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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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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
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Transformation of Home Energy Usage
Primary heating fuel used in Illinois Homes:Full transformation away from coal in a few decades
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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
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How to Get the U.S. Carbon Market Started?
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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.
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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.
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Proposed Emission Reduction Targets: Waxman-Markey,Kerry-Boxer, CCX, RGGI, trend
CCX
(ongoing +
extrapolated)
trend
RGGI
Waxman Markey
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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
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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 -
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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.
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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.
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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?
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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
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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 -
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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
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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