbon reduction has become commonplace” [5]. Interestingly enough these specific non-investor contracts have not declined, but increased year over year, as more celebrities find it necessary to fight global warming as found in a recent article: “A recent U.S. study noted that voluntary carbon credits are trading at approximately $6.30 per ton, a price increase of 26% over 2007 prices and 60% over 2006 prices” [5]. Whether it has been the influence of these celebrities and or companies, or solely the common interest of man to fight global warming, something has sparked the interest of society. One can see this by evaluating the growth of the Chicago Climate Exchange since it was created. “The global market for "carbon trading" grew 36 percent between January and September, to $84 billion from $67 billion, according to New Energy Finance, a London-based company that tracks activity in energy markets. By year's end, the market is expected to surpass $100 billion” [6]. This is a huge feat for the Chicago Climate Exchange and proves it is serving the purpose for which it was created. With more companies and role models worldwide stepping up to fight global warming, by purchasing these contracts, it could have quite an impact on the world. Original Research by Marco H. OptionMaestro.com The Chicago Climate Exchange has also influenced the emerging markets to create similar exchanges. As recently noted in a research study conducted by Merrill Lynch “Another piece of empirical evidence that Asian countries are serious about addressing CO2 emissions is the fact that several countries are setting up carbon related exchanges. So far, according to industry specialist IDEAcarbon, altogether 8 exchanges are being set up: two in Australian and in India each, and one in Beijing, one in Hong Kong, one in Singapore and one in Tokyo. These carbon-related exchanges will undertake such activities as Carbon Emission Reductions (CER) futures, Voluntary or Verified Emission Reductions (VER) and other Carbon products amongst others” [7]. This proves that Asian countries are jumping on the bandwagon to fight global warming. As shown in the chart below one can see that China and India are leading Asia by generating the most carbon credits through Clean Developmental Mechanism (CDM) projects. Through these CDM projects, companies from these countries are generating carbon credits which they will be able to sell on an Asian exchange, similar to the Chicago Climate Exchange. China seems to be showing increased interest in getting these CDM projects underway by the growth exerted in such a short period as stated from research by Merrill Lynch “According to World Bank figures, the market of greenhouse gas tradition doubled last year to $70bn. China, the world’s largest emitter, accounts for 73% of all CDM projects in 2007. As of August 2008 China had close to 1,500 CDM projects in the pipeline out of over 3,000 globally. China has accomplished a very high issuance success rate and has over 60mn MT (metric tons) of CER followed by India of 45mn MT” [7]. China and India through CDM projects have issued over 100 million metric tons of carbon credits, a phenomenal amount. A list of the countries generating the most carbon credits (in millions of metric tons) can be seen from the bar chart below. Original Research by Marco H. OptionMaestro.com From the chart above one can see that Almost 200 million metric tons of carbon credits have been generated from just these 10 countries. If these countries keep investing in greener technologies and continue to reduce emissions by at least this much, it is obvious the world will be a much cleaner place. There are many technologies which help reduce carbon emissions. The pie chart below shows a complete breakdown of which CDM projects the Chinese are implementing. Through these projects, China, the largest emitter of carbon worldwide, is cutting back at a rapid rate. It is necessary to get complete global involvement to make a change in the global environment. Though these projects may reduce only a small portion of overall emissions, it is a step in the right direction, and is better than nothing. If the emerging markets continue to reduce emissions at this rate, it will be very healthy for the global environment. The efforts of the Original Research by Marco H. OptionMaestro.com Chicago Climate Exchange have been somewhat responsible for the global push for change toward a greener environment. Without the idea of the carbon traded exchange, there may not have been any really good incentive for companies to invest in greener technologies today. Though it is too early to evaluate any major effects the Chicago Climate Exchange has had on global warming it is certainly a step in the right direction. With the efforts of many individuals and companies worldwide, whether it is for investment purposes or simply to offset their own carbon footprint, it seems this system could dramatically reduce future emissions worldwide. If the Chicago Climate Exchange continues to grow at its current pace, and influence emerging countries, the future of the world will most likely benefit even greater. One must think with increased interest and exposure in the market for trading carbon offsets it will cause more contracts to expire unused, due to individuals and companies trying to offset their carbon footprint. A key factor to maintain rapid growth would be to make carbon trading more understandable to the common public, this could be done by creating an easier to use trading platform. Perhaps another way interest could be gained from the public would be to allow the buyers to be eligible for a tax credit, assuming they never exercised the contract for emissions credit. If individuals and corporations could write the expense of these unused offsets off of their taxes, this could have a large effect on the amount of contracts that expire unused. If someone were speculating and purchased a carbon offset contract near the annual high back in the summer of 2008, that individual may choose to “do good” and let the contract expire for an overall loss of $750, versus a loss of around $600 and allowing for that contract to be used for emissions credit in 2008. Overall, as the Chicago Climate Exchange and the interest for carbon trading continue to grow the world should become a less polluted place. Sources [1]Chcicago Climate Exchange. 2007. Chicago Climate Exchange. 26 November 2008 [LINK] [2]"Governor Kaine Recognizes Efforts of CNX Gas to Reduce Greenhouse Gas Emissions in Virginia: CNX Gas Registers 8.4 Million Metric Tons of Emission Offsets for Trading on the Chicago Climate Exchange(R).” PR Newswire 11 June 2008: 1 ABI/INFORM Dateline. ProQuest. 26 November 2008 [LINK] [3]Steven T Taylor. "Sullivan & Cromwell Makes Right Move by Joining Chicago Climate Exchange." Of Counsel 1 Jun 2005: 3-4. ABI/INFORM Trade & Industry. ProQuest. 26 November 2008 [LINK] [4]"Bank of America Joins Chicago Climate Exchange, Makes Strategic Investment in Climate Exchange PLC; Expands its Greenhouse Gas Reduction Goal.” PR Newswire 25 July 2007: 1 ABI/INFORM Dateline. ProQuest. 2 December 2008 [LINK] [5]Ann Grodnik, Radha Kuppalli. "Guest Words: Investors Willing to Bet U.S. Carbon Market Has Legs.” Bond Buyer [New York, N.Y 17 Nov. 2008: 1 ABI/INFORM .] Trade & Industry. ProQuest. 25 November 2008 [LINK] Original Research by Marco H. OptionMaestro.com [6]Elwin Green. "'Carbon trading' now big business.” McClatchy - Tribune Business News 30 October 2008 1-2 ABI/INFORM Dateline. ProQuest. 26 November 2008 [LINK] [7]Lu Yeung, Spence, Parekh, Chow. “Asia Carbon Snapshot.” 29 September 2008: 116 Merrill Lynch. 1 Dec. 2008 [LINK] Original Research by Marco H. OptionMaestro.com
Sphere: Related Content
1 comments:
we are doing Chicago based environmentally responsible business and i found that you are also write a very good blog for my themed business.
thanks
Post a Comment