Carbon Trading Lives On In California (ICE, CME, NYX)

Last week the Chicago Climate Exchange, which is owned by Intercontinental Exchange, Inc. (NYSE: ICE), announced that it would no longer operate the voluntary carbon-trading program it has run since 2003. The CCX, as it was known, had been banking on the US Congress to pass some sort of cap-and-trade legislation, and when that didn’t happen the ICE was  forced into this decision.

 
There has been some crowing about the demise of the CCX, but even a moment’s thought indicates that the exchange’s demise was inherent in its creation. Because membership was voluntary, those companies that were sure that they would meet or exceed their low emissions targets joined willingly, but found no voluntary buyers for their excess credits. After all, if a company knew it would exceed some imaginary limit, why would it want to pay for something that has been, and remains, free?

 
But the state of California may breathe some new life into CCX and other competitors. The state’s voters rejected an attempt to delay the enforcement of California’s renewable portfolio standards and its strict carbon emissions reductions. Beginning in 2012, the state will set carbon caps on power plants, vehicle fuels, and heavy industry, and those caps will be lowered every year for the next eight years.

 
In the beginning, the state will issue pollution allowances, usually called credits, at low or no cost. After some time, the allowances will be auctioned. Cantor Fitzgerald has estimated a carbon market in California that will be worth between $3 billion and $58 billion by 2020, depending on how many credits the government gives away and on the price of carbon.

 
CME Group, Inc. (NASDAQ: CME) and NYSE Euronext, Inc. (NYSE: NYX) are planning to offer different services to California’s carbon market, including a derivatives pipeline and a carbon-offset registry. ICE and CCX are also eyeing the California carbon market, but a joint venture in China and EU emissions trading are the focus now.

 
Whether California’s cap-and-trade scheme will survive the next round of legal and electoral challenges remains to be seen. If a federal cap-and-trade program is ever to see the light of day, California’s results will play a big role.

 
Paul Ausick