NY Times Magazine, July 30, 2006 Capital Pollution Solution? By JEFF GOODELL
Richard Sandor, chairman and C.E.O. of the Chicago Climate Exchange, seems to be fond of green. His business card and company stationery are trimmed in green; he wears green neckties. When he is photographed by the news media, theres lots of green in the frame: green file folders, green paper, anything. For Sandor, it may be a way of signaling that the Chicago Climate Exchange a commodities market for an unusual kind of commodity, greenhouse gas allowances is more than just another business venture. It is, as he describes it, the engine of an environmental revolution.
But of course, green is also the color of money. And Sandor, who has been called the father of financial futures for his role in creating interest-rate futures in the 1970s and who made a fortune during the boom years of the 80s at Drexel Burnham Lambert, the firm of the junk-bond king Michael Milken, is also familiar with that particular shade. However high-minded in principle, the Chicago Climate Exchange is also about making a buck off the planets looming climate catastrophe.
Not that theres anything wrong with that. In fact, the trading of greenhouse gas allowances, also known as carbon trading, may be capitalisms best answer to the problem of global warming. To avoid a dangerous degree of climate change, many scientists say, greenhouse gas emissions worldwide will have to be cut by 50 to 70 percent over the next 50 years. The only hope of achieving that, short of an unforeseen technological breakthrough or the passage of draconian environmental laws, is to inspire radical change in the economic system. In a carbon-trading scheme, you must pay to pollute: price tags are placed on greenhouse gas emissions and then the market (not the government) essentially figures out the cheapest, most efficient way to reduce them. The beauty of carbon trading, Dan Dudek, chief economist at Environmental Defense, a nonprofit advocacy group, explained to me, is that it takes a primal human impulse greed and redirects it toward saving the planet rather than destroying it.
Last year, the European Union set up a carbon-trading scheme, the E.U. E.T.S. (Emission Trading Scheme), which, despite some recent problems in its teething stage, may reach $30 billion in market activity by the end of this year. Many economists speculate that a global carbon market could become the largest commodities market in the world. If the Chicago Climate Exchange were to become a major trading venue, as Sandor says he hopes it will, the commissions alone could be worth many millions.
For the time being, Sandors operation is somewhat more modest. The exchange, also known as CCX, opened for business in December 2003, after raising $25 million in a public offering on the Alternative Investment Market, a part of the London Stock Exchange. By May of this year, more than six million carbon allowances had been traded on the exchange, and the price for the allowances was hovering between $3 and $5 per metric ton of carbon dioxide. CCX now has more than 175 participants, including corporations like American Electric Power, Ford, Motorola, DuPont and I.B.M., as well as the state of New Mexico and six American cities, including Portland, Ore., and Oakland and Berkeley, Calif. Sandor says that in 2004, the members of CCX reduced carbon emissions by 30 million metric tons, roughly equivalent to the yearly emissions of two big coal plants. CCX is growing, the energy trading consultant Peter Fusaro told me recently, but compared with mature exchanges like the New York Mercantile Exchange, the volumes are still minuscule.
What makes CCX exceptional, despite its small size, is that its a private, voluntary endeavor. In Europe, the E.U. E.T.S. is a multinational, government-sanctioned project. The driving force behind the E.U. E.T.S. is a carbon-trading scheme that is built into the Kyoto Protocol, the 1997 international agreement on climate change, which committed industrialized nations to cutting greenhouse gas emissions by 5.2 percent from 1990 levels. (Kyotos emissions oversight is not scheduled to kick in until 2008, but last year the European Union set up the E.U. E.T.S. to help its members prepare for that eventuality.) By contrast, in the United States, which has not ratified Kyoto, there is no government-sanctioned carbon market.
Some analysts, including Sandor, contend that its just a matter of time before the United States adopts some sort of national emissions-trading scheme. Pressure is building on several fronts: environmentalists are demanding action on global warming, investment banks covet the arbitrage opportunities that a carbon market affords and international corporations seek long-term regulatory certainty. I think its all but inevitable that a trading program will become the tool of choice for managing emissions in the U.S., Christine Todd Whitman, the former New Jersey governor and the administrator of the Environmental Protection Agency early in the Bush administration, told me recently. Its just a question of when and how the program will be designed.
full: http://www.nytimes.com/2006/07/30/magazine/30carbon.html
