The Chicago Climate Exchange closure, a vote for robust GHG MRV?
In the wake of last week’s “wave” election in the United States significant attention has turned to sifting through the new political realities for climate policymaking in the US and beyond. As the climate world grapples with this political shift we would like to offer a slightly different take on the state of GHG management by pausing to examine a separate announcement that came out of the US just in advance of the elections, the meaning behind which is particularly instructive in this time of change and upheaval.
The stepwise shut down of the Chicago Climate Exchange (CCX) follows the purchase of its parent company Climate Exchange Plc (CLE) by the Intercontinental Exchange Inc (ICE). In addition to the CCX, CLE runs a network of financial exchanges, including an exchange in Europe, on which carbon commodities are traded. The CCX itself consists of two components: (1) a series of voluntary, yet legally binding, corporate emissions mitigation commitments embedded in an emissions trading program; and (2) a GHG emission offset program. (More on the specifics of the design and operation of CCX can be found here.)
Following ICE’s acquisition of CLE, market analysts identified two key factors that led to the deal: (1) that ICE wanted to expand into carbon trading in Europe’s regulated market vis-à-vis CLE’s profitable flagship London-based European Climate Exchange, and (2) with sentiment on the future prospects of carbon trading depressed on the heels of failure in Copenhagen and the US Senate, CLE was available at a bargain price.
The narrative of one company acquiring another followed by operational retooling is hardly unusual business-page fodder and not a news item we’d generally choose to highlight in this blog; however, wrapped up in this example of carbon market consolidation is the decision to effectively shut down the CCX’s pioneering corporate cap-and-trade scheme.
The CCX’s unique voluntary-yet-binding structure and atypical for-profit administration have served to catalyze significant debate on the program’s merits. Yet the timing of ICE’s decision to unwind the CCX has led commentators to tie the closure to a narrative related to sagging US climate policy sentiment. While there is truth to this analysis, there’s more insight to be gleaned from ICE’s decision-making. Indeed, counterintuitive as it may sound, the shuttering of CCX’s voluntary cap-and-trade experiment may stand as one of the more constructive milestones in the history of corporate climate initiatives. The real story here? The triumph of the next generation of climate programs, characterized by a fundamental shift toward more robust methods and systems to measure, report, and verify GHG emissions.
Breaking up CLE into its component parts —a network of commodity bourses, the CCX offset scheme, and the CCX corporate GHG program— provides a useful framework against which to both evaluate the significance of the CCX closure and handicap the present state of play in climate policy.
CLE operates a global network of carbon exchanges. An aggressive first-mover, the company was not shy about expansion, moving into new markets well in advance of the formulation of substantial trading regimes. The CLE network is best known for its bourses in Chicago and London, on which a range of carbon commodities are traded, though emission allowances and offsets destined for compliance use in the European Union’s Emission Trading Scheme make up the lion’s share of traded volumes. CLE also runs exchanges in more nascent markets in Canada (Montreal), Australia (Syndney), and China (Tianjin).
The development and administration of the CCX —the company’s original venture— extended well beyond the marketing and maintenance of financial infrastructure. Whereas CLE’s subsequent exchange network was developed to serve as regional clearinghouses for carbon commodities —credits developed through a range of third-party climate programs, administered by NGOs, intergovernmental bodies, and governments at all levels— the CCX took a more active role in policymaking, creating its own market from the ground up. Writing their own rules, they initiated an innovative and untested experiment: a privately administered voluntary cap-and-trade program.
Central to the effectiveness of environmental policy is trust. Insufficient buy-in and support from the public and other stakeholders can erode policy to the point of ineffectiveness. With respect to the CCX, operating as a venture of a private for-profit entity, the program faced a credibility gap from its inception. This shortfall, critics have argued, was never appropriately addressed, leaving open nagging concerns related to trust in the program. At scrutiny here was the program’s approach to transparency and information sharing. While government and NGO administered programs often strive for openness in their operations, the CCX operated an opaque regime.
The CCX’s closed process exacerbated discord amongst observing experts and advocates regarding a range of program design issues, including the stringency of the CCX’s organizational targets, the rigor of the MRV requirements for its offsets, and its treatment of key concepts such as additionality, leakage, and permanence. The CCX consequently became a lightening rod for criticism within practitioner communities and failed to achieve buy-in from key stakeholders, including several influential NGOs. (Some environmental NGOs even went as far as to actively discourage potential participants from joining the scheme. See for example the National Resource Defense Council’s memo “States and Cities Should Not Join the Chicago Climate Exchange” [PDF].)
Snapshots of the nature of CCX’s challenges during its early years of operation have been anecdotally captured in a range of media reports. (One of the more comprehensive pieces published in the New York Times in 2006 is available here.) With the benefit of hindsight, it now seems obvious that it was only a matter of time until the CCX’s programs were replaced. But an examination of shortcomings only tells half the story. While the CCX’s credibility gap loomed large as a potential challenge to the notion that CCX credits would be recognized in a future compliance regime, it was not until more sophisticated, open programs that seriously addressed the CCX’s technical shortfalls emerged that the scheme’s fortunes began to wane.
What does the case study of CLE and its CCX tell us about the state of play in climate policy? First, while sentiment on climate policy may seem bearish here in 2010, major mainstream actors are still making long-term bets. ICE may have acquired CLE for a relative low price, but their outlay still represents a significant expenditure.
In contrast to the relatively straightforward wager on future carbon trading volumes embodied by ICE’s interest in CLE’s bourse network, the CCX’s proprietary cap-and-trade program demands a more nuanced business analysis. In addition to the frequently parroted line that the CCX closure is a referendum on US climate policy sentiment, ICE’s decision to keep only the offset program running at bare bones administration can be viewed as a direct reflection of the CCX’s failure to satisfy the confidence of its stakeholders. Conversely, this development also reflects the success of peer programs in keeping up with these demands.
The Institute welcomes the increasing orientation of carbon markets towards technical sophistication. This quiet period for climate policy, we believe, represents an opportunity for the community to “double down” on robust MRV systems and capacity. Perhaps consolidation will be the unlikely force clearing the path for such action.