the role of exchanges and standardization in reducing emissions at scale - michael j. walsh, ph.d....

8/9/2019 The Role of Exchanges and Standardization in Reducing Emissions at Scale - Michael J. Walsh, Ph.D. Executive Vice President Chicago Climate Exchange, Inc.

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Chicago Climate Exchange, Inc. 2010 Chicago Climate Exchange 1

The Role of Exchanges and Standardization

in Reducing Emissions at Scale

Michael J. Walsh, Ph.D.Executive Vice President

Chicago Climate Exchange, Inc.


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Chicago Climate Exchange, Inc. 2010 Chicago Climate Exchange

Pacala-Socolow GHG Stabilization Strategy wedges:need for transformational change

Fill thExample: Stopping deforestation entirely would reduce carbon

emissions by more than 6 billion tons CO2/yr.Source: Pacala and Socolow, 2004


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McKinsey & Co. GHG mitigation supply curve

Source: McKinsey Climate Change Special Initiative, 2007.


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Proposed U.S. GHG emission caps and compliancegap: an illustration

Cumulativegap vs.

baseline:100 billion

mtCo2

baseline

targets (e.g. -2%/yr)


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Tianjin Climate Exchange

Climate Exchange Plc. (CLE.L) Global

Family of Exchanges

Climate Exchange Plc. companies own and operate the

worlds leading exchanges specializing in environmental

asset classes, including emissions, weather and

insurance-related products.


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Role of Exchanges in Efficient Markets

Develop product standards that facilitate capital flows

Transfer of price risk

Eliminate counterparty risk through clearing guarantees

Price discovery and transparency

Full audit trail for compliance, regulation


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Transformation: worldwide expansion ofnuclear power plants in two decades

14

360

1000

0

200

400

600

800

1000

1200

1970 1990 Pacala-Socolowwedge

NUmberof1,000mwequivplantsinoperation



Transformation of Home Energy Usage

Primary heating fuel used in Illinois Homes:Full transformation away from coal in a few decades



Major American success: SO2 pollution cut at very low cost

Based on EPAs latest air quality trends data the national composite average of SO2 annual meanambient concentrations decreased 48 percent between 1990 and 2005.

Annual Mean Ambient SO2 Concentration

1989-1991 2004-2006



How to Get the U.S. Carbon Market Started?



What is Chicago Climate Exchange?

Chicago Climate Exchange (CCX) is the worlds first

and North Americas only voluntary, legally binding

greenhouse gas reduction, verification, registry and

trading program for emission sources and offset

projects in North America, and globally.



CCX Market Architecture (2003-2010)

Phase I: Members made legally binding commitments to reduce or trade 1% per yearfrom 2003-2006, for a total of 4% below baseline.

Phase II: Members make a legally binding commitment to reduce to 6% below baselineby 2010.

Baseline = Avg. emissions from 1998-2001, emissions in 2000 (Phase II)

CCX is synergistic with and complementary to all emerging policy, precludes none whether

state, regional, national, voluntary or mandatory.



Proposed Emission Reduction Targets: Waxman-Markey,Kerry-Boxer, CCX, RGGI, trend

CCX

(ongoing +

extrapolated)

trend

RGGI

Waxman Markey



CCX Comprehensive Market Structure

Web-accessible secureElectronic Trading

Platform

Members Electronic Market RegistryComprehensive Rules System

Emitters: Standard baseline,multi-year allowance stream

equal to reduction targets

Offset Providers (project credits)

Liquidity Providers Associate Members



CCX Members: Corporate and Utility Leaders
http://en.wikipedia.org/wiki/Image:StoraEnso_logotype.pnghttp://www.cargill.com/http://www.kodak.com/http://www.monsanto.com/http://www.knoll.com/knoll_home.jsphttp://www.steelcase.com/na/office_furniture_steelcase_index.aspxhttp://www.intel.com/index.htm?iid=homepage+hdr_logohttp://www.motorola.com/http://www.st.com/stonline/index.htmhttp://en.wikipedia.org/wiki/Image:Amtrak_Logo.svghttp://www.wm.com/http://en.wikipedia.org/wiki/Image:ChicagoSeal2.pnghttp://en.wikipedia.org/wiki/Image:InternationalPaperLogo.pnghttp://en.wikipedia.org/wiki/Image:RR_logo.pnghttp://en.wikipedia.org/wiki/Image:IBM_logo.svghttp://en.wikipedia.org/wiki/Image:Dupont_logo.jpghttp://en.wikipedia.org/wiki/Image:Ford_Motor_Company_Logo.svg



CCX Membership

Electric PowerAGL Hydro Partnership

Allegheny Energy Inc.

