Before writing this article I had only the vaguest notion of what exactly carbon trading was and how it all worked. Now I have more than a vague notion, but certainly no expertise. I welcome comments from anyone in the community (post comments below) who may have special insight into this new trading vehicle.
My main source of information was the website for the Chicago Climate Exchange (CCX). The overview page gets right to the point: “Chicago Climate Exchange (CCX), launched in 2003, is the world’s first and North America’s only active voluntary, legally binding integrated trading system to reduce emissions of all six major greenhouse gases (GHGs), with offset projects worldwide.” The founder and CEO of CCX, economist Dr. Richard L. Sandor, is known as the “father of carbon trading.”
Before going any further, the first thing to get straight is what the nomenclature means. “Carbon trading” is a bit of a misnomer. This implies, as I once wondered over, that one could trade in the physical commodity of carbon emissions, somehow sequestered and rendered deliverable, like a bushel of wheat or a ton of zinc. Not the case. Carbon trading refers more specifically to something called carbon credit trading.
Carbon credit trading goes something like this. Company A, operating in Country 1, emits greenhouse gasses (GHG). The GHG it produces exceeds Country 1’s maximum allowable emissions for Company A’s industry, and so Company A is in need of another way to reduce its emissions. Company B, operating in Country 2, may also emit GHG but not in any significant amounts. Company B has instated what is called an “offset project,” which has enabled it to produce GHG that is less than Country 2’s emission target. That gives Company B a carbon credit, which it can then sell to Company A, who buys it in an effort to – on paper anyway – reduce its own emissions.
The CCX-identified tradable commodity, the thing that actually trades on the exchange, is called a Carbon Financial Instrument (CFI) contract. One CFI contract represents 100 metric tons of CO2 equivalents and is made up of what are called Exchange Allowances and Exchange Offsets. An Exchange Allowance is issued to the emitting member (Company A in our example); Exchange Offsets are generated by offset projects (undertaken by Company B).
What constitutes an offset project? Many processes and technologies qualify, but to do so they need to actively “sequester,” “destroy” or “reduce” GHG emissions. Here are some examples from the CCX website.
Agricultural methane: “Eligible systems include covered anaerobic digesters, complete-mix, plug flow digesters, as well as covered lagoons.”
Coal mine methane: “CCX coal mine methane offset projects are projects which collect and/or destroy coal mine methane which would have vented to atmosphere.”
Landfill methane: “… capture and combustion projects.”
Forestry projects fall into a number of categories and may include different practices. Direct from the CCX website:
- Maintaining or increasing forest area: reducing deforestation and degradation
- Maintaining or increasing forest area: afforestation / reforestation
- Forest management to increase stand- and landscape-level carbon density
- Increasing off-site carbon stocks in wood products and enhancing product and fuel substitution
I decided to see what’s been going on with the formal trading of the CFI contract. Thankfully the CCX website has a handy charting feature that allows one to view the trading history of different CFI contract “vintages,” beginning with inception of the instrument in 2003. Volume is reported in metric tons of CO2, and so in order to get the number of contracts traded (where one contract equals 100 metric tons), you have to do some simple division.
The interactive chart is available here.
The above chart shows the trading pattern of the 2003 contract since December 12, 2003. Volume has increased substantially over time, presumably because a) the product is getting more well known and membership on the exchange is increasing, and b) government mandated emissions targets continue to appear and to apply to more and more companies internationally. It currently costs six US dollars to buy one metric ton of CO2 gas.
There is obviously a lot to the process and I have only just begun to see how it works. I will continue to report more on the subject for Stockhouse in the future.
Please post comments in the comment box below.