Richard Sandor spent the past decade peddling a big idea: that capitalism has a solution for global warming. The trading house he launched in 2003, the Chicago Climate Exchange, would be the locomotive pulling an American environmental revolution into the 21st century as smokestack industries bought and sold a commodity called greenhouse gas emission allowances. Carbon futures and options, so his theory went, would turn financial speculators into tree-huggers.
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On Friday, Sandor and the other shareholders of parent company Climate Exchange cashed out of this big idea for about $600 million. The IntercontinentalExchange (ICE), an electronic futures and derivatives platform based in Atlanta and London, announced it had agreed to purchase the three exchanges, the Chicago Climate Exchange, Chicago Climate Futures Exchange and European Climate Exchange.
The combination brings the still-small U.S. carbon market closer to the profitable world of global over-the-counter (OTC) energy trading, which ICE specializes in. It also consolidates carbon emissions trading under the tents of two major commodity exchanges, ICE and CME Group, which operates the New York Mercantile Exchange's nascent platform for carbon trading, the Green Exchange.
"The combination of Climate Exchange's emissions markets and ICE's futures and OTC energy markets is an important and logical strategic combination for our customers and shareholders," said ICE's chairman and CEO, Jeffrey Sprecher.
In a statement, Sprecher noted that Sandor's idea paved the way for Europe's carbon cap-and-trade program. There, the exchange developed into the major platform for trading offsets in the form of E.U. carbon emissions allowances and certified emission reduction credits generated under the United Nations' Clean Development Mechanism.
A 'rough five years'
But the Chicago Climate Exchange and its sister futures exchange have struggled for traction in the United States. And it is in the U.S. market that Sandor had hoped to build a large trading operation that would be good for both business and the environment.
"This has been a rough five years," Sandor acknowledged in a telephone interview Friday. Sandor said the nature of ICE -- an energy-trading platform -- and the need to boost shareholder value and drive down the cost of trading carbon contracts led to the decision to sell. Shareholders needed to walk away happy, he said, in light of the roller-coaster ride that now defines climate politics and carbon markets.
"We thought it was the right combination with the right exchange and at the right time," Sandor said. "As other exchanges have merged, they've talked about the benefits of one platform, a single clearinghouse for both energy and environmental products, all of which will be healthy for the environmental space."
To some, ICE's buyout of Climate Exchange did not come as a huge surprise. The two have partnered almost since Climate Exchange's inception, with ICE providing the electronic platform for Climate Exchange's trading operations.
Still, analysts disagree on the likely reasons for the merger. Some said ICE recognized significant advantages to increasing its footprint in the European market, where carbon and energy trading are closely linked. Others said the ongoing tepidness of the voluntary U.S. carbon market, uncertainty that Congress can pass climate legislation, and high likelihood that U.S. officials will not let companies count existing emissions credits toward compliance in a federal program contributed to the decision to sell.
The European Climate Exchange represents about 90 percent of all exchange-traded carbon transactions under the European Union's Emission Trading System. "In Europe, you can't trade power without trading carbon," said Emilie Mazzacurati, manager of North American carbon market research at Point Carbon. "It only makes sense that there is further integration."
Buying into uncertainty, but potential growth
The U.S. carbon market is hamstrung by political uncertainty, but Mazzacurati said the Chicago Climate Exchange is still a smart investment for boosting ICE's position as a major trading platform in the United States. "In the U.S., it's really the potential growth that they're buying," she said, referring primarily to the futures exchange, which has a strong hand in developing offsets contracts.
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