Chicago Climate Exchange

Overview
The Chicago Climate Exchange (CCX) is a voluntary GHG emissions cap-and-trade scheme based in North America. Although participation is voluntary, compliance with emission reduction objectives is legally binding once a member joins. CCX has as part of its cap-and-trade scheme an offset programme with a full-fledged carbon offset standard. CCX members commit to reduce their emissions by a fixed amount below the established baseline level ¹.

Members who cannot achieve the reduction target through cutting their emissions internally can meet their compliance commitment by purchasing emission allowances (called Carbon Financial Instruments; CFI) through CCX’s electronic trading platform from other CCX Members that reduce their emissions beyond the reduction target. Offsets from projects implemented through the Chicago Climate Exchange offset programme can also be used to comply with reduction targets. Total use of offsets for compliance is limited to no more that one half of the required reductions.

History of Standard
In 2000, a group of researchers led by Richard Sandor at Northwestern University carried out a feasibility study on the viability of a cap-and-trade market to reduce
greenhouse gas (GHG) emissions in the US. Through 2002, they developed the rules and protocols required to establish the scheme and, by 2003, they launched trading operations with 13 members that made voluntary but legally binding commitments to reduce six GHGs. Total membership has grown to almost 400 entities.

Administrative Bodies
CCX Committee on Offsets is responsible for reviewing and approving proposed offset projects. The offset committee has currently approximately 12 members. Each member is appointed by the Chicago Climate Exchange Executive Committee for a 1 year appointment with the possibility of renewal.

External Advisory Board provides external strategic input to the Chicago Climate Exchange team and includes experts from the environmental, business, academic and policy-making communities.

Technical Advisory Committees are established by request of each CCX standing committee or on an ad-hoc basis. These technical committees are usually comprised of outside experts. Currently CCX has technical advisory committees on agricultural
methane capture, landfill methane capture, soil carbon sequestration for conservation tillage and rangeland soils, forestry and ozone depleting substances.

CCX Committee on Forestry is responsible, among other things, for reviewing proposed forestry offset projects.

CCX Regulatory Services Provider is the Financial Industry Regulatory Authority (FINRA), the largest nongovernmental regulator for all securities firms doing business in the United States, which provides external verification of the baseline and annual emissions report of each member, monitors Chicago Climate Exchange trading activity and reviews verifiers’ reports for offset projects.

Third-party Offset Project Auditors are called ‘verifiers’ and are approved by CCX for each project type to verify an offset project’s annual GHG sequestration or destruction. There are currently 29 approved auditors (12/07).

Financing of the S Standard Organisation
Climate Exchange PLC is a publicly listed company on the AIM division of the London Stock Exchange. Financials of Climate Exchange, including CCX, are available to the public. The operations and management of the exchange is financed primarily through trading and offset registration fees as well as through enrolment and annual fees generated from its members.

Recognition of Other Standards
The CCX allows trading of credits generated in some projects registered under the CDM. Such projects must be approved by the CCX Offsets Committee and must retire their CERs in exchange for receiving CCX credits.

Number of Projects registered and offffsets issued
44 offset projects have been issued 20.82 million metric tonnes of CO2e offsets since the scheme’s inception in 2003 as of 28 November 2007.

Comments on CCX
CCX has been a pioneer in establishing a cap-and-trade system. It was the first such system established in North America and it has given companies the opportunity to learn and gain experience with emissions reduction commitments and carbon trading. Despite these very positive aspects of CCX, there have been several points of criticism of CCX in general (as a cap-and-trade system) and of CCX’s offset programme. We first discuss the offset programme:

Co-Benefits
CCX does not require a local stakeholder consultation process and does not focus on enhancing cobenefits. For buyers who place value on these co-benefits, CCX would not be a sufficient standard.

Additionality
There has been significant criticism of the lack of additionality of some CCX offsets, in particular those involving no-till agriculture. There were several documented instances where farmers received carbon offset revenue for practicing no-till agriculture despite the fact that these farmers had been practicing no till for many years already.²

Chicago Climate Exchange argues that it would be unfair if the proactive farmer who has been practicing no-till cannot sell his carbon credits, whereas a farmer who just started doing so in order to get revenue can earn credit. This argumentation in favour of ‘rewarding early action’ with carbon credits conflates two separate issues:

Environmental integrity: ‘Rewarding early action’ with carbon credits undermines the environmental integrity of offsets: If non-additional credits enter a cap-and-trade system, emissions are actually increasing because the buyer of the non-additional offsets will continue to emit whilst no further emissions reductions are achieved through the offset projects.

