How I Saw It

The following sections are included:

• Dedication
• Praises for How I Saw It
• Foreword
• Acknowledgments
• About the Author
• Contents
• Introduction

Two facets of the convergence of environmental and capital markets became visible in September 1999 as final preparations were being made for the Conference of Parties (COP) 5 climate change meetings in Bonn…

Since the 1997 Kyoto Protocol to the Rio Climate Convention, Washington legislators have spoken about global warming and its policy cousin emissions trading — like old soldiers vaguely remembering a defeated enemy in a long-passed military conflict…

Scroll through most summaries of the Kyoto Protocol and you will notice that they all seem the same. There are discussions on the impact of climate change on weather, reports on the danger of continued reliance on fossil fuels and articles on the impact of rainforest destruction and the need to reforest our planet…

For young traders in a culture saturated with risk management tools and electronic trading, the pitch is easy but somewhat unsettling: forget global warming and focus on selling and trading new financial instruments that will facilitate living with climate change…

Bolstering a trend that would have been unbelievable in the pre-Kyoto era, both Ford and DaimlerChrysler have recently announced their decision to leave the Global Climate Coalition. This coalition is a group of companies that believes that the science of global warmingis uncertain and opposes international agreements to reduce emissions of greenhouse gases (GHGs). Ford, one of the largest and most powerful multinational corporations, became the first American car maker to announce its controversial departure (see Chapter 4 “Seeing the Wood for the Trees”, December 1999/January 2000). This followed the earlier departure of a group of other large companies including American Electric Power, Dow Chemical, and Royal Dutch/Shell…

In a stunning financial innovation that may radically alter the way developing countries and industrialized nations deal with issues of climate change, participants in the Kyoto debate crafted a project-based carbon crediting system termed the Clean Development Mechanism (CDM)…

On 28 March this year, an economist from the Chicago Board of Trade sent a fax to the hotel I was staying at in California describing the results of the US Environmental Protection Agency (EPA) annual auction of sulfur dioxide (SO₂) emission allowances. I was properly advised of the need for confidentiality until our press conference at 10:00 a.m. central time the next day…

It is commonly accepted in industrialized nations around the world that efforts to create a market-based solution for mitigating greenhouse (GHG) gas emissions have totally stalled in the United States, but commonly accepted knowledge doesn’t apply in the Midwest…

It seems as if two different scenarios will be played out in the next 5 months as 160 nations begin to formulate rules to implement the Clean Development Mechanism (CDM) of the Kyoto Protocol…

Two widely held beliefs continue to play a role in the political debate preceding Conference of the Parties (COP) 6, the November meeting of the UN’s Climate Change Convention in The Hague. They are…

The Clean Development Mechanism (CDM) is a major financial innovation that may radically alter the way developing countries and industrialized nations deal with issues of climate change. Richard Sandor explains its importance and recommends a simplified CDM process…

On 8 September 1999, the Dow Jones Sustainability Group Index — a stock index that tracks the performance of the top 10% of the leading sustainable companies in the Dow Jones Global Index — changed the asset management business in Europe. The index includes companies on the basis of best-in-class sustainability in terms of financial, environmental, and social performance. In the inaugural issue of environmental finance, this column described the launch of that new index. This is the promised update…

The deadlock result from The Hague, in November, is a textbook example of A.W. Tucker’s 1950 treatise on games and decision theory. In the “prisoner’s dilemma”, two players are keptapart and, acting rationally — but without knowing the other’s strategy — make decisions thatleave both worse off. With open communication, the players might jointly prepare a strategy that leaves them both better off. There is an analogy in the debate over the inclusion of forests in Kyoto’s Clean Development Mechanism (CDM). And there is a win-win strategy that advances the interests of developing countries and the goals of the climate convention…

In the months leading up to the power crisis in California, pundits listed a number of factors contributing to the situation. Rolling blackouts and the potential bankruptcy of the two largest utilities in the state required an explanation…

Discussions of coal, as a viable energy source of the future, usually end with cries of concern about its environmental impact. However, these discussions take a different tack when a generating company of the 21st century considers the many factors that affect the cost of producing power. These include the choice of fuel, changes in technology that alter emissions, and the costs of offsetting carbon dioxide (CO₂), sulfur dioxide (SO₂), and other pollutants. Those in the power business who make informed investment decisions and are environmentally concerned should question the premise that, under all conditions, coal is dead…

They don’t have trading pits in Chicago for sulfur dioxide (SO₂) or vast arcades for environmental derivatives. The talk on the floor centers around the potential impact of foot-and-mouth disease on grain and animal prices, or whether the Dow Jones Industrial Average has bottomed…

