Global exchange trading giant Intercontinental Exchange Inc. (ICE-N) will launch a landmark environmental futures market tailored to Alberta's rapidly expanding Technology Innovation and Emissions Reduction (TIER) carbon trading program.
Owner of the NYSE and many of Europe's largest clearing houses, ICE is creating the futures exchange to provide a reliable, verifiable and liquid futures market for market participants required to comply with TIER.
Pending final regulatory approval, AB Emissions Offset Futures (AEO) and AB Emissions Performance Credit Futures (AEPC) contracts will begin trading in August or September on ICE NGX, ICE's physical energy exchange and clearing house based in Calgary.
"We have worked to ensure the design of this market meets the requirements of Alberta’s environmental program and is tailored to the needs of our clients who currently participate in this market," Greg Abbott, President at ICE NGX, said.
"An Alberta carbon physical futures market brings price transparency and attracts new participants, while allowing clients to access greater liquidity and capital efficiency. (Bringing on board) the Alberta TIER program to ICE means these contracts will be traded alongside ICE’s global environmental and energy benchmarks across carbon, oil, natural gas and power, and cleared alongside Alberta natural gas and electricity."
The newly created ICE futures contracts will give corporations added flexibility in buying, selling and hedging their carbon credit exposure via participation in Alberta's dynamic TIER framework.
Alberta created TIER in January 2020 as a regulatory mechanism designed to manage the province's greenhouse gas emissions through a market which requires leading emitters to comply with annual greenhouse gas (GHG) reduction targets.
This market enables corporate and institutional emitters to meet their carbon emissions reduction obligations by purchasing emissions offsets or performance credits. These credits represent reductions in GHGs achieved through eligible projects.
Exchange a response to evolving market demand
In comments made exclusively to SustainableBiz, Abbott outlined the logic behind the creation of this important new market.
"Many of the energy firms in Alberta are long-time clients of ICE NGX, and are also active participants in the TIER program already, so they asked us to explore adding the environmental products to our suite of cleared markets," Abbott said.
"NGX Clearing will bring some delivery and payment assurance to the market and also allow for better capital efficiency for our customers. Clients post collateral for margin obligations on our existing products and adding a new environmental asset class will allow a client to utilize that collateral for more products.
"The more products that are available, the more efficient it is from a capital utilization perspective for our clients."
Abbott, who has been president and COO of ICE NGX since 2019, believes the Alberta energy market is becoming increasingly integrated into TIER, which offered NGX a clear opportunity and pathway to launch a targeted carbon futures exchange.
"Alberta is a production hub for energy in Canada. Renewable sources of energy like wind and solar facilities and investments in technologies like carbon capture and sequestration are now a key and growing part of the energy mix in Alberta," Abbott said. "These projects are helping to generate eligible credits, so customers want a marketplace to provide price transparency for these instruments and to buy, sell and hedge their exposure to these credits."
In addition to serving as a clearing house for the carbon futures contracts, ICE NGX intends to introduce a series of stringent measures designed to bring an added level of protection to market participants against the potential invalidation of credits under the program following delivery.
According to Abbott, "ICE NGX will have rules for those participants selling TIER products that will effectively act as a warranty for a period of time following delivery of the credits, providing the purchasers with comfort that they will be fairly compensated in the very rare case of a credit being invalidated by the Government of Alberta after delivery had occurred."
Price transparency and delivery of credits
Another critical component of the ICE carbon futures exchange is price transparency, which Abbott believes is the "key" to fostering a climate of trust.
"Having a marketplace you can come and see the price of a carbon credit in Alberta is really important because it will help a project developer understand what a carbon credit is worth before they start a project," he explained. "Another attraction of the Alberta program is that it is a physical market . . . (which corresponds to) NGX's operations as a physical energy exchange and clearinghouse.
"NGX will help to assure payment and delivery of the credit which should be an improvement to the bilateral market. ICE NGX will have provisions and standardized rules all participants will follow that will help to ensure the delivery of the carbon credit to the buyer and that payment and counter party credit risk is managed prudently."
The global reach and penetration of ICE is another factor which should reassure corporations and other market players of the viability and liquidity of the futures exchange once trading begins.
"We believe bringing the rigour and oversight of clearing will also improve the marketplace, helping to bring some transparency and liquidity to markets that have traditionally only been offered bilaterally," Abbott added.
Apart from ICE's preeminent standing within the global futures trading industry, ICE NGX has operated the Alberta natural gas and electricity futures markets for nearly three decades. As a result, the AB-NIT ("AECO") hub is today one of the most liquid spot and forward energy markets in North America.
A world leader in the trading of carbon/environmental products
ICE is the world's primary exchange for the trading of carbon and environmental products. For close to 20 years, ICE has offered environmental products in the form of futures and options and has hosted the four largest and most liquid carbon cap-and-trade markets in the world.
During this time, ICE exchanges have served as the trading site for carbon allowances equivalent to over 100 billion tons of carbon, over 250 million renewable energy certificates, three billion carbon credits, and the equivalent of over three billion Renewable Identification Numbers.
In addition, ICE is the most liquid trading centre for the EU carbon allowance market, the North American carbon market and the U.K. carbon allowance market. The ICE EUA carbon allowance future is the benchmark price for the cost of polluting in the EU, while the ICE UKA carbon allowance future is the price for the cost of polluting in the U.K.
Similarly, the California Carbon allowance market is hosted at ICE.