DAMMAM, Saudi Arabia () -- When it comes to investing capital, the time-tested values of patience and perseverance still pay off. Of course, having foresight, good judgment, know-how, plenty of capital and a network of like-minded individuals and organizations helps.
The notion of trading carbon dioxide (CO2) and other greenhouse gas (GHG) emissions credits was viewed askance by many, both in the commercial and environmental camps, going back some 25 years when hugely successful futures trading pioneer Richard Sandor and colleagues formed Environmental Financial Products LLC, joined with Northwestern University's Kellogg Graduate School of Management, and with a grant from the Joyce Foundation undertook a feasibility study aimed at establishing a GHG emissions reduction trading system.
Today, with evidence of sharp global climate change taking place and with the ratification of the Kyoto Protocol and its Clean Development Mechanism, it seems it is a concept whose time has come. Even with the U.S. notably absent from the list of Kyoto Protocol signatories, business is on the upswing at Chicago Climate Exchange Plc's [AIM:CLE] Chicago Climate Exchange (CCX) and the European Climate Exchange (ECX), its European subsidiary, as well as across carbon and GHG credit trading desks working the OTC (over-the-counter) market in major financial centres around the world.
The Body Politic
Climate change and environmental issues have taken an increasingly prominent role in U.S. politics in recent years, and activity, along with media attention, reached a fever pitch during 2006. California's Governor Arnold Schwarzenegger seized the environmental initiative during the year, launching a phalanx of renewable energy and environmental proposals, including the $2.9-billion California Solar Initiative, which went into effect with the New Year.
Gov. Schwarzenegger is casting a wide net, as are a growing number of his counterparts. In addition to a high-profile meeting with U.K. Prime Minister Tony Blair during which he concluded an environmental research and technology sharing agreement, Gov. Schwarzenegger and his administration have been busy discussing plans to develop and link CO2 and GHG emissions credit project development, finance and trading schemes in concert with a range of other U.S. states and Canadian provinces, including Manitoba.
California's governor recently toured part of the East Coast and met with New York Gov. George Pataki to discuss the possibility of developing and linking a California emissions trading system to the growing list of northeastern and mid-Atlantic states aiming to join in the Regional Greenhouse Gas Initiative.
In addition to the seven northeastern states slated to join the RGGI, Maryland has enacted legislation requiring it to become a full participant by the end of June 2007. The District of Columbia, Massachusetts, Pennsylvania, Rhode Island, the Eastern Canadian provinces and New Brunswick are also considering joining.
Back out west in neighbouring Oregon, the state's Carbon Allocation Task Force, under the leadership of Gov. Ted Kolinsky, late last month said that Oregon will introduce a load-based cap-and-trade system for GHGs compatible with similar schemes being developed in other western states.
A full-blown economic ecosystem is rapidly taking shape in the private sector as well. London-based EcoSecurities [AIM:ECO] - profiled in a - has spent the last seven years building its business as a principal and agent for Clean Development Mechanism (CDM) greenhouse gas (GHG) emissions reduction credits.
Having put together a geographically diversified portfolio focused on GHG emission reduction and renewable energy projects in countries such as Mexico and the Philippines, the company is expanding in Southeast Asia and South Africa. It is also busy setting up a New York office to expand in the U.S. as the list of state and regional CO2 and GHG trading initiatives grows.
Top tier, white-shoe U.S. and European investment banks are also ploughing additional capital into the field. Morgan Stanley plans to spend almost $3 billion to trade carbon credits on greenhouse gases over the next five years, according to a Dec. 28 New York Times report.
Capital Attraction
On September 20, the Chicago Climate Exchange announced that for 6.2 million pounds sterling it entered into a merger agreement to acquire the 60% of the Chicago Climate Exchange, Inc. (CCX) it did not already own. As part of the agreement, the exchange is also issuing up to 10.56 million new ordinary shares - an initial 6.9 million in late September and a further 3.64 million during the next three financial years if certain performance targets are met.
Goldman Sachs agreed to subscribe for 4.17 million, or 10.1%, of the enlarged share capital for 12.2 million pounds, or 293 pence per share, immediately after the new share issuance and placement.
An additional cash payment and issue of CLE shares was also granted to Climate Exchange option holders, according to a company press release. Climate Exchange thereby gained a majority interest in the CCX and ECX, its European subsidiary, as well as the Chicago Climate Futures Exchange, on which sulfur dioxide emissions credit futures are traded.
"Bringing all of the group interests into a unified shareholder and operating structure enhances the platform we have built to date," said Neil Eckert, Climate Exchange director, in a press statement. "We are pleased to welcome Goldman Sachs to the shareholder register at what is an exciting time for our company and the emissions trading industry."
