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Carbon credits and the state of play of North American carbon – Part III


March 7, 2008
By Karen Haugen-Kozyra

The CCX is North America’s first voluntary, rules-based GHG emission registry, reduction and trading system.

The Chicago Climate Exchange – Voluntary-based
The CCX is North America’s first voluntary, rules-based GHG emission registry, reduction and trading system. In this context, rules-based means that its registered companies have agreed to take on targets and achieve them by either taking action internally to reduce emissions or purchase offsets on the trading platform. The CCX is positioned as a pilot initiative to provide its member companies with experience in carbon markets. Although the CCX is a voluntary system, the offsets are backed by contracts – a legally binding aspect that puts a degree of rigor to the system. To some policy makers, the fact that the CCX is in the business of both defining the rules to create its own credits and offering a trading platform for its member companies, is seen as a conflict of interest if it migrates to a regulatory or compliance-based market sometime in the future.

 In the first installment of this column, Haugen-Kozyra provided a basic overview of the carbon credit market in North America. In the second installment, she provided a closer look at a compliance-based market.
See July/August and September/October issues of Manure Manager.
 


Because it is a voluntary market, the rules do not need to reflect the requirements of regulated initiatives. This gives the CCX much more flexibility in how it designs its credit creation side. The value of the carbon reflects the voluntary nature of the market – the price has fluctuated between $3.00 to $4.00 per ton.

To support the market, they have reportedly defined standardized guidelines for several project types (although these are not readily available through the CCX – transparency is key to provide confidence in the credits) – select agriculture and forestry projects and others such as renewable energy and fuel switching.

Tradable offsets can be registered and traded on CCX by both offset providers and offset aggregators. Both of these entities have to be accepted by the CCX administration. An offset provider is an owner of an offset project(s), registered and sold on its own behalf. An offset aggregator serves as the administrative representative of multiple offset generating projects on behalf of the owners. Members include corporations, utilities, universities, NGOs, cities and several states. All projects have to be verified by a third party auditing agency, approved by the CCX.

The CCX is developing a subsidiary platform in Canada called the Montreal Climate Exchange. The MCX has recently issued a statement that it will delay becoming active until Canada is clear about the rules for the compliance-based market. Through this statement, the MCX is effectively acknowledging that it would not want to bring in a voluntary approach into Canada, where regulated market requirements could be in conflict with some of the more flexible rules governing voluntary projects.

Overall, the framework the CCX is using to deliver offsets to their trading platform is similar to most of the requirements of project-based systems.

Considerations when contracting to the CCX Market
Past Crediting Period – for the 2003 to 2006 time period, the tons were retroactively based, required no practice change and the years involved were definitely ‘out of play’ for any system in Canada. Virtually no risk was involved for contracting. This period is now closed to new contracts.

Current Crediting Period – for 2006 to 2010, this involves future actions and carries more risk. Penalties for breaking the contract will need to be assessed against potential value received. Producers who sign up will be excluded from selling credits for the same activities into the Alberta market (contract stipulates a producer cannot enter into any other agreements once CCX signs the deal).

Farm gate value of CCX deals – current trading price of offsets on the CCX is low (approximately $3.00 to $4.00 US per ton), due to the voluntary nature of the market. By all reports, given the coefficients being used in the CCX projects, and accounting for secondary marketers involved in the deal, producers are reportedly expected to receive between $0.50 to $1.00 per acre/year or $3.00/ton of CO2 over the contracting period (for soil sink projects). These estimates are dependent on the selling price of Carbon in the CCX market.

Canadian Buyers are skeptical – companies who expect to be regulated in Canada, and understand the policy around project-based offsets are wary of CCX credits because of the more lenient requirements.

Lack of Transparency – on several occasions, Canadian policy-makers have requested to see the standardized guidelines for project-based credit generation used by the CCX.

Reasons why these considerations are important:
With the kinds of carbon markets Canada/Alberta is considering, the value of the offsets will likely be higher; Alberta rules will allow regulated companies to pay $15/ton of carbon into a fund and receive regulatory relief. This effectively becomes the ceiling price in the Alberta market.

Producers who sign on for the second crediting period (2006 to 2010) may be forfeiting the opportunity for a higher rate of return in Alberta.
In addition, the Canadian federal government has stated in its Notice of Intent to Regulate, that credit for early action may be considered – this opens up more opportunity for producers in Canada.

Summary
Deciding to engage in contracts for existing markets like the CCX is an individual choice by a producer, according to the level of risk they are prepared to take. The CCX requirements are likely less rigorous than potential requirements under a compliance-based market, particularly for countries like Canada, who have signed onto international agreements.

Karen Haugen-Kozyra is the acting director of policy development and offset solutions with Climate Change Central, a public-private partnership in Alberta that promotes the development of innovative responses to global climate change and its impacts. Climate Change Central builds links and relationships between businesses, governments and other stakeholders in Alberta interested in pursuing greenhouse gas reduction initiatives.


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