You asked for information on the Chicago Climate Exchange (CCX), a commodities market that trades credits for reducing emissions of carbon dioxide and other greenhouse gases. You specifically wanted to know (1) who can obtain the credits, how they can do so, and how they can sell the credits; (2) can state governments participate in the market, e. g. , could Connecticut obtain credits for installing fuel cells in its facilities and selling the credits on the market; and (3) if the state offered financial incentives to individuals or businesses for installing fuel cells or other alternative energy sources, could it require them to assign the resulting credits to the state for sale on the CCX.

CARBON TRADING MARKET

CCX is a voluntary trading system that reduces emissions of carbon dioxide and other greenhouse gases BY using a cap and trade approach. Public as well as private sector entities can become members. Charter members of CCX included the city of Chicago as well as major companies such as Bank of America, Ford, Dupont, and American Electric Power. The states of Illinois and New Mexico are currently members, as are several state universities, counties, and municipalities.

Members must agree to reduce their greenhouse gas emissions to 6% below the average of 1998-2001 emissions by 2010, with intermediate annual targets. While participation in the system is voluntary, the agreements are legally binding. Members are subject to emissions audits by the Financial Industry Regulatory Authority.   They also must pay an annual fee that ranges from $ 2,500 to $ 35,000, depending on their baseline emissions. CCX staff estimate that Connecticut's fee would be approximately $ 5,000 if it became a member.

Members that reduce their emissions below the targets earn credits (CCX Carbon Financial Instrument contracts) they can sell or bank towards meeting the targets in future years. Each credit represents 100 metric tons of carbon dioxide equivalent.   (Some gases, such as methane, have a larger impact on climate than others and are thus given greater weight in the system. )

Members that emit greenhouse gases above the targets can meet the system's requirements by buying credits from other members. Members that do not meet the targets can also buy credits from offset providers who own qualifying offset projects.   There are several types of offset projects, including renewable energy systems. Offset projects must be owned by individuals or entities in the agricultural, forestry, waste management, or renewable energy sectors that do not have significant greenhouse gas emissions.

Connecticut could become a CCX member and meet the emissions target through a variety of measures, including installing renewable energy systems in its buildings. To the extent that the state's emission reductions exceeded the targets, it could sell the resulting credits on the CCX market. However members participate in the exchange on a corporate, rather than a facility, basis. It does not appear that the state could obtain credits for installing a renewable energy system in a state facility without reducing its overall emissions.

The state could require recipients of state financial assistance for alternative energy systems to transfer any credits they earn for these systems to the state as a condition of the assistance. However, for the recipient to earn credits, it would have to be a CCX member or offset provider. A few CCX members, most notably United Technologies Corporation, have a major presence in the state, but most do not.

It is unclear that fuel cells would qualify as offset projects. CCX defines renewable energy systems as those that use wind, solar, hydropower, or biofuels. It has not addressed whether fuel cells are renewable systems. Fuel cells are substantially more efficient than conventional technologies and have virtually no emissions. But in practice they use natural gas, which is nonrenewable, as their fuel. On the other hand, CCX does allow offset providers to earn credits for energy efficiency and fuel switching projects on a case-by-case basis. Fuel cell and other alternative energy systems might qualify as offset projects under this provision.

It is also unclear whether it would be in an entity's financial interest to become an offset provider with regard to a fuel cell project. CCX bars renewable energy systems that are used to meet state renewable portfolio standards (RPS) from participating in the market as offset projects. In Connecticut, the electricity produced by fuels cells and by solar and wind systems is considered a class I renewable resource under our RPS. CCX also requires the offset project owner to surrender the renewable energy credits generated by qualifying systems to CCX, which then retires it to prevent double counting. The renewable energy credits technologies such as fuel cells produce are often critical to the economic viability of a renewable energy project.

Further information about CCX is available at www. chicagoclimateexchange. com.

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