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Posted: May 01, 2009

State of the state: Father of carbon trading sees offsets go mainstream

Snapshots of issues affecting Colorado business

Allen Best

Richard Sandor’s great experiment in commoditizing of environmental values has been a great success. The Chicago Climate Exchange, which he founded in 2003, set a record in February for contracts.

When Sandor spoke in Denver at the Sustainable Opportunities Summit on March 19, that one-month record had already been eclipsed during March, with 60,000 contracts and two more weeks of trading to be done.

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This voluntary trading of offsets for carbon dioxide and five other greenhouse gases is fast becoming mainstream. Participants in the Chicago Climate Exchange include 11 percent of the Fortune 500 companies, including Safeway, DuPont and Honeywell. Colorado-based companies include New Belgium Brewing and ProLogis and the cities of Aspen and Boulder. In joining, all are formally committed to reducing greenhouse gas emissions.

But do these exchanges really accomplish anything other than make the traders more wealthy? Sandor’s stake in the Chicago Climate Exchange a year ago was reported by the Wall Street Journal to be worth more than $260 million. In other words, has the Chicago Climate Exchange truly succeeded in tamping down the carbon emissions?

That’s a question being asked broadly as the United States grapples with strategies for decarbonizing its economy. Auden Schendler, the executive director of community and environmental sustainability for the Aspen Skiing Co., argues that renewable energy certificates are often less than what they claim to be. Purchased by ski areas, they are the financial instruments that allow ski areas to claim they are powered by the wind.

But in his new book “Getting Green Done: Hard Truths from the Front Lines of the Sustainability Revolution,” Schendler argues there’s too little transparency. The key is whether the money paid for the certificates actually produces new electricity produced by wind or some other renewable source. 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 Chicago Climate Exchange, of which Sandor is chairman and chief executive. One recent news story reported that a sewage treatment plant received money through the exchange for flaring methane, a potent greenhouse gas. But it was flaring the methane anyway. There was no changed behavior. In other words, the program had failed to demonstrate what is called “additionality.”

When he spoke at the Colorado Convention Center, the 67-year-old Sandor admitted to what he called “slippage.” In other words, some people being paid through the offset program really aren’t doing anything new.

But, while 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 Chicago Climate Exchange method of voluntary offsets is rewarding innovation that results in fewer emissions.

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.”

Then, in the early 1990s, he helped set up the trading market that resulted in the rapid curtailment of the torrential acid rain caused by emission of sulfur dioxide and nitrous oxide. Instigated by the 1990 Clean Air Act, the program is credited with efficiently allowing the marketplace to sort out the most efficient way to reduce those emissions.

While at Earth Summit, the 1992 conference held in Rio de Janeiro, Brazil, Sandor came up with the idea of commoditizing greenhouse gases. Following creation of the Kyoto Protocol, Sandor made plans to create a market for greenhouse gas reductions — using the concept of offsets — that allows those who do accomplish reductions to sell those successes to companies that have not.

If now entirely voluntary, emission reduction is expected to become mandatory, probably through a federally administered cap-and- trade system. Most economists believe that a straightforward tax on carbon and other greenhouse gases would be a more efficient way to stimulate innovation.

However, it is commonly perceived as politically toxic. Asked about this after his talk at the Sustainability Summit, he dismissed it as “yesterday’s argument.” He said he fears that a carbon tax would, through the political process, become heavily pocked with earmarks.

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