In a first for U.S. financial markets, exchange operator Intercontinental Exchange (ICE) has launched a carbon-neutral U.S. electricity futures index.
The ICE U.S. Carbon Neutral Power Index will track 12 months of ICE-listed electricity futures contracts from six major U.S. power pools. It will also include carbon allowance futures that are used to offset emissions stemming from these electricity futures contracts.
The move comes as the U.S. transitions its power grid to renewable energy generation. It aims to capture the impact this change will have on U.S. power prices. The index is based on the methodology licensed by Carbon Neutral Investment Company (CNIC), an investment firm that develops commodity-based investment products.
“Electricity is the second largest energy component of the Consumer Price Index and is not directly included in any of the existing major commodity indices,” said Varun Pawar, vice president and head of ICE Data Indices. “This rules-based index developed by ICE with methodology licensed from Carbon Neutral Investment Company LLC (CNIC) has the ability to be a preferred financial instrument for investors who are looking for sustainable North American commodity exposure in their portfolios.”
The new ICE U.S. Carbon Neutral Power Index will be representative of the broad U.S. electricity market on a carbon-neutral basis. As the market is moving away from fossil fuels and toward electricity to combat climate change, a significant source of carbon emissions is power generation, noted Preston Peacock, senior director of ICE Data Services and ICE Data Indices, in a recent statement.
“The current fuel mix used in power generation in the U.S. is almost 60% fossil fuels; however, the president of the United States has a stated goal of 0% fossil fuels used in power generation by 2035,” he said. “As part of the (new index) methodology, as the power generation fuel mix shifts to renewable sources and reduces the amount of carbon emissions, the (new index) will reduce holdings of carbon allowance futures contracts accordingly.”
ICE, a Fortune 500 company and operator of several exchanges, including the New York Stock Exchange, already provides a series of indexes that address sustainability, ESG, carbon reduction, and transition to clean energy.
Its Climate Index series includes bond indexes that use ESG screening and a carbon reduction methodology to achieve net-zero carbon emissions by 2050, including those aligned with the Paris Agreement.
ICE also provides Corporate ESG indices that exclude certain companies while giving a larger exposure to those with high-ranking ESG scores. Other ICE indices track bonds that use proceeds for green, social, or sustainable purposes. The exchange operator also provides Global Government Carbon Reduction indices.
Existing ICE Carbon Futures indices track pricing from the four most actively-traded carbon markets in the world. Those include the European Union Emissions Trading Scheme, the Western Climate Initiative (California Cap and Trade Program), the UK Emissions Trading Scheme, and the Regional Greenhouse Gas Initiative.
The newest U.S. Carbon Neutral Power index will provide a platform for investors and financial companies to track U.S. electricity consumption and pricing as the country transitions to a net-zero power generation grid.
One of the benefits of the index is that it can act as a diversification tool. Back-tested over a nine-year period, the index showed a very low correlation with the U.S. equity and bond indices, as well as broad commodities futures and sector indices.
“We are proud to have licensed our methodology as part of the ICE U.S. Carbon Neutral Power Index,” said Donald R. Sinclair, chairman of CNIC. “This index will assist us in developing financial instruments that provide investors exposure to exchange-traded electricity futures and carbon offsets, while having the ability to use the ICE U.S. Carbon Neutral Power Index as a benchmark.”