Alliant Energy

American Electric Power

American Municipal Power-Ohio

Associated Electric Cooperative

Avista Corporation

Central Vermont Public ServiceDTE Energy Inc

Duquesne Light Company

Dynegy

Green Mountain Power

Hoosier Energy Rural Electric

Manitoba Hydro

MirantNRG Power Marketing Inc.

PSEG Energy and Trade LLC

Progress Energy

Puget Sound Energy, Inc.

Reliant Energy Services Inc.

TECO Energy, Inc.

Aerospace & Equipment

Rolls-Royce

United Technologies

Agricultural Products

Agrium U.S. Inc.

Cargill, Incorporated

Monsanto Company

Automotive

Ford Motor Company

Beverage Manufacturing

New Belgium Brewing

Chemicals

DuPont

Rhodia Energy Brasil Ltda

Coal Mining

Jim Walter Resources, Inc.

PinnOak Resources LLC

Commercial Interiors

Knoll, Inc.

Steelcase Inc.

Counties & States

King County, Washington

Miami-Dade County, Florida

Sacramento County, CaliforniaState of Illinois

State of New Mexico

Electronics

Motorola, Inc.

Sony Electronics Inc.

Square D/Schneider Electric

Environmental Services

Atlantic County Utilities

Lancaster County Solid WMA

Veolia Environmental Services

Wasatch Integrated WMA

Waste Management, Inc.



CCX Membership

RecreationAspen Skiing Company

Retail

Safeway, Inc.

TechnologyFreescale Semiconductor

IBM

Intel CorporationSTMicroelectronics

TransportationAmtrak

San Joaquin Regional Rail

University

UC San DiegoHadlow College

Michigan State University

University of Idaho

University of Iowa

University of Minnesota

University of Oklahoma

Manufacturing

Bayer Corporation

Bosch

Eastman Kodak Company

Interface, Inc.

Smurfit-Stone

Municipalities

City of AspenCity of Berkeley

City of Boulder

City of Chicago

City of Fargo

City of Oakland

City of Melbourne, Australia

City of Portland

Petrochemicals

Petroflex Industria e Comercio

Pharmaceuticals

Baxter International, Inc.

Ethanol Production

Corn Plus LLP

Financial Institutions

Bank of America

Food ProcessingMeister Cheese Co. LLC

Premium Standard Farms

Smithfield Foods, Inc.

Forest Products

Abitibi-Consolidated

Aracruz Celulose S.A.

Cenibra Nipo Brasiliera S.A.

International Paper

Klabin S.A.

Masisa S.A.

MeadWestvaco Corp.

Neenah Paper Incorporated

NewPage

Plum Creek

Suzano Papel E Celulose SA

Tembec Industries Inc.



Practical and strategic drivers: Competitive advantages through leadership

reduce emissions in a rules-based, independently audited market system

obtain practical expertise through hands-on participation

build institutions: first-mover; global linkages

get ahead of disparate regulations, prepare for policy

reduce long-term mitigation costs

improve focus on energy efficiency, identify free savings

build carbon price into minds of operators and planners

trading profits, possible early action crediting

positioning in face of major growth in social investing

meet fiduciary commitments to shareholders and other stakeholders

Why Do Businesses, Governments and Institutions TakeDirect Action via CCX Membership?



Size of Live, Emerging, Possible GHG Markets

680

496

339

237 232206

174 171151 170

130

94 8671 60 56 45

0

100

200

300

400

500

600

700

CCX

GermanyCanada Poland

Italy

UnitedKingdom Australia

SpainFrance

USNEStates

(RGGI) California

CzechRepublic The

Netherlands

GreeceBelgium

NewSouth

Wales Finland

HundredMillionMetrictonsCO2

Live Market

M arket in development

Und er discussion

CCX includes more industrial emissions under its legally

binding cap than any country in the world



CCX Offset Projects

As science directs, foster emission reductions all sectors: low cost, win-win

Landfill, agricultural and coalmine methane capture/destruction

Agricultural soils best management practices

Reforestation

Fuel switching, renewables, ODS

All projects must be independently verifiedby an approved entity

CCX Offset Rules can be found at:http://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCredits

Minnesota dairy farmerreceives first check from sale

of CCX methane-destruction Offsets
http://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCreditshttp://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCreditshttp://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCreditshttp://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCreditshttp://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCreditshttp://www.chicagoclimateexchange.com/docs/offsets/CCX_Rulebook_Chapter09_OffsetsAndEarlyActionCredits



CCX Participant Members (sample)

Offset Aggregators

C-Green Aggregator, LLC

Delta Institute

Environmental Carbon Credit Pool, LLC

Environmental Credit Corp.