Efforts to address climate change are quietly continuing in the United States. In the second half of March, Christie Todd Whitman, administrator of the Environmental Protection Agency, said that President Bush’s letter to Senate Republicans rejecting caps on carbon dioxide (CO₂) emissions from the electricity sector was not intended to “preclude all action on CO₂”. In fact, there have recently been a considerable number of proposals in the United States to deal with climate change…

As the United States enters a major debate on energy use and endeavors to develop a policy to reduce carbon dioxide (CO₂) emissions, a project taking shape in the upper Midwest is poised to test market-based solutions to global warming…

It seems to be happening again. The shape of voluntary international emissions trading took one more small step toward clarity in June. Nuon, a Dutch utility company and GSF Energy, an affiliate of the US company DQE Inc., concluded a path-breaking transaction involving Nuon’s purchase of greenhouse gas (GHG) emission reduction credits equivalent to 301,252 tons of carbon dioxide (CO₂)…

Diplomats return to the negotiating table this fall in Marrakech to work out further details of the Kyoto Protocol amid a flurry of activity surrounding emissions trading. Individual trades continue to be closed since the last meetings in Bonn. At the same time, individual governments are beginning to take action…

In the inaugural issue of this magazine, and in its first anniversary issue, this column described the impact of sustainability on asset management. We focused on the Dow Jones Sustainability World Index (DJSI World) as the industry leader in sustainable investing. As promised, this is our annual update…

After a decade of debate within the environmental movement on markets versus command and control there is some good news for the private sector. The European Commission has embraced capitalism as a climate protection policy tool…

At the beginning of the 1990s, two apparently unrelated financial developments occurred. The first was the launching of the International Chamber of Commerce (ICC) Sustainable Development Charter in 1990. It marked the first time that a group of industry CEOs recognized the importance of positive social and environmental behavior in creating shareholder value. Financial innovation followed, thereby facilitating the flow of billions of dollars into socially responsible investing (SRI) and sustainable investments (SI)…

The Chicago Climate Exchange (CCX), an 18-month-old project with the goal of designing and implementing a voluntary “cap-and trade” market for greenhouse gases (GHGs), began its first industry meetings last month…

It didn’t make the headlines when Enron collapsed. It didn’t have the human interest stories of financial ruin associated with the loss of jobs and pensions. It lacked political drama and there was no need to debate legislative and regulatory action because it wasn’t associated with investor protection, fraudulent accounting, or inadequate corporate governance. It was only a story about market architecture that ended the same way others ended. However, its effect on risk management and the efficiency of energy markets may prove to be profound…

It hardly seems newsworthy. The Environmental Protection Agency’s (EPA) 10th annual auction of sulfur dioxide (SO₂) allowances conducted by the Chicago Board of Trade (CBOT) on 25 March provided no surprises. But, we think it is newsworthy precisely because of its routine results. It also provides us with an opportunity to describe the anatomy of an auction…

There are at least two different market-based approaches now being undertaken to address the problem of climate change: multi-sector and voluntary versus single-sector and mandatory. Over time both should provide valuable insights into the cost of mitigating the problem. Little attention has been given to the process of developing these approaches as opposed to the specifics of each. It is our objective to look at the different approaches in this light…

Following 5 years of talk in the US Congress—but no legislation—the American debate over cutting greenhouse gas (GHG) emissions has moved to the state level. As another example of the “bottom-up” approach previously discussed in this column, two states have passed laws to establish GHG “cap-and-trade” systems. Several others have passed, or are debating, laws establishing the infrastructure to facilitate trading. However, one particular state is considering legislation that has the potential to create a highly fractured US approach to climate change…

Recent reports on greenhouse gas (GHG) emissions in the United States can be summarized in two words: confusing and paradoxical. The situation reminds us of the importance of caution when interpreting environmental data. But, a close examination of recent US data reveals some modest cause for optimism as we begin the multi-decade efforts needed to manage the risks of climate change…

In the inaugural issue of this magazine and its two subsequent anniversary issues, this column described the impact of sustainability on asset management. We focused on the Dow Jones Sustainability World Index (DJSI World) as the industry leader in sustainable investing. As promised, this is our annual update…

In September 2001, global warming was pushed off the US national agenda and left for dead. It had fallen victim to terrorism, a falling stock market and the first recession in nearly a decade…

We’ve come a long way since Don Quixote tilted at windmills. Wind is an important form of sustainable energy in some countries and has significant growth potential in the largest energy market in the world…

One year ago, this column discussed the plurilateral evolutionary path of international environmental markets. That column opened with the above quote from the great neoclassical Austrian economist. He continues to be correct…

