Business As Usual - Cornell University



Policy Brief

The Chicago Climate Exchange

Business-as-usual?

Chelsea Acosta

Brittany Camp

Amar Kelkar

Grace Leonard

Christel Trutmann

Ellie Walsh

Roland Wang

Environmental Governance

Professor Steven Wolf

April 30, 2008

Introduction

Over the past two decades, there has been increasing awareness that greenhouse gas (GHG) emissions are associated with global climate change. Various environmental initiatives have been developed in order to reduce emissions. Such initiatives include renewable energies, reforestation, and, more commonly, CO2 and GHG offsets and emissions trading. The trading of emissions is gaining popularity as an Epoch II, short-term solution that attempts to minimize emissions through market principles (Dryzek 1997).

During the 1980s, the Environmental Protection Agency (EPA) established a cap-and-trade initiative to control sulfur dioxide (SO2) emissions from coal-generated power plants and to reduce the incidence of acid rain. The cap-and-trade initiative is considered the first emission trading program. Power plant companies that found it difficult to meet the emissions level purchased allowances from companies that were been able to meet the cap. This system of trade proved very successful and emissions were reduced faster than required or expected (EPA 2008).

The Chicago Climate Exchange (CCX) was established on the principle of the SO2 cap-and-trade program and is one example of a private, market-based approach to reducing GHG emissions in the United States. Developed in 2000 with grants from the Joyce Foundation and officially launched in 2003, the CCX is the first voluntary emissions trading market in the United States. Companies voluntarily join the CCX to trade GHGs but compliance is legally binding. Members of the CCX are subject to liabilities upon commitment violations including sanctions involving fines, trade suspensions, and ultimately termination of membership. Conversely, if a member reduces below their annual GHG emission reduction targets, then they have Carbon Financial Instrument (CFI) contracts that they can sell through the trading system or bank for future years. Those who have not met the targets comply with their commitment by purchasing CFI contracts. In 2003, only the 13 charter members were involved with the CCX, including the Ford Motor Company and DuPont. Today, there are over 300 members (CCX 2008).

The purpose of this policy brief is to examine the effectiveness of the CCX as a tool to mitigate climate change. We want to examine whether or not the CCX is effective in executing its goals of pushing change, or whether the companies are manipulating the system to make money without accomplishing the long-term goals of the program. Through the discussion of various case studies of CCX members in different industries and the current criticisms of the CCX, we argue that for the CCX to catalyze long-term positive environmental change, institutional changes must be made to the program.

Case Studies

Detailed in this policy brief are studies of different members in the CCX including a few public institutions, a university, a skiing company and a major chemical company.

Public Sector

States, counties, and cities are also members of the CCX. They join for many of the same reasons corporations do. It provides a positive image and is a means to reduce GHG emissions in a more progressive way than any federal plans. More importantly, states, counties, and cities join the CCX as a means to improve their environment for current and potential citizens. In an interview, Aspen’s original Global Warming Manager, Dan Richardson, said that the appeal of joining CCX is that it inescapably binds the city to commit to change. States and municipalities are significant energy users through their buildings, public transportation, direct services, and contracted services. The emissions associated with all these services are accounted for in the CCX (Dan Richardson Interview 2008).

Several universities have also joined the CCX. There are currently eight universities who are members of the CCX, including Tufts University, University of Minnesota, University of Oklahoma, University of California-San Diego, University of Idaho, University of Iowa, Michigan State University, and Hadlow College in the United Kingdom. Various partnerships have developed among the universities as well as with companies from other sectors in the CCX. For instance, upon joining the CCX, Michigan State University purchased credits from the University of Iowa in order to meet its reduction target as the university was implementing the use of alternative fuels for its power plant (Hammacher and Nichols, 2006).

The alternative fuels project at Michigan State is similar to an alternative fuel project started at the University of Iowa using oat hulls (a byproduct from Quaker Oats). The University of Iowa developed a project to burn oat hulls in order to replace the use of coal for their power plant. The University of Iowa joined the CCX after determining that their project would not only allow them to reach the CCX reduction targets within the first few years of use but would also provide them an excess of emissions credits. Initially, they had to purchase emissions credits from the Iowa Farm Bureau to meet their reduction targets, but with their oat hull burning they have been able to accumulate extra credits (Facilities Management, 2005).

