C.f.T.C. 

OFFICE Of THE SECRETARIAT 

iOOS S£.P 8 Prl 12 31 

Jeremy D. Weinstein, Esq. 

Law Offices ofJeremy D. Weinstein, P.C. 

1512 Bonanza Street 

Walnut Creek, CA 94596 

tel.: 925-943-2708 fax: 925-943-3103 

Received CFTC 

Recorda Section 

9/o/o1 

September 4, 2009 COMMENT 

Mr. David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Telefacsimi le (202) 418-5521 and email secrctarv(acftc. e:ov 

,' • 

Re: Comments to Commodity Futures Trading Commission ("Commission") Notice oflntent 

("NO I"), Pursuant to the Authority in Section 2(h)(7) of the Commodity Exchange Act 

and Commission Rule 36.3(c)(3), To Undertake a Determination Whether the Carbon 

Financial lnsLrumcnL Contract c·CJT.) Olfcrcd r·or T1·ading on Lhc Chicago Climate 

Exchange, Inc. ("'CCX"), Performs a Significant Price Discovery Function (Document lD 

CFTC-2009-0066-000 1) 

Dear Mr. Stawick: 

The Commission has by the above-referenced NOI sought comments on whether the 

CCX CFI contract "performs a significant price discovery function." 

In evaluating whether an exchange-traded contract "performs a significant price 

discovery function," Commodities Exchange Act §2(h)(7) directs the Commission to consider 

four specific criteria, one of which is "material price reference." Material price reference means 

the extent to which, on a frequent and recurring basis, bids, offers or transactions in a commodity 

are based on or determined by referencing the contract being traded on the exchange on which 

the contract is traded. 

CCX claims CFis represent offsets (or "allowances" 1

) of C02-equivalent emissions. The 

Commission recognizes that "the CFI market is solely a CCX-created entity."2 However, CCX 

Although the NOI uses the term "allowance", there are as of yet no federal allowances for C02, and much 

of what is permitted in CCX CFis would in most forums be labeled "offsets".(and sometimes "credits"). For 

example, the NOI notes "the CCX's GHG reduction program allows for the creation ofCFis through offset 

projects." NOI at 6. Therefore, in referring to the C02-emissions market, the term "offset" as used in this letter 

includes the aforesaid "allowances." 

NOI at 7. 
Commodity Futures Trading Commission 

September 4, 2009 

Page2 

promotes an alleged tie between CFis and the broader market for transactions in Carbon offsets, 3 

and therefore the Commission should consider whether transactions in the Carbon market at 

large, and not just in CCX's own proprietary CFI market, reference the CFI contract. 

The CFI contract does not perform a significant price discovery function for the Carbon 

market because CFis do not conform to the stringent additionality and leakage standards that are 

in the Carbon offset contracts that are accepted by the broader market. The lack of common 

standards between CFis and transactions prevalent in the marketplace prevents market 

participants from using CFI contracts to compare prices across markets, arbitrage CFis with 

other carbon contracts, and use CFis to execute or settle other transactions. 

There are key requirements that the broader Carbon market has adopted over the years in 

order to establish and maintain the legitimacy of the instruments in which it trades. A number of 

these "essential attributes of offsets"4 were discussed by presenters at the Federal Trade 

Commission ("FTC") January 8, 2008, Workshop on Carbon Offsets. 5 

Foremost among these is a set of concepts that fall within the rubric of "additionality." 6 

Additionality means that an action should not be given the bonus value of a Carbon offset if the 

:1ctivity would hZtvc occurred ZtnywZty. either becZtuse the Ztctivity \\'ZlS ITC]Liirccl by bw. for 

e:\ampk Zl Ia\\ rcquit·ing all lancllllls to captmc methane cmissic)ns. 01· bccn1sc it w~1s 

economically compelled, for example replacing an old appliance or smokestack. 7 Adclitionality 

has until today been perhaps the most fundamental, core concept for assuring Carbon market 

"Chicago Climate Exchange® (CCX®) today welcomed a decision announced this week by the 

Commodity Futures Trading Commission to consider whether the Carbon Financial Instrument® (CFI®) contract 

traded on CCX performs a Significant Price Discovery Function .... 'We look forward to working with the CFTC 

as it considers this designation and continues to prepare for growth in emissions trading,' said CCX Chairman and 

founder Richard L Sandor. 'We think this reflects the increasing maturity of the carbon market and we welcome the 

critically important function that regulation and transparency plays in new and emerging markets of all kinds.'" 

CCX Press Release, CCX Welcomes CFTC Consideration of Carbon Contract, available at 

http:i/www.chicagoclimatex.com/news.jsf?storv=3172. 

4 E.g., Ensuring Real, Measurable Emission Reductions from GHG Mitigation Projects, presentation by 

Maurice N. LeFranc, Jr., available at http://www.ftc.gov/bcp/workshops/carbonoffsets/presentations/mlefranc.pdf. 

