CO2 Emission Trades Fizzle on Chicago Climate Exchange

Published November 21, 2003

Carbon dioxide emission allowances were traded for the first time in the U.S. as the Chicago Climate Exchange (CCX) convened its first CO2 auction on September 30. Sellers of emission credits were sorely disappointed by low prices and a dearth of willing buyers.

Promoters billed the auction as “the first multi-sector, multi-national market” in which to buy, sell, and trade CO2 emissions in anticipation of mandatory reductions in greenhouse gas emissions.

“This is a landmark moment for market-based solutions to environmental concerns,” said CCX chief executive officer Richard Sandor. “By establishing a mechanism for achieving price discovery and disseminating market information, CCX has achieved one of its central goals.”

The success of the CCX, however, is dependent on the government or industry associations mandating greenhouse gas reductions. In the absence of such mandates, and with more and more scientists questioning the global warming hypothesis, CCX prices and participation rates have reflected a general lack of concern regarding CO2 emissions.

“Not Indicative of Anything”

Only a handful of companies participated in the September 30 exchange.

American Electric Power (AEP) purchased 87,500 of the 100,000 tons of CO2 allowances sold. The average successful bid for a metric ton of year 2003 CO2 emissions was just 98 cents.

By contrast, a metric ton of CO2 emissions currently trades at roughly $13 on the European Union’s trading program. The dramatic difference reflects the EU’s adoption of the Kyoto Protocol and mandatory emission reductions. In the U.S., it is widely believed that global warming alarmism is overstated and Kyoto-style mandatory CO2 reductions are unlikely to be necessary or implemented.

Significantly, CO2 emission credits for the year 2005 were sold at a mere 84 cents, reflecting an expectation of the declining value of CO2 reductions.

“Clearly, this is a very immature auction,” said James Johnston, an energy economist and policy analyst for The Heartland Institute. “Indeed, given the expected volatility on the order of electricity contracts, which are their prime substitute, the prices may not be significantly different from zero. Clearly this is just a demonstration and should not be indicative of anything.”

“We see this primarily as a policy demonstration to show this can work on a broader sense,” explained AEP spokesperson Pat Hemlepp.

Said Ethan Podell, CCX’s former senior vice president for sales and marketing, “The companies we really need to join a carbon cap-and-trade program, the large emitters of greenhouse gases, those who will end up as buyers of emission reduction credits—the utilities, the oil, gas [and] petrochemical companies, the cement makers, the truckers and railroads—these companies are not yet prepared to join a cap-and-trade program.

“Without regulation and governmentally imposed sanctions, the early evidence … is that the American business community is not very interested in a voluntary greenhouse gas cap-and-trade program,” Podell further explained at an October Senate hearing.

James M. Taylor is managing editor of Environment & Climate News. His email address is [email protected].