According to the associate director of Utilities & Energy Management at the University of Iowa, Ferman Milster, some of their current projects allow the university to easily reach the CCX reduction targets. The overall effect of the CCX’s marketplace approach will ultimately come down to the bureaucracy of the member institution. As Milster stated, the university will decide what they will do with the money from the extra credits, whether they will invest towards projects that further reduce their emissions or deposit the money in the university’s general fund. Milster stated that, “the purest thing to do” would be to “retire those credits from the market.” While the university was not challenged in meeting the CCX’s targets, Milster declared that their membership certainly helped give their projects visibility.

Private Sector

There are several private companies involved in CCX, including the Aspen Skiing Company (ASC), who have found some interesting ways to use the CCX system in a positive, environmentally-friendly way. The ASC does not actually trade on the market (Matthew Hamilton Interview 2008). They are members because the CCX is an inexpensive way to be audited by a third party. Since joining the CCX though, the ASC has improved its carbon footprint tracking and is using that to set plans to achieve substantial reductions. The company as not made any purchases of credits or offsets through the exchange. ASC is using the CCX as a means of ensuring readiness for imminent emission regulations imposed by state and federal government. They have found that many companies interested in becoming environmentally-friendly see the CCX as a trial project for determining their carbon footprints and making use of the auditors in place (Matthew Hamilton Interview 2008).

The membership of the CCX also includes several industrial and manufacturing corporations, such as DuPont. These companies are becoming increasingly aware of the need to integrate sustainability into their business practices in order to remain competitive. However, there is no guarantee that these companies, through their sustainable business practices, have any consideration for environmental protection. In other words, the appearance of sustainable practices is merely a tool to gain access to profitable markets.

Presently, most environmental goals at DuPont are still measured in terms of revenues from energy efficient products and in terms of research initiatives on biofuels, refrigerants without chlorofluorocarbons (CFC’s), and products that are labeled as environmentally friendly (DuPont Brochure, 2006). While new technologies are beneficial for reducing emissions, to view technology as the means towards environmental protection is to adopt a Promethean discourse (Dryzek 2005). Such as viewpoint can ignore the true impact of technologies on the environment.

But DuPont did not adopt such an approach and has found incentives to reduce their GHG emissions even before the establishment of the CCX. During the 1990s, DuPont has strived to reduce their GHG emissions, water consumption, and energy use as a result of increased public awareness of environmental degradation. One particular motivating cause for DuPont to adopt sustainable practices was the realization of the detrimental effects of CFCs on the ozone layer during the 1980s.

DuPont was a large manufacturer of refrigerants, like Freon-12, that generated CFCs. This became especially problematic after the EPA’s Clean Air Act Amendments of 1990 established a production phase out schedule for ozone-depleting chemicals and published a list of Class I Ozone depleting substances in January 1996 (). In 2003, DuPont became one of the 13 charter members of the CCX. DuPont committed to reduce all GHGs, including CFCs. Their CCX membership was a way to repair their public image. Part of their success as a member has been their ability to measure and gather environmental data, or envirometrics, for publishing and to have independent, third-party verifiers of their environmental management systems. In this sense, the CCX was not the key player in DuPont’s emission reductions.

Offsets

In addition to CFIs, the CCX offers an offset program where companies can counter overproduction of GHGs by assisting in offset projects that reduce GHG emissions, in particular carbon dioxide (CO2). A carbon offset project “neutralizes” CO2 emission from a CCX member by avoiding the release of the CO2 from another source that would have otherwise remained in the atmosphere (Taiyba 2005).

Offset projects may prevent, absorb, or destroy CO2 released through schemes such as forest sequestration, destruction of industrial gases, and renewable energy projects. To qualify as an offset, a project must prove that emissions will be lower than a “business-as-usual” scenario (Taiyba, 2005). Offsetting is a popular mode for emission reduction among members as 10 million metric tons worth of CO2 offsets were issued in CCX during 2006 (DiPeso 2007).

Offsetting will remain a popular method for CCX members as it is a quick and easy way to meet CO2 reductions. In support of offsets, Richard Sandor says that it is not the validity of the reduction but rather the incentive for getting people to “do the right thing” (Goodell, 2006). Offsets are not completely dismissed by critics as a method for CO2 reduction, they only warn of the increasing reliance upon them to meet standards. “The first step is not to rely entirely on offsets, but to integrate carefully selected offsets into broader climate strategy that starts with making direct emissions reductions through energy efficiency” (DiPeso 2007).

