Canada tests credit trading exchange

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Energy companies in the Canadian province of Alberta have begun trading CO2 emission reduction credits -- some of which are created by wind energy -- through a new Internet-based exchange. The KEFI Exchange converts emissions reductions on the province's electricity grid into a commodity that can be traded anonymously, like grain or soybeans. "We're trying to give some substance to what is, in essence, nothing," says Sheldon Fulton, the exchange's developer and president.

The system uses an index that links emission levels to electrical generation, and rewards actions that result in a cleaner average production. When a wind turbine displaces a greenhouse gas-emitting generator on the grid, it pulls the index up and receives emissions-free index points (EFIs) for every megawatt hour it delivers. A coal fired generator can also earn points by choosing not to generate power. Once a generator accumulates 1000 (K) emissions-free index points it earns a KEFI, a tradable unit equal to 12 tonnes of carbon dioxide reduction. Alberta's electricity system produces about 50 million tonnes of CO2 emissions a year.

Since the exchange began operating in October on a beta test basis, says Fulton, participation has been limited to 11 companies, including three wind power developers, that worked with him on its design. Only one trade has been conducted, but Fulton expects more activity when the exchange officially opens later this month. He hopes to have between 25 and 30 companies participating by the end of the first quarter of 2000. "At that level you can start to get some reasonable interaction in the marketplace."

Still, neither Fulton nor Fred Gallagher, managing director of Vision Quest Windelectric, anticipate large volumes of trading right away. The exchange is operating in an arena where the rules have yet to be defined. There is no legal ceiling on CO2 yet and no guarantee that Canada's federal government will recognise any of the KEFIs being bought and sold today. "I'm not sure the market is really ready for it," says Gallagher, whose company was involved in the creation of the exchange. "It's a long term play."

Fulton agrees it will be the rules governing which reduction measures receive credit that will ultimately give the KEFI value. In the short term, he says, the exchange is a tool to help convince policy makers that market-based mechanisms to reduce greenhouse gas emissions will work. "What we're doing is establishing the principle," he explains. "There's been a lot of debate as to whether or not you could trade emission reductions as a commodity. We think its important that we demonstrate that we can."

Instead of a carbon ta

xUnlike, for example, a carbon tax, "the dollars companies want to spend to buy credits will go directly to the companies that need the money to make the investment to generate the credits," he says.

Environmentalists are reacting cautiously to the new exchange. Rob Macintosh, director of corporate eco-efficiency services for Alberta's Pembina Institute for Appropriate Development, says he's not convinced of the "validity" of the exchange's credit creation mechanism. In any trading scheme, he says, it's essential to ensure that credit is given only for actions that are additional to business-as-usual. Otherwise, "Canada's no better off and the atmosphere's no better off. All it means is somebody else is going to have to find real reductions, and that either means a cost to the taxpayer or an additional burden on other industries," Macintosh says.

"I'm not aware of any sort of sufficient mechanism in the KEFI process that would protect against non-additional offsets being credited."

Fulton argues that from a "pure commodity trading perspective" it shouldn't make any difference. "If there's an emission reduction you should be entitled to the value," he says, adding that, right now, it's up to the market to weight the risks and decide what that value is. If necessary, he adds, the ability to "handle additionality" is inherent in the exchange's design. Rules could, for example, restrict the ability to earn KEFIs to generators making certain minimum improvements in the index.

In addition to operating a spot market, the exchange will sell futures contracts for emissions credits. The contracts will give companies the ability to attract capital, says Fulton, a feature of the exchange that's already led to inquires from close to a dozen wind producers. "A forwards market is critical to the long-term ability to forecast your income and thereby finance your projects," says Gallagher.

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