It floats out there in popular culture as “America’s heartland”; home to a vast amount of soybean and corn production; a dreary and cold continental climate; its great fame achieved from gangsters such as Al Capone and John Dillinger; and the region is far from the east and west coasts that link the United States with Europe and Asia. Yet, Chicago could become the proving ground for the concept of market-based solutions to environmental and social issues…

A flimsy transparency introducing the title of the talk was placed on an old-fashioned overhead projector in Gleacher Hall at the University of Chicago. The organizers of the conference had purposefully chosen a low-tech teaching tool. Institutional innovation is itself a very disruptive idea: a compelling story best told without PowerPoint. I was to address guests of the Ronald Coase Institute. We discussed the evolution of institutional innovation and how these innovations have helped to form the intellectual basis for environmental markets and the Chicago Climate Exchange. The institute and its members provided a most fitting audience, as its principles and the ideas of one of the greatest thinkers of the 20th century — Nobel prize–winning economist Sir Ronald Coase — on the significance of transaction costs and property rights provide the intellectual basis for environmental markets. This column shares some points of that discussion and provides three examples of such institutional innovations leading up to the current market for carbon dioxide (CO₂)…

Stories about the demise of sulfur dioxide (SO₂) emissions trading appear routinely every year. This year was different—there seemed to be more of them. Some implicated the program in local mortality rates; others predicted the complete failure of the program while erroneously linking it to unsuccessful lawsuits that would have brought older plants under new regulation. Forward prices were going to collapse and the entire SO₂ allowance market with it. However, it now appears that the death of “cap and trade” systems are tomorrow’s story and, parenthetically, promise to always be so…

Ronald Coase wondered out loud why this organizer of the event had asked him to deliver the opening remarks as he lacked any specific knowledge of greenhouse gas (GHG) emissions trading. However, in the next 30 minutes he would put the purpose of our 2-day seminar and subsequent work into a context that we all understood…

Two distinct, yet closely related, stories made headlines in the early part of May. In one, the UK government announced the results of the first year of its voluntary emissions trading program. Meanwhile, a report from the European Environment Agency (EEA) revealed that emissions of greenhouse gases (GHGs) in the European Union (EU) are on the rise for the second consecutive year. The underlying message of these two, apparently, distinct stories can shed some light on the importance of encouraging flexibility in the design of emissions trading programs…

Water markets are on the move. New ones are emerging and those that already exist are being modified. Energy and emissions brokers are entering the market and this once arcane business continues to attract a widespread following. The reasons are obvious. Water is scarce and becoming more so. Command and control has had little success in achieving the best possible use of this commodity…

The Chicago Climate Exchange (CCX) has reached several milestones in the past few months, fulfilling its first objective of proving that a cross-section of private and public entities in North America (including 17 companies, one university and the City of Chicago) could reach agreement on a voluntary commitment to reduce greenhouse gas (GHG) emissions…

The trend is unmistakable. From ethical investing to socially responsible investing and now sustainability. Each year, we update readers on the status of the Dow Jones Sustainability World Index (DJSI World), the industry leader in this field. This year we will do the same, and also comment on the increasingly prevalent role that environmental considerations play in the day-to-day decisions of firms that use corporate sustainability as their guide…

Almost 12 years ago, in 1992, countries involved in an international water conference held in Dublin issued a statement that “Water has an economic value and should be recognised as an economic good”. The other “Dublin Principles” recognized the finite nature of freshwater and called for a participatory approach to water development and management…

The United Kingdom’s national allocation plan (NAP) should be heard as a wake-up call…

In country after country of the European Union, serious debates are taking place as member states have to finish their national allocation plans (NAPs) for carbon dioxide emission allowances by 31 March. As this column is being written, only a few countries have produced drafts. The rest of the participating nations are working out major technical and political issues surrounding allowance allocation. EU NAPs are emerging as a combination of industrial policy and emissions trading…

For the past 11 years, it has been one of the most highly reported events in emissions markets. In the early days, nay-sayers and protesters were rife. This writer had the privilege of being actively involved in the first sulfur dioxide (SO₂) auction in his role as chairman of the clean air committee at the Chicago Board of Trade (CBOT) and witnessed numerous headlines referring to “smut traders” and picketers outside the CBOT building with banners that read “trading pollution is not the solution”…

In 1787 and 1788, a series of 85 letters called the Federalist Papers was written by James Madison, Alexander Hamilton, and John Jay. The essays, originally published to encourage New Yorkers to ratify the recently drafted US Constitution, are now often cited by those who advocate for states’ rights. The United States, a federal republic, continues today to rely on state-level initiatives for national leadership on many fronts, just as it did in the late 1700s…

