Chicago Climate Exchange
www.chicagoclimateexchange.com
Overview
Additionality and Quantification Procedures
Overview
Type of Standard and Context
The Chicago Climate Exchange was launched in 2003 as a voluntary greenhouse gas (GHG) emission cap and trade scheme located in North America. This page gives a short overview of the CCX cap and trade program but primarily focuses on its offset program.
Participation in the CCX cap and trade scheme is voluntary, but once entities elect to participate and commit to emission reduction targets, compliance is legally binding. Members can comply by either cutting their emissions internally, trading emission allowances with other CCX members, or purchasing offsets generated under the CCX offset program. There is a 50% limit on the use of offsets to meet compliance standards. Offsets currently account for approximately 15% of all emissions reductions achieved under the CCX program.
In the first phase of the scheme, from 2003 to 2006, CCX members agreed to cut their emissions by 1% each year below their annual average emissions for the period 1998 to 2001, thereby by achieving a reduction of 4% by the end of the fourth year. For the second phase from 2007 to 2010, the original members agreed to cut their emissions by an additional 0.5 % each year to achieve an overall target of 6% below 1998–2001 levels by 2010. New members participating in the second phase must achieve a similar overall reduction target by 2010 by reducing their emissions by 1.5% each year.
Standard Authority and Administrative Bodies
The CCX has a well-developed administrative structure, which includes:
• Senior Management and staff responsible for the day-to-day administration of the CCX and its operations;
• A 12-member Committee on Offsets comprised of CCX members responsible for reviewing and approving proposed offset projects. Each member is appointed by the CCX Executive Committee for one year with the possibility of renewal;
• A Committee on Forestry comprised of CCX members responsible for the review of proposed forestry projects;
• A Regulatory Services Provider is responsible for auditing the baseline and annual emissions reports of CCX members, monitoring trading activity and reviewing verifiers’ reports for offset projects.
• Independent auditors called CCX Verifiers responsible for verifying a project’s annual GHG sequestration or destruction; (There are currently 29 approved auditors.)
• Technical Advisory Committees comprised of external experts, established at the request of the Committee on Offsets or on an ad-hoc basis by CCX administrators to assist in the development of rules for each offset type.
Regional Scope
Initially, CCX membership was limited to the US but it is now open to participants from other countries. Similarly, offset projects were mostly implemented in the US but offsets generated by projects outside the US are now also sold on the CCX.
Recognition of Other Standards/ Linkage with Other Trading Systems
The CCX allows trading of Clean Development Mechanism Certified Emission Reductions (CDM CERs) once the project has been approved by the CCX Committee on Offsets. The CERs must be retired in exchange for receiving the CCX’s tradable unit, the Carbon Financial Instrument (CFI).
Market Size and Scope
Tradable Unit and Pricing Information
Carbon Financial Instruments (CFIs) are the tradable units of voluntary CO2e reductions under the CCX. One CFI is equivalent to 100 metric tons of CO2e. CFIs have been traded at an average price of USD 2–USD 7.5 per metric ton of CO2e.
Participants/Buyers
The CCX distinguishes between members, associate members and participant members. Members are organizations, companies, institutions and municipalities that produce significant direct GHG emissions and are committed to reducing their emissions. In 2008, the CCX had nearly 400 members including companies such as the Ford Motor Company, American Electric Power, Sony Electronics and Bank of America; US state governments such as the State of New Mexico; and educational institutions such as Michigan State University.
Associate members are entities that produce negligible direct GHG emission but are committed to offsetting 100% of their indirect emissions associated with energy purchases and business travel.
Participant members include Offset Providers, owners of title rights to credits generated by offset projects and Offset Aggregators, which are entities that serve as the administrative representative of multiple offset projects, in particular projects generating less than 10,000 mtCO2e in emission reductions per year.
Current Project Portfolio
As of March 2009, the CCX had registered approximately 60MmtCO2e in offsets from over 137 projects. (The latest information is available at http://www.chicagoclimateexchange.com/offsets/projectReport.jsf.)
Offset Project Eligibility
Project Types
Project types eligible to register and sell offsets on the CCX include:
• energy efficiency projects;
• fuel switching projects;
• renewable energy projects;
• methane capture coal mines, livestock operations and landfills;
• bio-sequestration through forestry and agricultural management practices; and
• destruction of ozone depleting substances.
Project Locations
Projects cannot be located in EU-ETS member states or in other Annex B countries that have ratified the Kyoto Protocol.
Project Size
There is no limit on project size.
Start Date
Projects that sell offsets on the CCX should not have started before January 1, 1999. However, the earliest start date for forestry projects is January 1, 1990 and for HFC destruction projects is January 1, 2007.
Crediting Period
Most of the eligible project types can earn offsets for the eight-year period 2003–2010. The exceptions include renewable energy projects, which can earn offsets from 2005 to 2010 (six years), HFC destruction projects, which can earn offsets from 2007 to 2010 (four years) and rangeland soil carbon projects, which can earn offsets from 2006 to 2010 (five years).