Materials available at http:f/www.ftc.gov/bcp/workshops/carbonoffsets/ 

A worthy example of the variety of uses to which the term "additionality" has been put in the course of 

negotiations concerning implement the United Nations Framework Convention on Climate Change Conferences of 

the Parties following the Kyoto Protocol is Ertel and Egelstrom, COP 6- big decisions or big disappointment, 

Environmental Finance, June 2000 at 26, available at 

http:/iwww.emissions.or0publicationsimember articles/ef6ema26.pdf. 

"Additionality, then, is a tool used to separate the genuine from the opportunistic." Reynolds, Do we need 

financial additionality, Environmental Finance, March 2008 at 36, available at 

http://www .en vi ronmentalmarkets .orgi galleries/ default-fi I e/EFO 3 0 8 Mru-ketview. pdf 
Commodity Futures Trading Commission 

September 4, 2009 

Page 3 

legitimacy. 8 As that legitimacy is conceived, it is additionality that makes an offset "real." 

H.R.2454, the version ofthe American Clean Energy and Security Act of2009, popularly known 

as Waxman-Markey, passed by the House of Representatives includes additionality as a firm . 9 requirement for Carbon offsets. . 

The CCX's General Offset Program Provisions 10 do not even mention the word 

"additionality"; nor do the CCX Rulebook provisions for CCX Exchange Offsets and Exchange 

Early Action Credits. 11 Neither use the word "additional" in the sense described above. 12 

Another core concept to ensure market legitimacy is "leakage." If a forest is saved from 

being cut down for development, and an equivalent acreage of neighboring forest is cut down for 

that same development, there have been no net Carbon savings; rather, there has been "leakage." 

Measuring and minimizing leakage is another way to ensure that a Carbon offset represents a 

real and legitimate saving of C02 emissions into the atmosphere. Several provisions of the 

I, Waxman-Markey address leakage. -' 

"The fact that additionality testing is difficult doesn't mean we can simply ignore it. ... Crediting even a 

fraction of these billions of tons of non-additional reductions would undercut the environmental integrity of almost 

any em iss inns tr::1cling system." Blnomg1rdcn ::1ncl Trexler_ .lnntlwrf0nk of oddi!ir<nc,fil1'. Fnvironmcnt1l fin:1ncc. 

;'v!ay 2008 at 17. alailcibk <It ~:.:y 1 '.\ .•.'il\ ;;' 

tilc:LF05uS ·~,, 'iJ\brk-:tvi.cv, .nd t . 

Section 732(b)(2) of Title VII of the Clean Air Act that would be added by H.R 2454 requires that 

regulations implementing the offset program to be established "ensure that such offset credits represent verifiable 

and additional greenhouse gas emission reductions or avoidance, or increases in sequestration". Section 734(a)(l) as 

added by H.R. 2454 requires "A standardized methodology for determining the additionality of greenhouse gas 

emission reductions or avoidance, or greenhouse gas sequestration, achieved by an offset project of that type. Such 

methodology shall ensure, at a minimum, that any greenhouse gas emission reduction or avoidance, or any 

greenhouse gas sequestration, is considered additional only to the extent that it results fi-om activities that- (A) are 

not required by or undertaken to comply with any law, including any regulation or consent order; (B) ... were 

registered as of the date of enactment of this title under an offset program with respect to which the Administrator 

has made an affirmative determination ... ; (C) are not receiving support under partE of this title or title IV, subtitle 

D ... ; and (D) exceed the activity baseline established .... " 

10 As updated to August 20, 2009, available at 

http://www.chicagoclimatex.comidocs/otTsets/CCX General Offset Program Provisions Final. pdf. 

II Chapter 9, January 2004, available at 

http://www.chicagoclimatex.com/docsioffsetsiCCX Rulebook Chapter09 OffsetsAndEarlvActionCredits.pdf 

12 Using Google to search the Climate Action Registry website shows 116 documents that use the word 

"additionality"-

http:!/www.google.com/search?q=additionalitv+site:http:i/www.climateactionreserve.org&hl=en&lr=&client=firefo 

x-a&rlz-= l Rl GGGL en US3l4&hs=IZh&filter=O as opposed to only five documents using the word 

"additionality" on the CCX website: http://www.google.com/search?hl=en&lr=&client=firetoxa&rlz= 1 Rl GGGL en US314&hs=eE2&g=additionality+site%3Ahttp%3A %2F%?Fwww.chicagoclimatex.com 

%2F &aq=f&oq=&aq i= 

13 Section 734(a)(4) of Title VII of the Clean Air Act that would be added by H.R. 2454 requires "A 

standardized methodology for accounting for and mitigating potential leakage, if any, from an offset project ofthat 

type, taking uncertainty into account." 
Commodity Futures Trading Commission 

September 4, 2009 

Page4 

CCX Protocols appear specifically to disclaim leakage assessment; for example, the CCX 

coal mine methane protocol provides "no Project specific leakage assessment is required." 14 

Instruments traded in the Carbon market at large include offsets developed under the 

rigorous protocols of the Climate Action Reserve, 15 

successor to the California Climate Action 

Registry. 16 As one can see from exploring the detailed protocols posted with their long history 

of prior drafts and open stakeholder meetings and comments, 17 the essential concepts for market 

legitimacy, including additionality and leakage, were covered at length and in depth. 18 