First Capital Risk Management, LLC

Agragate/Iowa Farm Bureau

National Carbon Offset CoalitionNorth Dakotas Farmers Union

Offset Providers

Beijing Shenwu Thermal Energy Trading

Hubei Sanhuan

Gallo Cattle

Granger Holdings

Intrepid Technologies, Inc.

Lugar Stock Farm

Precious Woods HoldingsSexton Energy

Sustainable Forestry Management, Ltd.

AGS Specialists, LLC

Amerex Energy

Breakwater Trading, LLC

Calyon Financial, Inc.Cargill Power Markets, LLC

Eagle Market Makers, LLC

Evolution Markets, LLC

EXO Investments

FCT Europe, Ltd.

First New York Securities, LLC.

Friedberg Mercantile Group, Ltd.

Liquidity Providers

Galtere International Master Fund, LP

GFI Securities, LLC

Goldenberg, Hehmeyer & Co.

Grand Slam Trading, Inc.Grey K Environmental Fund, LP

Haley Capital Management

ICAP Energy, LLC

Kottke Associates, LLC

The League Corp.

Marquette Partners, LP

Natsource, LLC

Peregrine Financial Group

Rand Financial Services, Inc.

Serrino Trading Co.

Shatkin Arbor, Inc.S.R. Energy, LLC

SwissRe Financial Products Corp.

TEP Trading 2 Ltd.

TradeLink, LLC

Tradition Financial Services, Ltd.

TransMarket Group, LLC



Views of Important Thought Leaders onU.S. Farm-based Climate Solutions

Campaign webpage of President-elect Obama:

"I will also develop domestic incentives that reward forest owners,farmers and ranchers when they plant trees, restore grasslands or

undertake farming practices that capture carbon dioxide from the

atmosphere, creating new opportunities for rural America to help

solve the climate crisis."

Three, the addition of so-called carbon sinks, including those

from soils, principally from farm lands and grazing lands, withappropriate methodologies and accounting. Farmers such asSenator Lugar and ranchers in the U.S. and around the world needto know that they can be a part of the solution.

Al Gore, suggesting enhancements to an international climate treaty in histestimony to the U.S. Senate Foreign Relations Committee, January 29, 2009


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Composition of GHG Mitigation By CCX Members Years 2003through 2008* (metric tons CO2)

*As of 1-26-10. A portion of new member emission reductions

are currently undergoing verification.

83%

15%

2%


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Dozens of available climate solutions: How CCX MembersHave reduced GHG emissions

Energy efficiency: improved lighting and motors, power plant retrofits, LEEDbuildings

Renewable energy: recovered methane, wind power, biomass fuels

Electricity generation: expanded use of natural gas, hydro, nuclear

Carbon sequestration: reforestation, forest management, agricultural bestmanagement practices

High-potency GHGs: thermal destruction of GHGs that also deplete the ozonelayer

Manufacturing: reduce use of fluorocarbon gases in semiconductorplants, abatement of nitrous oxide at chemical plants

Management strategy: match building heating/cooling to occupancy, close doors,

automated controls

U S Carbon Allowance Prices: Voluntary (CCX Cal) regional


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U.S. Carbon Allowance Prices: Voluntary (CCX, Cal), regionalmandatory (RGGI), federal mandatory (CFI-US V2013, CFI-USV2014)

* RGGI price is short tons CO2

CCFE CFI-US V2014

(federal when-issued)

CCX

RGGI

CCFE CFI-US V2013

Cal

$6.50

$6.84


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Engaging win-win solutions globally: India micro-digesters


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What carbon constraints might look like in 2015-2020?

1. Regulatory-driven carbon constraints

USEPA adapts existing Clean Air Act, develop micro-sector-specific approaches,

aims to control energy by requiring technology redesign and workplace standards

2. Limited-scope domestic cap-and-trade system

domestic cap and trade for power sector only, domestic offsets only, regional US

markets superseded, international cooperation limited to funding forest protection

3. Expansive carbon market

Multi- sector domestic + internationally linked markets (allowances + offsets + REDD),

migration towards a world carbon price (EU + US/CA + Aus NZ + Japan + developing

country offsets)

In all cases, working assumptions are: strong incentives for nuclear and CCS, national

RPS/RECs in place


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Division of Labor: Carbon Market Responsibilities of RelevantGovernment Authorities