It's been Climate Exchange's chairman and CEO Sandor and his colleagues who have nursed the CCX and ECX to the point where they are apparently ready to fly on their own.
"The recent growth in membership and trading volume of the Climate Exchange group illustrates that market-based solutions to environmental concerns are here to stay," he said in a press statement. "The global nature of these issues requires a global solution and our entities have become the leading brands in their respective markets, while also attracting the interest of business and policymakers around the planet."
Sandor owns a majority of original CCX shares through two of his affiliate companies. Climate Exchange directors, having cleared the merger transaction with the Climate Exchange's Nominated Adviser and AIM exchange officials as per related party transaction rules, approved the terms of the merger agreement. Sandor's shares will be subject to a one year lock-in with a portion subject to a further lock-in until the end of December 2008.
Redux Growth
The CCX is the first and North America's only greenhouse gas (GHG) emission registry, reduction and trading system covering all six GHGs. It is a self-regulatory, rules based exchange designed and governed by CCX Members and regulated by the National Association of Securities Dealers (NASD).
The range and number of exchange participants is growing rapidly. Participants include multinational corporations, non-profit organizations, municipalities and state government agencies, universities, banks, brokers and a variety of specialized project development and environmental finance companies.
In the last six months of 2006, a steady stream of organizations has joined the CCX, including United Technologies Corp. [NYSE:UTX], Pennsylvania furniture designer and manufacturer Knoll, Inc. [NYSE:KNL], Utah's Wasatch Integrated Waste Management District, Michigan State University and CME Dairy Complex specialists Rice Dairy.
According to exchange literature, members make a voluntary but legally binding commitment to reduce GHG emissions. All members are obliged to reduce direct emissions 4% below a baseline period of 1998-2001 by the end of Phase One trading, which ended on December 31, 2006. Phase II extends the CCX reduction program through 2010 and requires all members to reduce GHG emissions 6% below baseline.
In addition to CCX trading of a set of standardized Carbon Financial Instruments (CFIs), the CCX's wholly-owned Chicago Climate Futures Exchange (CCFE) subsidiary enables trading, clearance and settlement of standardized futures contracts on sulfur dioxide emission allowances.
With the advent of EU's Emissions Trading Scheme, the CCX's European Climate Exchange (ECX) subsidiary has come to dominate exchange-based emissions allowances trading in the EU. Since its launch in April 2005, ICE-ECX CFI Futures trading volumes accounted for 80% of total exchange-traded volume. Contracts are traded using the ICE's (International Commodity Exchange) electronic trading systems platform.
ECX trading volumes have increased by 400% year-on-year, according to exchange statistics. Between January and mid-November 2006, 380 million tonnes of CO2 EU allowances traded compared to 94 million tonnes throughout 2005. Open interest of the ICE-ECX CFI Futures contracts traded on ICE Futures exceeded the 100 million tonnes mark for the first time on November 16. October average daily trading volumes totalled 2.3 million tonnes of CO2 equivalent emissions reductions.
Modus Vivendi
The Chicago Climate Exchange has tapped into the increasing environmental concerns and sustainable development activities of a broad range of businesses, as well as NGOs, supra-national, national, state and local government entities.
By designing and developing a means of monetising their GHG emissions reduction efforts, the Chicago Climate Exchange has been instrumental in fostering the evolution of a practical mechanism whereby a variety of businesses and other types of organizations can realize their GHG emissions reductions aspirations, as well as meet mandated obligations set out in the Kyoto Protocol and other emissions reduction initiatives.
"Joining CCX through the Clinton Global Initiative complements an already ambitious environmental program at Knoll," said Andrew Cogan, the company's CEO. "For well over 25 years, we have been a quiet leader in policies and practices designed to protect the biosphere, conserve natural resources and reduce waste."
New Zealand carbon brokerage and trading company Carbon Market Solutions on October 10 joined the CCX as an Offset Aggregator, enabling it to list and sell CCX CFIs from GHG Emission Reduction projects which meet Exchange criteria.
"The main reason for our joining the Chicago Climate Exchange (CCX) is to allow New Zealand emission reduction projects access the growing demand for emission reductions in North
America" said Wayne King, Carbon Market Solutions' director.
"Not only does it offer us the possibility to assist New Zealand companies with verified emission reduction projects to sell their carbon credits but we also see linked opportunities in the forestry sector with the recent announcement by the New Zealand Government of the Permanent Forests Sink initiative (PFSI)."
