Free Market, Cleaner Air
The Chicago Climate Exchange may be an experiment, but don't suggest to its creator, economist Richard Sandor, that it is a humble one.
CCX, as it is known, attempts nothing less than using market forces to slow global warming. Sandor bristles at some environmentalists' doubts about the voluntary program, begun in 2003, for polluters to cut emissions of greenhouse gases such as carbon dioxide. "Our goals are not modest," he says, noting that some purportedly stringent Capitol Hill proposals would not force companies into commitments as ambitious as the ones they've already made to join his market-based solution. CCX's legally binding reductions, he says, are "a major environmental achievement."
Sandor, 63, is used to having a big impact--and to facing harsh skepticism. Known now as a leader in the free-market approach to environmental protection, he long ago made his mark as a finance pioneer. As chief economist for the Chicago Board of Trade in the 1970s, he helped develop U.S. Treasury futures--allowing traders to hedge interest-rate risk much as farmers manage exposure to market swings through pork belly futures. Financial futures are now a multitrillion-dollar market, accounting for 82 percent of the Chicago Board of Trade's business, and the financial industry's initial coolness to the concept is scarcely remembered--except by Sandor.
"I have been thrown out of almost every bank in America," he says. "They said that interest rates weren't volatile, and there was no risk in not hedging, and it was a stupid idea and I should go back to Berkeley," where he had been a professor in the 1960s. But he kept championing a financial futures market as a solution to the problem of tight money and soaring interest rates.
The same thinking, he says, underpins his approach to climate change. "Back then, you had to price money, and now you have to price clean air," Sandor says. "These are both scarce commodities."
CCX members agree to reduce their overall carbon dioxide emissions by 1 percent per year. Those who can do more sell "credits" to other members who can't cut as much--in effect, the latter pay a price to pollute. The 102 participants include American Electric Power, Ford, IBM, DuPont, the cities of Chicago and Boulder, Colo., and Tufts University.
The so-called cap-and-trade system is modeled on the program initiated in the early 1990s to combat acid rain; nationwide sulfur dioxide emissions have been cut far more rapidly than originally planned at a fraction of the anticipated cost. The program design drew heavily on a position paper by none other than Richard Sandor, then a Drexel Burnham Lambert executive. It was his first foray into environmentalism.
Sandor began writing on emissions trading as an antidote to global warming. He spoke at the 1992 United Nations environmental conference that laid the groundwork for the Kyoto agreement on climate change five years later. "There were literally no ideas on the table" about financing until Sandor came along, says Paula DiPerna, then a vice president of the Cousteau Society. She calls him a "practical visionary."
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