Market-Based Solutions through Environmental Finance: the Case of the Chicago Climate Exchange

February 13, 2004

Description

Back when he came up with the idea of creating a public exchange that would trade the rights to carbon dioxide, many on both sides of the equation — the financial community and environmentalists — thought his chances of success were, well, small.

After all, the markets were down and the U.S. had pulled out of the Kyoto Protocol, which could have helped jumpstart the initiative.

But Richard Sandor, who created the idea of trading financial futures in the 1970s, knew it could work. And in December 2003, through perseverance and perhaps a little luck, he saw his dream come true in the form of the Chicago Climate Exchange, a self-regulatory exchange that administers a voluntary greenhouse gas reduction and trading program for North America.

At a Milken Institute roundtable meeting with government officials, environmental organizations and members of the financial community, Sandor said the Exchange has been wildly successful in its first two months.

Already on board as members are such firms as Ford, DuPont, IBM, Motorola and American Electric Power, as well as the city of Chicago and the University of Oklahoma. And the trading of carbon dioxide has nearly tripled since the Exchange opened on Dec. 12.

"This is going to dominate the environmental forefront," Sandor said of the idea of cap-and-trade programs. It could even expand into the areas of trading the rights to air and water.

"They are our most important commodities, and they have to be rationed," he said. He added that markets are the best way to do that — much better than armies fighting over it.

The meeting was part of the Milken Institute's ongoing series of presentations of financial innovations addressing long-standing public policy problems bringing together financial practitioners, policy makers and change agents in the public and private sector.

Dr. Sandor, Chairman and CEO of the Chicago Climate Exchange, was the recipient of the Milken Institute's 2003 Award for Financial Innovation and the subject of recent in-depth reports in Time and Forbes magazines. He is a director on numerous boards, including the Intercontinental Exchange, an electronic marketplace for commodity and derivative products, and is a member of the design committee of the Dow Jones Sustainability Index.

For more information about the Exchange, visit www.chicagoclimateexchange.com. (Note: This link takes you to a web site outside of milkeninstitute.org. To return, hit the back button on your web browser.)