In contrast, it is not at all clear that CCX CFis require additionality or assess leakage, to 

mention just two of several concepts that are essential for any legitimate market in C02-emision 

equivalents. Commodities Exchange Act §2(h)(7) does not include the desire of an exchange to 

have its contract regulated among the acceptable criteria for Commission determination of 

14 Chicago Climate Exchange Offset Project Protocol: Coallvfine Methane Coffection & Combustion Offset 

Pmiccts_ Aug. 20, 2009_ P- 11_ available at 

'• :, j I·,~:;<._:.\ , __ ;;,_ 

. -- ---- ·- - ~ -···--·-- -

.. no Project-specilic leakage assessment is required,"' Clllcogo ( '/imore Lxchunge O)jse/ Frojec/ l'ruroco/. Smoff 

Scafe Renewable Biogas, p. 9, available at 

http://www.chicagoclimatex.com/clocs/offsets/CCX Srm1ll Scale Renewable Biogas finaLpdf; "no Projectspecific leakage assessment is required.", p. 11, available at 

http://www.chicagoclimatex.com/docs/off<;ets/CCX Avoided Emissions Organic Waste Disposal Final.pdf; "no 

project specific leakage assessment is required", Chicago C'!imate Exchange Offset Project Protocof: Agricufturaf 

Best J\!Janagement Practices- Continuous Conservation Tillage and Conversion to Grass!and Soil Carbon 

Sequestration, p. 16 available at 

http://www.chicagoclimatex.com/docs/otlsets/CCX Conservation Tillage and Grassland Conversion Protocol Fi 

nal.pdf Using Google to search the Climate Action Registry website shows 94 documents that use the word 

"leakage"-

http://www.google.com/search?g=leakage+site:http://www.climateactionreserve.org&hl=en&lr=&client=firefoxa&rlz= I R1 GGGL en US314&hs=xDO&filter=O as opposed to only twelve documents using the word 

"leakage" on the CCX website: http://www.google.com/search?hl=en&lr=&client=firefoxa&rlz=1Rl GGGL en US314&g=leakage+site:http://www.chicagoclimatex.com/&start=O&sa=N&filtei=0 

There is a higher CAR:CCX use ofthe term "leakage" when compared to use of the term "additionality", but it 

arises from the CCX protocol exclusions ofleakage as a tool for determining whether the activity has offset C02-

equivalent emissions. 

15 http://www .c limateactionreserve.org/. 

16 http://www.climateregistry.org/. The California Climate Action Registry is now a subsidiary of the 

Climate Action Reserve. See Climate Action Reserve Press Release at 

http://www.climateregistry.org/resources/docs/pressreleases/CI imate%20 Action%20Reserve% 70becomes%20parent% 70organization%20040209. pdf. 

17 Available at http:/iwww.climateactionreserve.org/how/protocols/. 

18 Accordingly, the Chicago Climate Futures Exchange ("CCFE") CCAR-CRT (for Carbon Reduction Tonne) 

futures could serve a useful price discovery function once there is sufficient market depth. The CCFE data posted at 

http://www.ccfe.com/mktdata ccfe/futuresSummary.jsf?svmbol=CCAR-CRT shows negligible open interest. 
Commodity Futures Trading Commission 

September 4, 2009 

Page 5 

"significant price discovery function." This is especially important to keep in mind when the 

exchange in question has already used this very NOI for its own marketing purposes.

19 

Accordingly, the CCX CFI contract is not a material price reference. The absence from 

the CCX CFI contract of the most essential requirements for commonality with other carbon 

offset contracts prevents market participants from using the CFI contracts for material price 

reference, arbitrage, and settlement and execution of transactions. In fact, the CFI is so 

significantly disconnected from what the marketplace and those federal and international 

regulators who have considered the issue accept as a "legitimate" Carbon offset that a 

Commission finding of the CFI as a "significant price discovery contract" could undetmine the 

very market legitimacy that thousands of experts and stakeholders around the world have 

invested many years to develop. Because the CFI does not meet standards of the broader Carbon 

market, it in fact sends a false price signal and would sow even further confusion were it 

legitimized by a positive Commission determination. The Commission should rather await the 

development of liquidity in instruments that more accurately reflect the C02 offset market from 

which to select a significant price discovery contract. 

This letter represents solely my own personal opinion, and is not submitted on behalf of, 

nor is intended to represent the opinion of. any other person or entity. 

Yours truly, 

Is/ 

Jere my D. Weinstein 

cc: Gregory K. Price, gprice((~cftc.gov 

Susan Nathan, snathan@,dlc.gov 

19 Google shows 4,030 instances of the CCX press release, CCX Welcomes CFTC Consideration of Carbon 

Contract, available at http://www.chicagoclimatex.cominews.jsf?storv=3172, in news stories, twitters and blogs. 

http://www .google.comisearch?hl=en&g=%22CCX + W elcomes+CFTC +Consideration+of+Carbon+Contract%22.