‘CCX offers market solutions to environmental issues’

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Michael J Walsh is an old associate of Richard Sandor, who is better known as the father of carbon credits trading. So, when Sandor founded the Chicago Climate Exchange (CCX) in 2003, he chose Walsh as the executive vice-president. An accomplished economist, Walsh has been involved with carbon credits trading on behalf of CCX’s predecessor, Environmental Financial Products. He has also conducted auctions of sulphur dioxide emission allowances for acid rain reduction. He spoke to FE’s Rajiv Tikoo during his recent visit to India. Excerpts:

How did Chicago Climate Exchange come into being?

It was in late nineties that Richard Sandor saw the need for building a bottom-up system to offer market-based solutions to solve environmental problems. So, he set up the world’s first climate exchange in Chicago. It’s a voluntary, but legally binding trading system to reduce greenhouse gas (GHG) emissions.

What does voluntary, but legally binding mean?

The exchange members make a voluntary, but legally binding commitment to reduce their GHG emissions. If members more than meet their targets, they sell additional allowances to those who fall short of their targets.

The US has not ratified the Kyoto Protocol. Is it hampering trading?

Probably, our activity would have been higher if the US had a mandated system, but we didn’t set up the exchange in the hope that the US would ratify the Kyoto Protocol.

Even the future road map leading to the new climate change treaty is not clear yet. How do you cope with this long-term uncertainty?

The space is completely saturated with uncertainty both at the national as well as at international levels. We are taking a lead to reduce the uncertainty by providing rules on emission reduction goals, standardised audits, standardised quantification and standardised trading rules.

Do you think such market moves put pressure on political establishment to act?

I don’t know whether it puts pressure or not, but it does provide working examples of proven rules and methodologies to ensure that significant emission reductions can be made immediately.

How is your affiliate European Climate Exchange doing?

The European exchange has been active for three years now. Its mission is to provide low-cost trading for instruments that have been established by government action.

It has already become the focal point for carbon credits markets in Europe and has captured large chunks of trading, offering transparency and low transaction costs.

Are any more exchanges coming up in the near future?

We do expect there will be exchanges around the world and we are taking steps to make it happen. The Montreal Climate Exchange should be activated this year.

Besides, we have indicated very publicly our intention to provide exchange services, standardisation, low transaction costs and price transparency in any environment.

What is the nature of your tie-up with the Multi-Commodity Exchange of India?

The Multi-Commodity Exchange of India has a licensing agreement with us to list small versions of our carbon financial instruments. It’s easily accessible to Indian firms at Indian hours and in Indian currency.

Is the response of Indian companies encouraging?

Our open market mechanism is very welcoming of Indian participation. Indian companies are already participating in the exchange to introduce mitigation projects in India. They want the opportunity to generate income and reinvest that income to reduce GHG emissions. Recently, we offered a customised exchange service to Tata Motors for selling its carbon credits under the Clean Development Mechanism (CDM).

What are your predictions for the CDM market?

It’s impossible to say with certainty where the CDM would be after 2012. We consider it like any first generation mechanism. What is important is to recognise the impact of capital flows to developing countries, engagement of developing countries and opportunities for clean technology, which are very important in building a global response to climate change.

How do you ensure transparency and accountability?

The amount of material that we put out around the world is comprehensive and enormous. Perhaps the most important factor is providing information on the price of carbon, which is of critical importance in driving behaviours and responses as well as planning and launching mitigation projects. And we are completely transparent on pricing.

How are you addressing the systemic shortcomings?

We need to make sure that all sectors have a clear set of rules and at reasonable cost. It’s critically important to have a structured approach that makes sense and is credible. To optimise the global response, we need to leverage the diplomatic and business resources. Markets don’t drive emissions down; standards do. Technologies and methodologies do. So, we need to refine them as early as possible. If governments provide right signals and incentives to the private sector, capital markets will offer a robust responses.

Where do you see yourself in the next five years?