Posted: March 23, 2009
Father of carbon trading sees offsets go mainstream
Richard Sandor among speakers at Sustainable Opportunities SummitAllen Best
By the numbers, Richard Sandor’s great experiment of turning greenhouse gases into commodities has been a great success. Dubbed the “father of carbon trading,” Sandor launched operations of the Chicago Climate Exchange in 2003. Today, the voluntary trading of offsets for carbon dioxide and five other greenhouse gases is fast becoming mainstream.
The CCX set a record in February for contracts. And when Sandor, 67, spoke in Denver at the Sustainable Opportunities Summit on March 19, that one-month record had already been eclipsed, with 60,000 contracts and two more weeks of trading to be done in March.
Participants in the CCX include 11 percent of the Fortune 500 companies, including Safeway, DuPont and Honeywell. Colorado-based companies include New Belgium Brewing, ProLogis and the cities of Aspen and Boulder. American Farmers Union, which has a strong presence in Colorado, is also a member.
In joining, all make a voluntary but legally binding commitment to meet greenhouse gas emission reduction targets set out by the CCX. Those who reduce beyond those targets have surplus allowances to sell or bank; and those who go over must buy CCX contracts.
But does the trading of greenhouse gas offsets really accomplish anything other than make the traders more wealthy – including Sandor, whose 2008 stake in the CCX was estimated at $260 million by the Wall Street Journal? In other words, has the CCX truly succeeded in tamping down the carbon emissions?
That’s a question that is being asked broadly, as the United States grapples with strategies for reducing the economy’s dependence on carbon.
Do carbon offsets work?
Auden Schendler, the executive director of community and environmental sustainability for the Aspen Skiing Co., argues that renewable energy certificates, or RECs, are often less than what they claim to be. Purchased by ski areas, they are the financial instruments that allow ski areas to claim that they are powered by the wind.
In his new book “Getting Green Done: Hard Truths from the Front Lines of the Sustainability Revolution,” Schendler argues there’s too little transparency: It’s hard to know whether the money paid for RECs actually results in the creation of more wind power or some other renewable source. And if it only provides revenue for a wind farm that was already built, is there any true cause-and-effect?
The same criticism has been made of the CCX, of which Sandor is chairman and chief executive. One recent news story reported that a sewage treatment plant earned money on the CCX even though it was flaring methane, a potent greenhouse gas.
When he spoke at the Colorado Convention Center, Sandor admitted that some people being paid through the offset program really aren’t changing their behavior.
But, citing the French philosopher Voltaire, Sandor argued a greater danger: “You can’t let the perfect be the enemy of the good.” If imperfect, he said, the CCX method of voluntary offsets is rewarding innovation that results in fewer emissions.
The genesis of CCX
Sandor began developing his ideas about trading intangible things in the 1970s. He has been described as a “principal architect of interest rate futures markets.”
In the early 1990s, he helped set up the trading market that quickly brought an end to torrential acid rain caused by emission of sulfur dioxide and nitrous oxide. Instigated by the 1990 Clean Air Act, the program is credited with allowing the marketplace to sort out the most efficient way to reduce those emissions.
While at 1992 Earth Summit in Rio de Janeiro, Sandor came up with the idea that became CCX. Following the creation of the Kyoto Protocol, Sandor saw an opportunity for a market for greenhouse gas reductions that rewarded companies for exceeding expectations; companies could sell credits to help other companies “offset” higher emissions and still meet Kyoto’s standards.
Now entirely voluntary, emission reduction is expected to become mandatory, most likely through a federally administered cap-and-trade system. However, many economists say that a straight-forward tax on carbon and other greenhouse gases would be a more efficient way to stimulate innovation, even though it’s not popular politically.
The carbon tax question
At the Sustainability Summit, Sandor dismissed such a carbon tax as “yesterday’s argument.” He said he fears that a carbon tax would, through the political process, become heavily pocked with earmarks.
But will the national energy policy eventually be married to a national climate policy? Colorado Gov. Bill Ritter, who also spoke at the conference, said he thinks so.
“We must transition away from an economy that depends so heavily on carbon-based fuels,” he said. “We have to think very long term.”
While this economic transformation will take time, conference speaker Denver Mayor John Hickenlooper, said now is the time to take advantage of the sustainability movement’s momentum. Green movement leaders need to frame their core messages in ways that keep them fresh and vibrant, he said.
“Right now, with all this synergy and all this excitement, we don’t want to let it go stale,” Hickenlooper said.