Fairness to early actors: it is true that additionality raises an equity issue: Individuals who have acted as pioneers and have already been engaged in non-traditional low-carbon practices such as no-till agriculture will not be able to sell their carbon credits because their actions are by definition nonadditional (they happened for other reasons than the carbon offset market).

In order to preserve the environmental integrity of the broader offsets market, the fairness concern would need to be addressed via measures other than handing out non-additional carbon credits (e.g. early action provisions, tax/subsidy treatment, discounting of credits, etc).³

The following points apply to CCX in general:
Transparency of CCX - Several groups have in the past criticized CCX for its general lack of transparency.⁴ Chicago Climate Exchange has responded to this criticism by making its rule book and many of the methodologies available on its website. We welcome this increase in transparency which will enable a more independent evaluation of project
methodologies.

Accomplishments of CCX and additionality of CFIs - Companies who voluntarily signed on to Chicago Climate Exchange are a self-selecting subset of corporations who are likely to be confident that they can comply or even over comply with the commitments. It is therefore difficult to assess the achievements of the CCX per se. The very low prices of CFIs indicate that many of the member companies of CCX have over-complied with their commitments and, conversely, that the CCX targets are not stringent enough to exert any pressure above and beyond the companies’ expected emission levels. If the cap in a cap-and-trade system is low and there is over-compliance, the cap may not be leading to any reductions beyond business as-usual. There is a risk that carbon offsets from unspecified CFIs do not actually lead to emissions reductions beyond business-as-usual.

Future of CCX
Chicago Climate Exchange was the first cap-and-trade system that was established in the US and as such has played a innovative and valuable role in bringing carbon trading to the US. It is unclear how CCX will function if the US adopts a mandatory cap-and-trade programme. It is possible that CCX could become largely a trading platform and exchange, deferring to government authorities to define rules and procedures and to certify reductions.

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¹In the first phase of the scheme, from 2003 to 2006, members agreed to cut their emissions by 1 per cent each year below their annual average emissions for the period 1998 to 2001, thereby by achieving a reduction of 4 per cent by the end of the fourth year. For the second phase from 2007 to 2010, the original members have to further cut their annual emissions to achieve the target of six per cent by 2010. The new members who did not participate in the first phase have to achieve the same target by 2010 by reducing their emissions by 1.5 per cent each year.

²J. Goodell, “Capital Pollution Solution?” New York Times Magazine (July 30, 2006).

³CCX responded to this criticism by claiming that tillage can only be ensured through a contract and a verification process, which Chicago Climate Exchange provides. “There is no guarantee it would go on without a contract with CCX.” No-till has been practiced for decades. Where it can rightfully be assumed that more farmers will change to no-till now that revenue from offsets are available, the argument that without the offsets the amount of no-till agriculture would actually decrease below the current level is not supported. CCX further states:
The primary concern was that we not encourage perverse actions that would encourage people to game the system to qualify as “new no-tillers” by virtue of the fact that they have tilled up fields that formerly had been subject to conservation tillage that removes CO2 from the air. We did not want to see reversals of stored carbon dioxide with the resulting release to the atmosphere. (Michael Walsh, e-mail communication 12/21/08)
Although a valid argument, it is unclear how many farmers would choose to start to till again, since they had enough incentive to switch their tilling practice before offsets were available. Even more importantly, the argument ignores the issue that nonadditional offsets will lead to a de facto increase in emissions under a cap-and-trade system (see chapter 5.1.)

⁴ Dale S. Bryk. (2006). ‘States and Cities Should Not Join the Chicago Climate Exchange.’ Natural Resources Defense Council.

Source: WWF Germany, March 2008, Making Sense of the Voluntary Carbon Market: A Comparison of Carbon Offset Standards, Anja Kollmuss (SEI-US), Helge Zink (Tricorona), Clifford Polycarp (SEI-US). Full report is available as a PDF here.

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