Third-Party Monitoring and Enforcement

The Financial Industry Regulatory Authority (FINRA) is the third-party watchdog company for the CCX. FINRA's core tasks are to assist in the registration of new CCX members, to ensure CCX members comply with CCX procedures, to audit the emissions baselines, and to verify and certify the annual offset program. Through the registration process, FINRA educates all participants on the market rules. FINRA must enforce the rules specified by the market for carbon, the CCX, and the federal securities laws. Therefore, if a company violates any laws or rules of the trading program, FINRA is bound to reporting the violation both to CCX and the federal government (FINRA 2002).

There are advantages and disadvantages to having a third-party monitor. FINRA appears to govern and monitor without bias, but also as a business they take the simplest and most cost-effectives measures to calculate baselines, GHG emissions and effectiveness of the offset programs.

Criticism

From discussion so far, we have a clearer understanding of the CCX – its role and purpose in the reduction of GHG emissions – and its members through the various case studies. Despite being five years old, the CCX has proved to be a popular and somewhat successful system for GHG reduction. But is it successful?

The CCX is exceptional because it is small and private in the sense that it was established by private entities and transactions, without public or governmental input (Goodell 2006). In this way, the CCX trading system is not transparent to the public and its actions do not involve stakeholders in any way, thus ensuring confidentiality for its members (IU News Room 2008, Goodell 2006). Despite a third party verifier, the methods used by the CCX and the verifier to evaluate reduction projects by its members are not made to the public (IU News Room 2008).

The CCX is not a perfect solution to regulating GHG emissions and thus faces many critics. One main concern with the CCX is the presence of loopholes in its rules. In particular, its offset regulations are widely criticized for being lax (Goodell 2006). The loopholes essentially allow businesses to meet their emission targets without actually adhering to its emission reductions. For instance, if a business joins the CCX and then opens a new plant, the emissions from the new plant will not be accounted for in the business’ total emissions. This effectively allows the businesses to merely comply with the emission caps despite actually emitting more than permitted by the cap (Goodell 2006).

Another major criticism of the CCX is its low emission reduction goals (Shyy 2006). Critics claim that its initial reduction policy of 1% per year was not only too modest but also too business-friendly (Arnold 2006, Goodell 2006, Shyy 2006). More importantly is the issue of the calculation of the baseline emission, the point from which emissions increases and reductions are measured. Since the CCX is private, the methods used to calculate the baseline emissions are elusive. This raises questions about the legitimacy of the emission reductions trumpeted by large companies as to whether or not the reductions are the result of good corporate social responsibility or are they really a function of high baseline levels (Arnold 2006, Goodell 2006).

Even with a cap system that theoretically should penalize businesses that do not meet their emission targets, there are apparently no explicit penalties for companies that missed their targets (Goodell 2006). A condition included in the CCX rules states that emissions exceeding 4 percent (today it is 7 percent) of the business’ baseline emission will not be counted. Given the lax rules, the effectiveness of this system is compromised (Goodell 2006). An additional problem is that the rules are not officially published anywhere and to see them in-full, one must be a member of the CCX. This brings to question how much the CCX is really pushing for environmental change (Bright 2008).

Another concern is whether offsets reduce CO2 levels in the atmosphere. “Offsets, no matter how innovative, cannot promise us a velvet environmental revolution. Rather than bringing about major change, they may extend the life of business as usual” (Bright 2008). Critics emphasize the lack of a standard for measuring and verifying genuine offsets to ensure they would not have happened without CCX (DiPeso 2007). An example of this ambiguity is the case of a Nebraskan farmer who gets paid by a CCX member to practice no-tilling to count as an offset. No-tilling farming prevents the release of trapped CO2 in soil by planting crops without mixing up the soil (Goodell 2006). The complication is that the farmer has been practicing no-tilling for 14 years. This offset would happen without the payment of CCX, which only creates problems for using offsets to reduce CO2 levels. We encountered this issue again in an interview with Granger, a company that had been harnessing CO2 released from landfills and using it as an alternative energy source for years prior to the founding of CCX.

Clearly, the CCX is not without a host of problems, inefficiencies and criticisms. As of now, there is no government-sanctioned emissions market and the CCX is currently the only voluntary GHG market system in the United States. While markets in general are effective in dealing with pollution, it would be foolish to only rely on markets to manage a global problem like global warming. Scientists say that global emissions must be reduced by 50 percent over the next 50 years if we are to avoid the dire consequences of climate change. Markets are only one of a handful of tools that we must explore and eventually use to ensure environmental sustainability.