Co-benefit Objectives and Requirements
Offset projects must comply with the rules and regulations of the host country. Beyond this legal prerequisite, the CCX does not have requirements to ensure stakeholder involvement and other secondary benefits.
Additionality and Quantification Procedures
Additionality Requirements
Each project undergoes review by the CCX Offsets Committee. The CCX requires that offset projects are "recently implemented," "beyond regulation," and involve “rare/best in class” practices. Some project types are required to fulfill specific rules:
• Commit to five years of continuous no till, strip till on enrolled acres for agricultural soil carbon sequestration projects;
• Be located within designated land resource regions or other specified locations for rangeland soil carbon sequestration projects;
• Be located on deforested or degraded land for forestation and forest enrichment projects, or in specified locations for forest conservation projects if they are undertaken in conjunction with forestation on a contiguous site;
• Only destroy ozone depleting chemicals that can no longer be produced (e.g. CFC’s which can no longer be manufactured in the US but are still present in refrigerators and air conditioning units); ensure that electricity generated from renewable energy projects is not also sold as “green”; and that if Renewable Energy Credits (RECs) are applicable to the project, they must be surrendered and retired by the CCX to avoid double-counting
Quantification Protocols
The baselines and methodologies for calculating emission reductions are pre-defined for each eligible project activity. Some baselines are project-specific, including large reforestation projects which are credited relative to measured, site-specific carbon levels prior to the start of the project. Other baselines are quantified using performance standards, such as avoided deforestation projects in Brazil which use pre-determined annual deforestation rates for specific states in Brazil.
CCX rules address the permanence issues around forestry projects by requiring a commitment to the long-term maintenance of project carbon stocks, and a carbon reserve pool equal to 20% of all offset credits issued for the project and the cancellation of reserve pool offsets in case of sequestration reversal.
Permanence
CCX rules address the permanence issues around forestry projects by requiring a commitment to the long-term maintenance of project carbon stocks, a carbon reserve pool equal to 20% of all offset credits issued for the project, and cancellation of reserve pool offsets in case of sequestration reversal. Offsets from the carbon reserve pool are released at end of five-year a crediting period.
Project Approval Process
Validation and Registration
The CCX does not distinguish between validation and verification. Both steps are usually done at the same time and are called “project verification and enrollment”. The initial validation of projects is optional.
Monitoring, Verification and Certification
Verification of emission reduction is done annually and projects are subject to on-site inspections at any time for the duration of the project's enrollment with CCX. A CCX-approved third-party auditor verifies an eligible project’s actual annual GHG emission reduction, sequestration or destruction and submits a Verification Statement to the CCX. Following a successful review by CCX staff and by the third party providers of regulatory services, the CCX issues the offset provider or aggregator with Carbon Financial Instrument (CFI) contracts equivalent to the quantity of emissions reduced, sequestered or destroyed.
Registries and Fees
The CCX Registry is the electronic database that serves as the official record holder and transfer mechanism for CFI contracts. All CCX members have CCX Registry Accounts.
Fees for CCX membership are USD 1,000–60,000 per year, depending on the size and type of member. Offset registration fees are USD 0.12 per metric ton from non-Annex I countries and USD 0.15 per metric ton from Annex-I countries. The trading fee is USD 0.05 per metric ton. Trading and offset registration fees are posted on the CCX website and are subject to change.
Selected Issues
The 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 from and gain experience with emission reduction commitments and carbon trading.
The CCX has also been criticized for the lack of additionality of some of its offsets, in particular those issued to no-till or reduced-tillage projects (Bryk, 2006). For example, farmers can receive CCX offset credits for practicing no-till agriculture even if they have been practicing it for many years. If such credits enter a cap and trade system, emission actually increases because the buyer of the credits will continue to emit and no real emission reductions are achieved through the offsets. The CCX recognizes this, but argues that early action by proactive farmers should be rewarded and not penalized. The argument is that it would unfair to the proactive farmer if only farmers who had just started practicing no-tillage were allowed to earn the credits.
CCX further argues that discriminates against farmers who may have already been doing continuous conservation tillage by excluding them from eligibility introduces perverse incentives to stop no-till practices in order to take it up again at a later point and earn offset revenue.
While these counter arguments are valid, they do not address the issue that by rewarding early action, non-additional offsets are being verified. Early actions can be rewarded through other means, such as special allowances or incentive programs that do not compromise the environmental integrity of carbon caps.
CCX has only limited provisions to acount for the risk of reversal.
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At the end of the 5 year crediting period for soil carbon projects, a farmer has no obligation to hold that carbon in the soil, so while CCX has 2 mechanisms in place to address permanence (see above), they are far from adequate.
References
Bryk, D.S. (2006). States and Cities Should Not Join the Chicago Climate Exchange. Natural Resources Defense Council.
Chicago Climate Exchange (2007). Overview.
Goodell, J. (2006). Capital Pollution Solution? New York Times Magazine, July 30, 2006.
Point Carbon Research (2007c). Voluntary Carbon Markets: Lost in Transactions? Carbon Market Analyst, October 24, 2007 (fee required).