At the international derivatives conference in Brgenstock, Switzerland, the world financial community was introduced to the European Climate Exchange (ECX) futures and cash contracts for EU carbon dioxide emission allowances – the first quoted and cleared market for European emissions contracts.
The ECX products will trade on the International Petroleum Exchange (IPE), offering for the first time a pan-European platform for greenhouse gas emissions trading, with standard contracts and clearing guarantees. ECX products will include both futures and cash contracts in ECX Carbon Financial Instruments (ECX CFI). Each ECX CFI will be based on emission allowances issued under the EU’s Emission Trading Scheme (ETS). The ETS is a market-based regulatory mechanism designed to help scale back carbon dioxide (CO2) emissions within the EU to pre-1990 levels by 2012. For the first phase of ETS, emission allowances come into effect from 1 January 2005 for 12,000 energy and industrial installations that account for 46 percent of the EU’s CO2 emissions.
ECX products were introduced by Richard Sandor, the founder of financial futures. Sandor directed the launch of Chicago Climate Exchange (CCX), which provides a similar greenhouse gas trading market in the United States. ECX is a wholly owned subsidiary of CCX.
Under an agreement between CCX and the International Petroleum Exchange (IPE), Europe’s leading energy futures and options exchange, a series of futures contracts will be launched by the end of 2004, with cash products to follow in early 2005. Both the ECX CFI cash and futures products will be listed by the IPE and traded on the IPE’s electronic platform, under licence from CCX. It is intended that the contracts will be cleared by LCH.Clearnet Ltd.
Sandor, chairman and CEO of CCX, said, “Exchange-traded spot and futures contracts on ECX CFIs will facilitate trading for compliance with EU laws, and will bring this market the liquidity it will need to operate efficiently. These products will be attractive to both emitters and derivatives traders.”
Peter Koster, chief executive of ECX, said, “Climate change is a top priority global environmental issue. The European Emissions Trading Scheme is a first step to reining in CO2 emissions and ECX products are efficient tools for businesses to trade allowances to cost-effectively manage their emission portfolio. Once the economic costs of CO2 production are established then businesses can use ECX products to efficiently meet their environmental commitments.”
Koster added, “Both emitters and financial institutions will see the benefits of trading ECX CFIs in terms of liquidity, price transparency, counterparty risk and regulation. Emissions trading will be the next great market opportunity for traders. A company that trades an ECX CFI contract will be able to demonstrate clearly to its stakeholders and regulators that it has obtained a true market price. This is a key distinction for ECX and will prove important to businesses as they report their ETS trading activities.”
Richard Ward, chief executive of the IPE, said “The EU ETS provides a unique opportunity to build a liquid marketplace in environmental contracts. ECX Contracts will be of benefit both to the full range of participants in the EU ETS and to the financial community. We welcome the launch of ECX and look forward to working with them on this exciting initiative.”
The model of the CCX provides a clue to the likely success of ECX: although the United States has yet to sign up to any climate treaty, more than 60 leading businesses and public institutions, including global companies such as Stora Enso, Ford Motor, American Electric Power, Dupont, Motorola, Rolls Royce and IBM, have voluntarily joined the exchange. CCX industrial members commit to limit their CO2 emissions, with the result that more than one million metric tonnes of carbon dioxide have been traded on the exchange. The European ETS, which applies to companies in all 25 EU member states, is mandatory and ECX would therefore expect to see much greater levels of activity and participation from the businesses that have been awarded allowances.
The sales and marketing headquarters of ECX are in Amsterdam, The Netherlands.