MERCHANDISER
California Carbon Allowances Make Promising Start Two leading emission exchanges – ICE and GreenX
– have launched futures contracts to service the California carbon market, marking the first round of a battle to determine who will serve as the primary platform for the US’s largest carbon market. In one corner is the IntercontinentalExchange, which will begin listing vintage-specific California carbon allowance (CCA) future contracts on Monday. The ICE contracts are for delivery in 2013-2015 immediately available, with CCA options to be made available from September 19th
. These contracts will
require the delivery of a specific vintage year allowance or earlier to satisfy the terms of the deal. In the other corner is the Green Exchange (GreenX), which has launched its CCA contracts that correspond to compliance periods, not vintage year. The GreenX contracts are cleared by CME Group, the world’s largest exchange traded commodity marketplace. John Melby, GreenX’s North American MD, said
GreenX designed their contract after extensive engagement with market participants. He said the GreenX can rely on its experience in the European Union’s carbon market to help it develop in California. “We’re number two in Europe at the moment, but that doesn’t mean we’re second best,” Melby said. “We were the first out of the gates to announce our contract for California, and we don’t plan on being number two.” Several sources said that while ICE will have a leg up
with power traders, GreenX is better positioned to be the platform of choice for “pure carbon” traders. “The Green Exchange is further along in understanding the products and writing the documents and communicating that they are going to have an exchange,” a second trader said. “The question is whether ICE can catch up.”
Market sources said ICE’s biggest advantage coming out of the gate is that traders of western power in the US currently use ICE for those transactions, so they are already familiar with the platform. “The genuine hedgers of these things are already going to be using ICE, so they’ll just have to pull up their California credits on there too. They don’t have to install any new software,” one trader explained. Brookly McLaughlin, a spokesperson for ICE, said
the exchange has experience in developing new environmental markets and noted that the ICE-owned Chicago Climate Futures Exchange (CCFE) has 98% market share in the RGGI and SO2 markets. “With our California carbon allowance contract,
we look forward to continuing that leadership and delivering the risk management solutions that traders are looking for as this new market evolves,” said McLaughlin. CCA trades on ICE can be executed anonymously via WebICE or submitted as cleared OTC trades, she said. Ultimately, there will probably be enough room for
both exchanges, another trader commented. “They both have their advantages and my guess is there will be trading activity on both ... the market will be big enough for more than one exchange. I don’t see one exchange winning and the other going away,” he said. There are currently three active contracts for California
carbon allowances – ICE’s contract for delivery of 2013 allowances in December 2013, the GreenX’s contract for 2012 allowances, and Barclay’s previously established contract for over-the-counter allowances. Even though ICE’s new contract appeared to jump
quite dramatically in the first week of trading – rising 33% – market participants downplayed the significance of the move, saying it was natural for prices to bounce around in the early stages of any new exchange product. Sources attributed the higher than expected prices
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www.commodities-now.com 22 September 2011
to the newness of the exchange-traded products and the entrance of new participants into the market – not market fundamentals or news developments. The high exchange prices also boosted the price of contracts in the OTC market. Overall, participants said they were encouraged by what they saw, with one trader calling this week’s activity a great start. “I believe there are natural compliance entities beginning to excise their hedging programs and that’s probably the most important development,” said Kedin Kilgore, head of Barclays’ US emissions trading. “I also believe they will need to see more efficient and
larger markets being made. That’s when it becomes interesting and useful for them. We’re waiting for the same thing,” he said. Market participants are eagerly waiting for the
California Air Resources Board (ARB) to release their revised market rules [due September 8th
]. They continue
to hold out hope that regulators will alter a provision around offset invalidation that traders say is preventing the development of the offset market.
Thomson Reuters Point Carbon Additional reporting from Commodities Now
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