Conclusions

“However high-minded in principle, the Chicago Climate Exchange is also about making a buck off the planet's looming climate catastrophe” (Goodell 2006). It is certainly concerning that the CCX make commissions off of each trade in the CFI market and is therefore quite profitable. If the CCX hopes to maintain its image as leader in catalyzing positive environmental change and reducing GHGs, then it must make some bold changes that will attract the attention of its participants and critics, because the CCX cannot afford to send the wrong message.

While there are cases to be made defending the CCX, we see it as an ineffective system at bringing about change and with each coming year companies will get better and better at manipulating its systems. There is certainly a huge problem with the system when “a member company emits less carbon dioxide than it did a few years ago, it gets to sell those reductions as offsets—regardless of whether they are the result of legitimate reductions in carbon output or just declining sales, plant closures, routine maintenance, or, say, rising sea levels” (Bright 2008). Altruistic or noble-minded companies, such as the Aspen Skiing Company, and institutions, such as Tufts, may be involved in the CCX, but it appears that many of the players involved, particularly in the private sector, are more focused on getting ahead of the yearly reductions goal after starting with a particularly poor baseline year and then making profits in selling excess CFIs and also benefitting from a public relations standpoint. For instance, a company reducing 5% of its baseline emissions in year one could theoretically not change a thing for four more years and still profit off of CFI trades. Therefore companies that make any sort of large change have no incentive to keep changing by this system.

The CCX also takes a "polluters pay" stance, but it doesn't push that stance very strongly. The epoch II mentality is that the market can effectively and consistently be manipulated to take advantage of innovation from an opportunity to make money (Dryzek 1997). Unfortunately, companies can and are finding ways to manipulate the CCX system to generate profits while only making short-term improvements, without consideration for long-term environmental improvements.

Our policy recommendations based on our research are to:

1. Eliminate the sale of credits from past years in conjunction with increasing yearly reduction goals to promote consistent yearly change and investment in future green technologies. The problem with buying and selling past credits is that companies who had one successful year have no encouragement to keep changing because they have more than enough credits and can make profits off it, but won't keep changing. That said, such a model can be successful if large enough changes are made quickly. Therefore, if the reduction rates were to increase from the current yearly rate of 1%, companies with the potential to cut emissions faster would do so. This is because they would see an opportunity for profits, because there would be more underachieving companies and therefore a higher market demand for credits.

2. Force companies to set their baseline year as their starting year. Currently, companies are allowed to choose their baseline year from the past few years. Such a system allows companies to chose their worst year and work from there.

3. Attempt to emulate the cap-and-trade system for SO2 imposed by the government, because that has been such a successful program.

4. Step up punishments, because there is no current system in place to impose severe penalties on excessive over-producers.

5. Reduce commissions on CFI trades, because it supports the spirit of change that the CCX is supposedly creating.

6. Revive the offsets program by enforcing stricter regulations on offset programs through FINRA and impose some additional penalty for companies having to offset CO2 instead of avoiding emissions altogether.

7. Publish the CCX participant rules to open them to scrutiny. Concealment doesn’t allow for the criticism of public review and the natural corrections that are made from that criticism.

If the CCX hopes to avoid falling off its pedestal, it cannot appear to be another profit-seeking business, benefitting from a growing environmentally-friendly cultural movement. As long as there is no government system in place to deal with excessive GHG emissions the CCX must be fixed. The path to “business-as-usual" is a dangerous one for a company in this position, because it has the potential and the participation necessary to be a leader in this cause and must capitalize on it.

Works Cited

Arnold, Tom. 2006. Sandor and the Chicago Climate Exchange: Build it and they will come? TerraPass Blog. August 1 2006. Retrieved April 19, 2008 .

Aspen Skiing Company: Environmental Commitment. 2007. Retrieved December 10, 2007 .

“A PROGRESS REPORT ON THE CITY OF PORTLAND AND MULTNOMAH COUNTY LOCAL ACTION PLAN ON GLOBAL WARMING.” 2005. Retrieved April 20, 2008 .

Bright, Adam M. 2008. “Buy Now, Pay Later: Is it too late to buy off our carbon debt?” Good Magazine, January 18, 2008. Retrieved April 28, 2008 .

Chicago Climate Exchange. 2007. 10 Dec. 2007 .

City of Melbourne. 2006. “City of Melbourne signs up for carbon trading scheme.” City of Melbourne, Retrieved April 15, 2008 .

Dipeso, Jim. 2007. “Carbon Offsets: is the Environment Getting What You Pay for?” Environmental Quality Management (2007): 89-94. Retrieved April 17, 2008.