National

Diplomatic Corps,

Multilateral

bodies

National

Environment

Ministries

Finance Ministries,

Exchange and

Trading Regulators

Finance Ministries,

Tax, Currency,

Criminal Authorities

Negotiate multi-

lateral environmental

agreement that

enables national and

multinational efforts

Establish bi-lateral

and plurilateralmarket linkages

Implement national

policies, enforce

environmental

objectives

Operate registries,

facilitate mechanics of

international linkages

Authorize and regulate

exchange and off-

exchange trading

Coordinate

internationally

Ensure conformance

with related tax, contract,

currency and financing

laws; oversee and

prosecute possible

criminal activities


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Chicago Climate Futures Exchange(CCFE):Market Operations

Commodity Futures Trading Commission Designated Contract Market

Clearing services provided by Clearing Corporation

Market Surveillance provided by the National Futures Association (NFA)

CCFE Products offer:

Standardized contracts

Price transparency / price discovery

Anonymity

Elimination of counterparty credit risk

Leverage benefits allow low-cost hedging

Market hours: 7:00 am to 3:00 pm CST


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CCFE Futures Market Role

Facilitate Hedging:

Risk transfer from those seeking to shed risk to those willing to absorb it

Hedgers that sellfutures contracts (the shorts) lock-in sales price for future

delivery (to address risk of falling prices)

Hedgers that buyfutures contracts (the longs) lock-in purchase prices for

future delivery (to address risk of rising prices)

Price discovery in an orderly, transparent and competitive marketplace

Enjoy benefits of liquidity and central clearinghouse: eliminate counterparty risk


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CCFE Clearing Members
http://bnpparibas.com/http://www.db.com/index_e.htm?ghpmeta=ENG_homehttp://www.mizuho-sc.com/en/index.html


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Multiple Regulatory Layers Governing U.S. Carbon, SO2 and NOx

allowance trading on Chicago Climate Futures Exchange (CCFE)

Environmental enforcement,

registries, auctions- emissions monitoring and reporting- compliance and enforcement- registry control and operation, auction

administration

Carbon

dioxide:

RGGI State Environmental Authorities

SO2, NOx: U.S. Environmental Protection Agency

Consumer, legal and economicregulation

State Offices of Consumer Counsel(as applicable)State Public Utility Commissions(as applicable)

State Attorneys GeneralU.S. Department of Justice, federal & state contract law

Market and Exchange(when trade involves use of CCFE, a CFTC

Designated Contract Market (DCM))

Commodity Futures Trading Commission(position limits, reporting rules, anti-fraud, market monitoring,approval of exchanges and contracts, disciplinary)

National Futures Association(participant screening, market monitoring, disciplinary)

CCFE Compliance Department

(CFTC reporting, market monitoring, exchange rulesenforcement, CCFE Rules, Clearinghouse Rules)


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$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

$90.00

25-Feb-10

27-Feb-10

1-Mar-10

3-Mar-10

5-Mar-10

7-Mar-10

9-Mar-10

11-Mar-10

13-Mar-10

15-Mar-10

17-Mar-10

19-Mar-10

21-Mar-10

23-Mar-10

25-Mar-10

27-Mar-10

29-Mar-10

31-Mar-10

2-Apr-10

4-Apr-10

U.S. SO2 Emission Allowance Prices on CCFE

(contracts for allowance vintages 2009, 2011, 2012, 2013)

V2013

V2011

V2009

V2012

2005 94 million tonnes of CO2 traded notionalvalue 2 1 billion


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value 2.1 billion

2006: 452 million tonnes of CO2 traded notionalvalue 9 billion

2007: 1 billion tonnes of CO2 traded notional value17.5 billion

2008: 2.8 billion tonnes of CO2 traded notionalvalue 55.9 billion

2009: 5.1 billion tonnes of CO2 traded notionalvalue 68 billion

Price and volume: ECX Contracts


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Price Drivers in EU ETS: Crude Oil?


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Price Drivers in EU ETS: German

Power?

C


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Preparing and Managing Climate Policy Exposure:Elements of a Strategy

Make climate risk management strategy a Board-level issue

Board strategy implementation team: CFO, General Counsel, environmental

and fuel specialists, energy and emissions traders

Evaluate your optimal historic emission baseline among allowed time periods.

Include carbon shadow price in strategic and capital expenditure decisions

Develop and test emission trading capabilities: market access, internal

procedures

Consider gaining practical experience: e.g. Carbon Disclosure Project, ChicagoClimate Exchange and EPA Climate Leaders program.

Understand the benefits and risks associated with buying credits from

recognized early offset projects and emission allowance programs

the role of exchanges and standardization in reducing emissions at scale - michael j. walsh, ph.d....

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