Pioneering Cap-and-Trade Program to Fade into the Sunset

Pioneering Cap-and-Trade Program to Fade into the Sunset

A tough political atmosphere in which Congress backed away from comprehensive clean energy and climate change legislation may have been the nail in the coffin for one of the voluntary carbon market's early pioneers.

The Chicago Climate Exchange (CCX) will discontinue its voluntary greenhouse gas cap-and-trade program next month, according to Intercontinental Exchange Inc., its parent company. In its place, CCX will launch a new registry program for 2011 and 2012 carbon offsets.

The development marks a stark contrast from two years ago when many considered climate change legislation in the U.S. to be inevitable.

"Fundamentally with any program that relies on voluntary compliance for something not yet mandated into law, it makes it more difficult ultimately to have as vibrant a market as you'd want," said Bruce Braine, vice president of strategic policy at utility American Electric Power (AEP). "That was the ultimate weakness. For a period of time, up until the last year, a lot of it was thriving on anticipation there would be legislation."

AEP was one of 13 CCX founding members when the program launched in 2003, and Braine sat on the board of directors for much of its existence. The most recent election, he said, where several candidates ran on platforms against cap-and-trade illustrated that "the waters have been poisoned for cap-and-trade legislation, at least for a couple of years."

"There was a period during the 2008 primaries and into 2009 where it certainly looked pretty positive and looked like we were going to see legislation passing fairly soon." Braine said. "As a result, activity on CCX increased, there was more trading, prices went up. In the last six to 12 months, activity started to drop off and a lot of that was related to an increasing sense that we might not see a cap-and-trade system anytime soon."

In interviews conducted since the CCX announcement, Braine and others within the business and research communities discussed the strengths and weaknesses of a program that demonstrated for many how reducing emissions could complement, not hinder, business performance.

The news also comes on the heels of the demise of another voluntary program, the EPA's Climate Leaders, giving fewer options to businesses that want to voluntarily and publicly report and reduce their greenhouse gas inventories.

"EPA has made it abundantly clear to everybody that they're just heading down a regulatory path now, and voluntary Climate Leader-type programs are no longer really relevant in their minds so there really isn't a lot you can do," Braine said.

The CCX cap-and-trade program had about 450 members. The program was both a registry for organizations to report their greenhouse gas inventories, and an exchange platform through which they could trade emissions reduction permits. Members committed to reduce emissions during a specific time phrase; those that reduced emissions to levels below the target could trade the extra emission credits, while those that fell short of their goals had to buy permits to make up the difference.

The program offered a teachable moment to many who grappled with finding ways to reduce emissions, said Terry Tamminen, operating advisor to Pegasus Capital Partners and former advisor to Calif. Governor Arnold Schwarzenegger.

"It helped people understand the price discovery, the concept discovery, and allowed people to try it on for size to see if it would work and to see whether it was analogous to SO2," Tamminen said, referring to the successful sulfur dioxide emissions trading program put in place to address acid rain. "It was a great education exercise. It got people to understand this was not going to be the end of the world."

CCX was an early mover that helped propel the carbon market forward, said Michael Gillenwater, executive director and dean of the Greenhouse Gas Management Institute. "They brought an enormous amount of expertise in terms of proper exchanges."

But CCX also faced design and quality issues, Gillenwater said, such as the fact that CCX used corporate-wide emissions rather than facility-based. As others have mentioned, the voluntary nature of the program weakened the business case for participation because of the absence of regulation.

"It doesn't take too many years of economics to figure out that only companies that want to sell (permits) will tend to join, and companies that need to buy (permits) avoid joining," Gillenwater said.

Other programs, including Climate Leaders and The Climate Registry, fulfilled some of the same functions.

"Both of those programs --  not that they're perfect, and Climate Leaders is now shut down -- invested a lot in the technical rigor and quality of what they were doing," Gillenwater said
 
There was a perception within the expert community, he said, that CCX was not making its own methodologies and protocols as stringent.
 
"That was especially the case with offsets," Gillenwater said. "The general perception was that the offset protocols developed by CCX were of the lowest quality out there in the greenhouse gas emissions offset marketplace. That impacts people's perception of the program."

The combination of an exchange for trading with an emissions registry, Gillenwater said, was not widely embraced.

"The other registries that followed, none of those had exchanges," Gillenwater said. "If you look at emulation as an indication of what makes sense, others didn't think that was what the market was calling for."

Although it had 450 members, CCX could have also used more staff to reach out to a broader network, Tamminen said. "Greater participation could have had more impact on the national debate."

However, as Tamminen suggested, the CCX succeeded in introducing people to the concept of both disclosing carbon footprints and using cap-and-trade as a means to reduce them.

"I think CCX was a significant and, at the time, innovative program that did a lot of good in terms of getting people to pay attention to and thinking about greenhouse gas emissions reporting, and giving credibility to the idea of emissions trading because big companies were willing to engage with it," Gillenwater said.

For AEP, participation in CCX allowed the utility to focus on its own sustainability commitments and view processes through a carbon lens. Employees from a range of departments "began to realize that this was a part of our overall objective," Braine said.

"They found things. They saw things that we could do that were in many cases win-wins," he said. "We figured out ways to both save money and reduce emissions. We probably would not have found those things had it been for looking and focusing on the carbon issue."

Members include businesses, universities and manufacturers. In its first and only two phases, CCX members reduced nearly 700 million metric tons of greenhouse gas emissions, but Intercontinental Exchange Inc. Chief Executive Jeff Sprecher recently told the Financial Times that members wanted to pull out of they weren't going to get credit for their efforts under a compliance regime.

"People wanted to get credit for early action," Braine said. "When that goes away, I guess the value of the system just dries up."