How the Chicago Climate Exchange Works

Membership of the Chicago Climate Exchange

The city of Chicago itself is part of the Chicago Climate Exchange, along with auto giants, universities and power companies.
The city of Chicago itself is part of the Chicago Climate Exchange, along with auto giants, universities and power companies.
Robert Glusic/Digital Vision/­Getty Images

The member base in the CCX is broken down into categories:

  • Members
  • Associate members
  • Participant members (offset providers and aggregators and liquidity providers)
  • Exchange participants

Members are those who directly generate and emit greenhouse gases through activities such as energy production, manufacturing and travel. Associate members don't generate their own direct GHG emissions but instead agree to offset 100 percent of indirect emissions, including electricity (and other energy) use and business travel.

Offset pr­oviders and aggregators and liquidity providers are participant members. Offset providers own projects that offset GHG emissions by storing, eliminating or reducing those emissions. Qualifying projects generate exchange offsets that can be traded (we'll find out more about these later). Offset aggregators administratively manage offset projects for the providers.

Liquidity providers and exchange participants are a little bit different. Liquidity providers aren't in it to comply with emission reduction, they're market makers -- professional traders, hedge-fund groups and proprietary-trading groups -- companies or individuals who want to trade on the CCX market. Exchange participants are companies or individuals without a GHG emissions reduction commitment of their own, such as the U.S. House of Representatives and the Clean Air Conservancy. Exchange participants buy carbon financial instruments (the CCX's measure of emissions) with the sole purpose of retiring the contracts.

With so many types of members, the CCX is made up of a diverse set of players, from Amtrak and Ford Motor Company, to waste-management facilities and even a brewing company. About 25 percent of members are from U.S. power utilities, 17 percent are part of the Dow Jones Industrials and 11 percent represent Fortune 100 companies. It's not just industry, though. Eight universities, eight U.S. cities, three counties and two states have also joined the CCX [source: Chicago Climate Exchange].

Joining is voluntary and self-regulating and comes with attractive benefits. Many U.S. companies see government emissions regulations in the future and want to get on the path to compliance before legislation is enacted. Many also need to comply with Kyoto Protocol regulations if they do business in countries committed to that treaty. Others see it as a good way to make extra money. If making the minimum reduction is easy for a company, it can profit from selling credits on the exchange. It's not all about profit and regulation, though. Reducing emissions is good for the planet and good public relations.

To join the CCX cap and trade system, each GHG-emitting member pays an entry fee and is given a yearly emission allowance based on their emission baseline and the CCX emission reduction schedule. This is their exchange allowance. Annual membership costs and compliance are also determined by the emission baseline and audits conducted by third-party verifiers. Once committed, the contract is legally binding.

The emission reduction schedule is two-phased. A member's emission baseline is calculated from average of annual emissions, worldwide, during a specific period of time. For Phase I (the first four years of the CCX -- 2003 to 2006) baselines were determined by 1998 through 2001 annual emission levels; during this phase, members reduced their carbon dioxide (or other GHG) emissions by a minimum of 1 percent annually. Phase I members committed to reducing total emissions to 4 percent below their established baseline.

Phase II extends of the reduction schedule and covers the subsequent years up to 2010. For members who participated in Phase I, emission reduction requirements rose by 2 percent, to a total of 6 percent. The baseline for new members joining Phase II is established by total emissions during the year 2000, and the reduction target is a minimum of 6 percent below that baseline. Phase III? We'll have to wait and see.