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ICE launches benchmarks to track carbon prices

Tied to major U.S. and EU carbon markets, indexes show how derivative markets can manage climate risk

23 April 2020

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Intercontinental Exchange has launched a new family of indices designed to track the global price of carbon, the latest sign that derivatives markets are a key part in managing risks related to climate change.

The ICE Global Carbon Futures Index, which debuted on April 22, is formulated using volume-weighted average pricing from the three most actively traded carbon markets in the world: the European Union Emissions Trading Scheme, which started in 2005; the California Cap and Trade Program, which started in 2013; and the Regional Greenhouse Gas Initiative, which was established in 2009 to coordinate efforts in the Northeastern U.S. The index will be calculated in U.S. dollars.

ICE also launched carbon price indices for each individual market: the ICE EUA Carbon Futures Index, ICE CCA Carbon Futures Index and ICE RGGI Carbon Futures Index.

All four indices track the performance of futures traded on exchanges operated by ICE: CCA and RGGI futures traded on ICE Futures US, and EUA futures trade on ICE Futures Europe.

In a press release, Lynn Martin, president of ICE Data Services, said standardized benchmarks will play an important role "in reducing carbon emissions and mitigating against global warming" and the new ICE Global Carbon Futures Index "is a first step in producing an accurate, transparent global price for carbon."

The latest data shows the exchange continues to see growth across the entirety of its global environmental complex. A report from ICE showed volume of nearly 2.2 million lots across these products in March -- a record high that topped the previous record set in October 2018 by 36%.

Carbon emissions trading is a decades-old concept, taking its roots in the landmark 1997 Kyoto Protocol which set emission reduction targets for 37 industrialized countries. The idea was to create a market-based system to control emissions worldwide by putting a price on carbon and creating economic incentives to reduce carbon emissions.

The coronavirus pandemic has caused a precipitous drop in the demand for fossil fuels which will reduce short-term demand for emissions-trading schemes. It is worth noting, however, that carbon markets saw a significant increase in activity last year that hints at the long-term potential for these markets. Specifically, regional initiatives in the U.S. including the Western Climate Initiative that spans California and the northeastern Regional Greenhouse Gas Initiative together saw trading volume gain 49% over the prior year and value increase 74% to more than $23 billion. In addition, institutional investors are putting an increasing emphasis on environmental factors in their investment strategies, and several major index providers have introduced new indices as benchmarks for carbon-conscious investors.

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