Greenhouse-gas emissions are released into the atmosphere, so you may be wondering how something in the air can be bought and sold. What's actually traded on the CCX market is something called the carbon financial instrument (CFI).
A CCX member who has hit or surpassed its target emission reduction goals has an emission credit. These credits, the difference between the actual GHG emission levels and the allowed GHG emission levels, are represented by the CFIs. One CFI contract is made up of exchange allowances and exchange offsets and represents 100 metric tons (110 tons) of carbon dioxide equivalent (CO2e), the international measure of greenhouse-gas emissions. CFI contracts can be saved or sold to members who exceeded their reduction goal to help with their compliance. But sold at what cost? That's the beauty of the system -- the market demand sets the price of CFI contracts. The more members who want to buy credits, the more in demand they are, which causes prices to rise accordingly.
Trading isn't conducted through brokers, but is instead done anonymously (to other users) on the CCX electronic trading platform, an Internet-based trading floor that is linked with the CCX registry. This comprehensive system is available to the CCX member base and offers administrative and reporting tools, as well as a tracking system for members to manage their emission inventory (the gases they're emitting), portfolio of CFI holdings, bids (orders) and statements, emission allowances and offsets.
CFIs are issued by the year in which the emission reduction was realized: 2003 Vintage CFI, 2005 Vintage CFI, etc. A CFI can be used in the same calendar year as its vintage, or a member can save it for use in upcoming years.
Transactions made in the CCX electronic trading platform are done based on live market quotes posted by members and may be settled one of two ways -- trades that are exchange cleared or trades that are bilaterally cleared. Exchange cleared trades are those cleared and settled through the CCX; the cash settlements in bilaterally cleared trades are handled by the members themselves. All trade settlements are made in U.S. dollar amounts.
All members with exchange allowances and exchange offsets are monitored continuously and report their emissions each year via procedures set up by the CCX and by the World Resources Institute/World Business Council for Sustainable Development initiative. Another layer of monitoring happens through the Financial Industry Regulatory Authority (FINRA), a nongovernmental regulator for all securities firms doing business in the United States. In addition to the CCX, FINRA works with NASDAQ, the American Stock Exchange and the International Securities Exchange. FINRA also verifies offset projects proposed and registered by members and offset providers and aggregators.