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Trading Greenhouse Gases and Carbon on the Internet, Part 2

Trading Greenhouse Gases and Carbon on the Internet, Part 2

"The level of investment is accelerating, and I do not see any reason why it will moderate. You can debate around oil pricing and how much that is driving it, but there are other factors here at play -- energy security [and] independence, environmental concerns, focus on sustainability, etc.," said Jeff Lipton, managing director of investment banking at Jefferies & Co.

By Andrew K. Burger
01/22/07 4:00 AM PT

With ongoing technological and process improvements in the alternative and renewable energy sectors -- and with concerns about energy sources, supplies and environmental degradation increasingly at the forefront of social and political issues -- energy and commodities have become a focal point for businesses, NGOs (non-governmental organizations), government, the broad public and the media.

Trading in carbon and greenhouse gas (GHG) emissions reduction credits is growing rapidly, as Part 1 of this two-part series notes, primarily as a result of the ongoing development of the Kyoto Protocol's Clean Development Mechanism (CDM) and the European Union's Emissions Trading Scheme (ETS).

Now, U.S. states are hatching plans to develop local and regional carbon and GHG reduction credit systems and markets.

ICE and CCX Lead the Way

Some states -- California prominent among them -- are crafting plans for local and regional carbon and GHG reduction credit systems and markets.

In Washington, Sens. John McCain (R-Ariz.) and Joe Lieberman (D-Conn.) last week reintroduced a bill in the U.S. Senate that mandates stricter CO2 and GHG emissions reduction targets, as well as a plan to establish a cap-and-trade emissions reduction credit system identical to the United Nation's Clean Development Mechanism.

The Intercontinental Exchange (ICE) and the Chicago Climate Exchange (CCX) are at the leading edge of the wave, having developed large-scale, Internet-based trading platforms for the origination and trading of carbon and GHG reduction credits, and a range of energy and commodity derivative contracts.

"In both the futures and OTC markets, we have made energy contracts available around the clock and across the globe in 44 jurisdictions worldwide, with state-of-the-art technology making real-time information and trade execution accessible and affordable," Mark Woodward, ICE Futures' regulation and compliance policy and emissions project manager, told the E-Commerce Times.

Worldwide Trend

The ICE and CCX aren't alone, however. As a member of the Climex Alliance, Barcelona, Spain's SENDECO2 is gearing up to launch its third market in Italy during this year's second quarter.

"SENDECO2, the Mediterranean CO2 exchange, has, since its launch in January '06, grown exponentially, trading nearly 2 million emission allowances in areas like Spain, Portugal and, as of next quarter, in Italy," Javier Tordable Parcerisa, the exchange's director general, told the E-Commerce Times.

Reducing Emissions

Futures and options contracts for CO2 reduction credits are proving to be new sources of trading activity and, hence, revenue for the ICE.

The exchange, in concert with the European Climate Exchange, a subsidiary of the Chicago Climate Exchange, in April 2005 launched the first exchange-traded futures contracts based on emission allowances issued under the EU Emissions Trading Scheme.

Known as "ICE Futures-ECX Carbon Financial Instruments Futures Contracts" (ICE-ECX CFI Futures), the contracts "allow users to lock in prices for emissions allowances delivered at set dates in the future and are a useful alternative to over-the-counter forward contracts, allowing users to secure transparent prices and reduce counter-party risk," ICE Futures' Woodward explained.

"The aim of the EU Emissions Trading Scheme is to meet environmental aims through economic means," said ICE Futures' chairman Sir Bob Reid said, upon signing the Cooperation and Licensing Agreement with the Chicago Climate Exchange.

"In doing so, the Scheme provides new obligations, challenges, incentives and benefits to those companies which fall within it. We are committed to delivering market-leading risk management products to meet the needs of market participants, and our agreement aims to create the futures market of choice for European emissions," Reid added.

"Since their launch, ICE-ECX futures have become the dominant exchange-traded market," noted Woodward, "with more than two-thirds of the exchange-traded market and an increasing percentage of the overall market."

Trading volume increased to more than 450 million tons of emission allowances in 2006 from 94 million tons in 2005, with average daily volume of 1,884 lots. The exchange complemented the futures contracts with the introduction of ICE-ECX CFI futures options contracts on Oct. 13, 2006.

Growing Competition

Given the growth in the market for CO2 reduction credits in Europe, it is not surprising that the ICE has competition.

Comprising a group of five organizations stretching from the UK and across continental Europe, the Climex Alliance is busy building a pan-European electronic market for trading carbon and GHG reduction allowances of its own -- and business is growing fast.

"We exist because of the EU ETS scheme. We provide a secure, transparent and safe environment so that affected EU ETS companies can commercially interact as to satisfy their buying and selling CO2 emissions needs," explained SENDECO2's Parcerisa.

"With only two years of experience, the EU ETS has tripled and reached the trading figure of 817 million allowances traded with a 14.6 billion euros (US$18.8 billion) value. As the end of the first EU ETS period nears, we can only expect to increase this by a factor of three at the least," he added.

Together with Climex Alliance members APX B.V., APX U.K., STX Services and Vertis Environmental Finance, SENDECO2 provides participants transparent access to a growing European market for CO2 allowances that stretches across 11 countries from the UK to Greece and makes use of a common Internet-based trading platform.

"The Climex platform provides very easy and simple -- as well as simultaneous -- access to bid and offer firm, tradeable CO2 prices with default risk-free capabilities since the duct energy exchange APX acts a central counter-party," Parcerisa explained.

Tier-Based Participation

As is true at the ICE, SENDECO2 participants make up a broad and diverse group. Tier 1 participants include the larger European energy and utility companies.

Medium-sized industrial and manufacturing companies such as cement producers and steel manufacturers typify Tier 2 members.

Rounding out the exchange's growing list of counter-parties, smaller ceramic, paper, pulp and glass manufacturers comprise Tier 3.

To participate in SENDECO2 and the Climex Alliance's markets, members pledge money or other acceptable liquid assets before entering the market as buyers, or pledge allowances before entering as sellers.

The level of investment in the renewable energy sector is accelerating, as is trading in CO2 and emissions reduction credits, Jeff Lipton, managing director of investment banking at Jefferies & Co., told the E-Commerce Times.

"I do not see any reason why it will moderate. You can debate around oil pricing and how much that is driving it, but there are other factors here at play -- energy security [and] independence, environmental concerns, focus on sustainability, etc.," he pointed out.

"I think the biggest single factor will be continued public and private support. Clearly, incentives, rebates, RPS (renewable power standards), tax credits, etc., are important and critical [in the] near term to this sector remaining strong. Equally important, though not as prominent in media reports," Lipton concluded, "is the fact that large multinationals are committing real dollars here."

Trading Greenhouse Gases and Carbon on the Internet, Part 1


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