Chicago Climate Exchange 101

I've been talking about The Chicago Climate Exchange a lot over on Triple Pundit, but I thought it was time TreeHugger readers got a little 101 on this very interesting cap and trade program to reduce CO2 emissions.

One of the most effective methods of reducing a particular pollutant is to create a cap and trade program. This means that an authority such as government states that only some amount of the pollutant will be permitted, per year, and that each company in the country or state is permitted some amount, generally a bit less than their historical norm. After that, if a company manages to reduce its emissions by a greater amount than they were legally bound to, they may sell the "right to pollute" to other companies who have been unable to meet their target.

The United States created a very effective cap and trade program to deal with Sulphur Dioxide in1990, and the EU has now begun using cap and trade as a way to reduce CO2 - in keeping with the Kyoto accord. But what's a country to do if they're not a Kyoto signatory, and their government doesn't want to create a market for a particular emission, say CO2?

Simple - get a bunch of companies together and create your own market! A growing group of companies, including DuPont, Dow, Ford, Bayer and numerous city governments (see the impressive list here) have signed on to a legally binding contract to reduce their emissions, and trade their right to pollute on a free market exhange based in Chicago - the CCX.

So what would possess a major corporation to voluntarily do anything a long these lines, much less legally bind themselves to do so? Read on for the reasons...1) It's a proactive response to future government regulation.

Smart companies already realize that increased regulation of emissions by government is likely, if not inevitable. By taking the steps now to comply, sheltered by an association of like-minded companies, the likelyhood of draconian government action is reduced.

2) Streamlines ease of doing business with Europe

Many US companies are already losing business in Europe as their cross Atlantic counterparts become leaner and more competitive in response to Kyoto. Furthermore, they are needing to comply with stricter regulations overseas if they choose to sell products there.

3) It's profitable now

Reducing emissions means making your operations more efficient. More efficient operations cost less. Lower costs mean higher profits. By selling your carbon savings on the open market, you then get a double bonus - direct income given to you from less efficient companies.

4) Believe it or not, some companies are starting to see the light.

Companies are made up of people of all kinds. Many of them are as interested in making the world a better place as they are in making a living (after all, without a planet, you won't have much of a living). These people are starting to move their companies in a greener direction. There's a long road to go, but joining the CCX looks like a great start.

How does the cap get lowered?

You might also want to know how the cap gets lowered in a free market. In any cap and trade system, simply adding a cap does not actually lower emissions. The cap, and thus emissions, can only be lowered in two ways - One, if the governing authority lowers it by some percentage. In the case of CCX, there is a binding agreement when signing on to reduce the cap by a certain percenage annually. Secondly, emissions credits can actually be permanently retired so they can't be used the next year. Many "carbon offset" companies such as TerraPass or DriveNeutral do this by buying emissions rights on behalf of their customers, then retiring those rights - therefore the overall cap gets lowered by an amount equivalent to the emissions of a driver's yearly car use.

Pretty smart eh?

For more reading, check out this article on WBCSD.