Wednesday, August 01, 2007

Where pollution rights are bought and sold

Here's how William Cronon describes the agricultural futures markets in his book "Nature's Metropolis":
"As the historian Morton Rothstein has aptly put it, the futures market, when viewed in the most cynical terms, was a place where 'men who don't own something are selling that something to men who really don't want it.' Resolving this apparent paradox reveals the extent to which the Chicago grain market had distanced itself from the agricultural world around it. The futures market was a market not in grain but in the price of grain. By entering into futures contracts, one bought and sold not wheat or corn or oats but the prices for those goods as they would exist at a future time. Speculators made and lost money by selling each other legally binding forecasts of how much grain prices would rise or fall."
It sounds like the Chicago Carbon Exchange is poised to make some folks a lot of money in the futures market. It's unclear whether or not the impact it will have on reducing carbon emissions in the real world will be proportionate to those profits. (GW)

Chicago Climate Exchange poised for fast growth

Chicago Business
July 28, 2007

Richard Sandor considers himself a radical, dating to his days teaching at the University of California, Berkeley in the late 1960s. But while students were practicing free love, Mr. Sandor was advocating for free markets. In those days, he conceived of financial futures contracts and wrote a paper touting the potential of electronic trading, then an alien concept.

"People looked at us like we were insane and smoking something, given it was Berkeley," Mr. Sandor recalls.

His idea broke big in 1975, when, as the Chicago Board of Trade's chief economist, he invented the interest-rate futures that eventually cemented Chicago's place as the world's derivatives capital.

Today, Mr. Sandor appears on the cusp of another breakthrough. His Chicago Climate Exchange is positioned for breakneck growth as lawmakers prepare to mandate carbon-emissions trading, thrusting what had been an idealistic and marginal local marketplace into the forefront of the fight against global warming.

Federal legislation expected to pass in the next two years will force U.S. companies to either reduce greenhouse-gas emissions or buy pollution credits from other companies. The Climate Exchange is the sole U.S. market for emissions credits, where members buy and sell pollution rights just like stocks — or bond futures.

The push to reduce emissions already has companies flocking to the exchange. Since Mr. Sandor launched it in 2003, it has grown from 14 to 350 members, including Motorola Inc. and Ford Motor Co. Governments are also signing up, including Chicago and, of course, Berkeley. Membership requires annual 1% pollution cuts.

The holding company that owns the exchange and its counterpart, the European Climate Exchange, is valued at $1.5 billion on the London Stock Exchange.

"We have struck a latent demand for this market," Mr. Sandor says.

But that will pale next to the demand once emissions trading becomes a federal mandate. Companies could be required to cut emissions as much as 80% by 2050, depending on which of eight bills becomes law.

"It's going to be a bigger thing than just Chicago," says Leslie Rosenthal, chairman of Chicago futures broker Rosenthal Collins and vice-chairman of the Climate Exchange.


Intense and engaging, Mr. Sandor looks more like a corporate executive than an environmentalist. He spent much of the 1980s working at Drexel Burnham Lambert, the Wall Street trading giant that became a symbol of that decade's greed when it collapsed amid insider-trading scandals. In three years as the CBOT's top economist, he created a host of new futures contracts, including the 30-year bond future, which catapulted the exchange into the world of financial derivatives.

In the early '90s, Mr. Sandor began to ponder how the power of trading markets could be harnessed to solve social problems. Following the passage of the federal Clean Air Act in 1990, he joined an advisory committee to help the U.S. Environmental Protection Agency implement the act's most innovative provision, which imposed annual caps on sulfur dioxide emissions in hopes of reducing acid rain. Power plants that couldn't comply with the caps were allowed to buy pollution credits from those that could.

The program generated deeper-than-expected reductions at less than half the projected cost. For Mr. Sandor, it planted the seeds of a vision.

By the mid '90s, debate was heating up over another potential ecological catastrophe. Carbon pollution was causing the earth's temperature to rise, environmentalists warned. Believing the warnings would eventually be widely accepted, Mr. Sandor formulated the concept of a climate exchange.

He began calling on corporate polluters. In his pitches, he brought not only the bona fides from his CBOT days, but an evangelical belief that a market would induce businesses to reduce pollution.

One of his first visits was to Deerfield-based Baxter International Inc., which had for years been tracking its emissions. It became a charter Climate Exchange member.

Ron Meissen, a senior Baxter director who met with Mr. Sandor in 1998, says his track record was hard to ignore. "He was highly successful when he met with us," he says.


Even as it's grown, the Chicago Climate Exchange's parent, Isle of Man, U.K.-based Climate Exchange PLC, has operated at a loss for much of its existence, including a $21-million loss on $9.7 million in revenues in 2006. CEO Neil Eckert told investors in April that the holding company would break even in first-quarter 2007. (Results have not yet been reported.)

Mr. Sandor, who is chairman of the parent company, exudes unshakable confidence in the exchange's prospects. He's already talking about expanding the concept to help solve a water shortage in the West and protect endangered animals.

A source close to the exchange says it may list its shares on a U.S. stock exchange in the near future, another boon to early investors like the Rev. Francis Smith, manager of an endowment fund used to maintain the Jesuit Santa Clara Mission Cemetery in Silicon Valley. He became the exchange's first outside shareholder when he contributed $750,000 in 2002, then doubled down with another $700,000 a few months later. Rev. Smith says he invested because he believed in the mission — and in Mr. Sandor.

"If anybody was going to do it, he was the guy to do it," he says.

Rev. Smith's faith proved well-founded. The Jesuits have sold half their shares since the exchange went public, but still retain a stake worth $5 million.

Mr. Sandor, who owns a 16% stake in Climate Exchange PLC valued at $240 million, has taken his commitment to the green cause to heart. He traded in his sport-utility vehicle for a hybrid Lexus and uses his extensive photography collection to showcase images of environmental destruction.

Mr. Sandor's LaSalle Street offices feature some of his favorite photos: Owens Lake in the Sierra Nevada mountains, sucked dry by Los Angeles' thirst for water, and an abandoned cadmium mine.

The collection ranges beyond ecological photos. Friends say framed photos occupy nearly all the wall space in Mr. Sandor's Gold Coast home. He champions up-and-coming artists: In his office, he points to a photo of a solitary bride taken by 38-year-old photographer Alex Soth.

"He's going to be the next superstar," says Mr. Sandor, who knows a few things about spotting hot commodities.


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