Dryzek, John. 1997. The Politics of the Earth: Environmental Discourses. Oxford: Oxford University Press.

DuPont Chemicals. 2006. “2015 Sustainability Goals” Brochure, DuPont Chemicals, September 28, 2006. Retrieved April 17, 2008.

Environmental Protection Agency. 2008. “Ozone Layer Depletion.” Washington, D.C.: Environmental Protection Agency, Retrieved April 17, 2008 .

Facilities Management at the University of Iowa. 2005. “Renewable Energy at the University of Iowa.” (2005). Retrieved April 20, 2008 .

FINRA. 2008. “About the Financial Industry Regulatory Authority.” FINRA, Retrieved April 14, 2008 .

FINRA. 2002. “NASD and the Chicago Climate Exchange® Reach Historic Agreement: World's Leading Provider of Regulatory Services to Oversee Voluntary Private-Sector Program to Trade Greenhouse Gases.” FINRA, Retrieved April 14, 2008 .

“Going green: Is hospitality doing enough?” Caterer and Hotelkeeper October 4, 2007. Retrieved December 10, 2007 .

Goodell, Jeff. 2006. “Capital Pollution Solution?” The New York Times Magazine. July 30 2006.

Retrieved April 10, 2008 .

Hammacher, Deb., Nichols, Sue. “MSU goes greener in joining Chicago Climate Exchange.” News release, November 14, 2006. Retrieved April 20, 2008 .

Interview with Ben Cronheim, Dupont EH&S. April 18, 2008.

Interview with Todd Davlin, Director of Operations of Granger Energy Companies. April 16, 2008.

Interview with Dawn Granger, Granger Energy of Decatur, LLC. April 14, 2008.

Interview with Matthew Hamilton, Manager of Community and Environmental Responsibility at Aspen Skiing Company. April 21, 2008.

Interview with Rafael Marques, Vice President of Chicago Climate Exchange Inc. April 18, 2008.

Interview with Ferman Milster, Associate Director of Utilities & Energy Management at the University of Iowa. April 11, 2008.

Interview with Dan Richardson, Global Warming Manager for Aspen. April 23, 2008.

Interview with James Rocco, Assistant Engineer of Cumberland County Improvement Authority. April 16, 2008.

“Introducing Auden Schendler — Part I: Those quotes in Businessweek’s ‘Little Green Lies’.” Climate Progress. 2006. 10 Dec. 2007 .

IU News Room. 2008. “Congress, carbon and the Chicago Climate Exchange – this time it’s our money.” January 15 2008. Indiana University, Retrieved April 15, 2008 .

Mazmanian, Daniel A. and Kraft, Michael, editors. 1999. Towards Sustainable Communities: Transition and Transformations in Environmental Policy. The MIT Press, Cambridge, Massachusetts. Retrieved April 20, 2008.

Norton, Jim. 2006. “Climate Change Initiatives in New Mexico and the West”: Retrieved April 16, 2008 .

Shyy, Alice. 2006. Offset Upset. Plenty Magazine. August 26 2006. Retrieved April 20, 2008 .

Taiyab, Nada. 2005. “The Market for Voluntary Carbon Offsets: a New Tool for Sustainable Development?” Gatekeepers Series (2005). Retrieved April 16, 2008.

Yang, Tseming. "The Problem of Maintaining Emissions “Caps” in Carbon Trading." Vermont Law. 22 Sept 2006. Vermont Law School. Retrieved April 12, 2008 .

Interviews:

Amar - Interview with Rafael Marques, Vice President of Chicago Climate Exchange Inc. April 18, 2008.

Brittany - Interview with Matthew Hamilton, Manager of Community and Environmental Responsibility at Aspen Skiing Company. April 21, 2008.

Chelsea - Interview with Todd Davlin, Director of Operations of Granger Energy Companies. April 16, 2008.

Chelsea - Interview with James Rocco, Assistant Engineer of Cumberland County Improvement Authority. April 16, 2008.

Christel - Interview with Dan Richardson, Global Warming Manager for Aspen. April 23, 2008.

Ellie - Interview with Ferman Milster, Associate Director of Utilities & Energy Management at the University of Iowa. April 11, 2008.

Grace - Interview with Ben Cronheim, Dupont EH&S. April 18, 2008.

Roland - Interview with Dawn Granger, Granger Energy of Decatur, LLC. April 14, 2008.

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