In the U.S., the Chicago Climate Exchange and the Chicago Climate Futures Exchange trade voluntary carbon permits that are legally binding. Members of the CCX, as the Chicago exchange is known, include Ford Motor Co. (NYSE:F), United Technologies Corp. (NYSE:UTX), DuPont (NYSE:DD), Potash Corp. (NYSE:POT), American Electric Power Co. (NYSE:AEP), and FMC Corp. (NYSE:FMC).
Now IntercontinentalExchange, Inc. (NYSE:ICE) is getting into the game. ICE is an Atlanta-based company that operates London-based global futures exchanges, clearing houses, and OTC markets in crude oil, refined products, natural gas, electrical power, plus a variety of agricultural products and derivatives. It operates the world’s largest energy trading platform.
Known as The Ice, the company announced today that will purchase London-based Climate Exchange plc for about $604 million. Climate Exchange operates carbon trading floors in Europe, Chicago, Toronto, and China. In Europe, the exchange trades the carbon permits issued by the EU under the cap-and-trade scheme put in place to help the EU meet its commitments to the Kyoto Protocol to reduce greenhouse gas emissions.
The acquisition gives The Ice a strategic position in what it believes will eventually be a large market for carbon emissions credits. The European Climate Exchange is the world’s largest trader of carbon emissions credits, and the CCX has a substantial share of U.S. emissions permit trading.
The deal values Climate Exchange at 58X the company’s adjusted 2009 pretax profit, so it is pretty rich. However, the potential for growth is very large because carbon trading has yet to take hold fully in the U.S. or China.
The proposed U.S. climate change legislation pending in the Senate has dropped the cap-and-trade provision in an effort to accommodate opponents who believe that carbon permits will drive up the cost of electricity generated from coal and natural gas. The higher costs would be passed on to consumers who are already struggling with high energy costs.
For supporters of cap-and-trade, or some similar method for putting a price on carbon emissions, the issue is one of adding a carbon component to the cost of burning hydrocarbons to replace what have historically been external costs absorbed by everyone in the world.
The Ice is taking a calculated risk with this buy. It’s betting that sooner or later a cap-and-trade system will be adopted in both the U.S. and China to deal with the emissions of greenhouse gases. The only other reasonable option to restrain emissions is some kind of carbon tax, and new taxes are poisonous in the U.S..
Of course, the U.S. and China could just drift along for a long time without either making any serious attempt to deal with carbon emissions, and the EU is already talking about ditching the whole idea. That would be bad for everybody.
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