Carbon Primer: The Chicago Climate Exchange


Can the world trade its way out of the climate change mess? That depends on who you ask. But listen to most carbon emission hawks, including former Vice President Al Gore, and you’re likely to hear about the Chicago Climate Exchange (CCX), a sort of stock market for greenhouse gas reducers. Four-year-old CCX and its London-based sister, the European Climate Exchange, are at the forefront of a carbon market that tripled in size to $30 billion in 2006, according to the World Bank.

Here’s how CCX works: companies voluntarily join the exchange, pledging to reduce their greenhouse gas emissions by about one percent annually. So-called ?offset providers? then create projects, such as renewable energy plants, to reduce carbon emissions. The offsetters receive Carbon Financial Instruments (CFI), which represent 100 metric tons of carbon dioxide, from the exchange. Businesses that can’t meet their yearly emission reduction goals purchase these CFIs. To keep the market liquid, CCX encourages financial traders to buy and sell CFIs, too, just as they would securities like bonds and mutual funds.

The end result is a reduction in greenhouse gas emissions, and extra revenue for the businesses that are most successful in cutting down on pollution. Similar systems have already helped phase out lead from motor fuel, and have limited sulfur dioxide emissions, which cause acid rain. The European Union has established a carbon program, and here at home, politicians including Sen. Joe Lieberman (I-Conn.) and California Governor Arnold Schwarzenegger are big advocates.

Cap-and-trade isn’t without its skeptics: Last March, Newsweek ran a story entitled “?The Carbon Folly,”? that claimed current efforts have done little to reduce overall carbon emission, particularly in the EU, where some argue governments were too lax with setting caps. (The article is no longer on Newsweek’s web site, though cut-and-pasted versions can easily be found online.) And two weeks ago, New York Mayor Mike Bloomberg told a U.N. climate change conference in Bali that cap-and-trade would be more prone to corruption than a straight-up tax on carbon emissions.

Yet a growing proportion of corporate America is optimistic about cap-and-trade. Trading volume on CCX during the first half of 2007 was higher than during all of 2006. This summer, Bank of America made a strategic investment in CCX’s parent, Climate Exchange Plc, and earlier this month, agribusiness giant Monsanto signed on as a member, joining more than 300 others. If more states –- or the feds –- set specific carbon reduction guidelines and goals, economic incentives would likely encourage even more to participate. In the meantime, it’s yet another proposed solution to climate change that will need time before its benefits can truly be assessed.


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