It is a tale of two continents. One pilot is mandatory and the other is voluntary but legally binding. While much has been made of the apparent difference between European and US approaches to climate change policy, a closer look indicates that things are not necessarily what they seem…

Shortly after the passage of the Clean Air Act of 1990, critics of sulfur dioxide (SO₂) emissions trading in the United States were quick to point out the lack of activity in the market. It took almost three years for the first trades to occur. It seemed irrelevant to sceptics that the first compliance period didn’t begin until 1995…

It’s front page news around the globe. Everyone seems to be talking about it but few seem to be analyzing it. Some associate it with both national security and economic growth…

Fifteen years ago, climate change was a concern to a limited number of scientists and environmentalists. An even smaller number of individuals were thinking about a market-based solution to climate change. Today global warming is the subject of international treaties and sovereign law. It’s discussed in the media, journals, and books. The movie The Day After Tomorrow grossed $70 million on its opening weekend…

The trend remains unmistakable. This time of the year, we take the opportunity to update readers on the status of the Dow Jones Sustainability World Index (DJSI World). Sustainable investing continues to make an impact in the halls of the business community. The United Nation Global Compact Summit held in June saw major investment companies endorsing the integration of environmental, social, and governance criteria as standard components in judging corporate performance and investment decision-making…

Every sport, war, and game has its tipping points. This one was really unlikely. President Putin’s announcement that Russia would sign the Kyoto treaty heralded a whole new era for the Chicago Climate Exchange (CCX). On 23 September, the price of the exchange’s “carbon financial instruments” was $0.96 and total volume was 1,315,100. Since that eventful moment, prices have doubled and volume has increased to 2.3 million tons of carbon dioxide (CO₂)…

Approximately a century ago, the US Congress was debating product standards for traded commodities. In Historical Review of the US Grades and Standards for Grain, Hoffman and Hill noted that: “Congress finally took action in 1906 … ten more years went by before any legislation adopting uniform standards was passed”. They added that, “In place of research, trade practices and public hearings were used to identify acceptable grades”. Is history repeating itself in the current US debate on climate change? Is it possible that federal law on greenhouse gas (GHG) emissions will be driven by state and local governments as well as private sector activity…

It seems to be front-page news on a regular basis. This year it’s the cool weather and excessive rains in California. Last year it was hot weather and droughts in the southwest…

Last year’s battle over United States, sulfur dioxide (SO₂) allowance prices was once again about direct supply and demand, but it was also about energy prices and future regulatory regimes. It may also have been about what has been described in the United States as the “energy crisis”. It seems worthwhile to discuss what has happened this year in light of the movement of prices in the energy markets…

Everybody seems to be talking about it. From corporate board rooms to policy desks to the average Joe filling up his gas tank, our oil-hungry economy is looking for ways to cope with fluctuating crude prices. Worldwide oil demand in 2005 is expected to be about 84.3 million barrels a day, an increase of 2.1% from last year…

There are no heads of governments peaking or even attending. There are no vistas of mountains with snow-covered trees. Why should we even compare it to the beautiful Swiss city of Davos and the annual meeting of theWorld Economic Forum (WEF) that takes place there? The Milken Institute Global Conference takes place in the fashionable community of Beverly Hills, California, but it does have some important similarities to the WEF meeting. This year it attracted more than 2,300 people. Panelists included seven Nobel Prize winners, as well as such notable individuals as former US vice president Al Gore, General Wesley Clark, and News Corp CEO Rupert Murdoch. It appeared to me that institutional investors controlling at least $2 trillion were there…

Any emissions trading system relies on three pillars: overall registries, targets to allow the transfer of allowances, and a process to verify participants’ emissions. Now that the European Union (EU) Emissions Trading Scheme (ETS) has completed the allocation of allowances, and with progress under way on its registry systems, we felt it would be timely to share some of the lessons learnt in developing the verification process at the Chicago Climate Exchange (CCX)…

It’s been a long journey, spanning more than a dozen years and four continents. The first steps were taken in Rio de Janeiro. Five years later, an international treaty emerged in Kyoto. Six years later, the first rules-based, multisectoral marketplace began in Chicago and a mere two years later the European Union (EU) Emissions Trading System (ETS) got started. This pilot has been extraordinarily successful in a short time but the future task of successfully implementing the Kyoto Protocol is formidable. The post-Kyoto period presents an even greater set of challenges. But all of these hurdles look less daunting in view of our experiences over the past 13 years…

It started 10 years ago, with a grant to develop a pilot program that would apply financial innovation to advance environmental and economic goals. It has resulted today in a cap-and-trade system in the United States with an annual baseline of 600 million tons of carbon dioxide and cumulative cuts of more than 400 million tons. This market—created by the Chicago Climate Exchange (CCX)—compares with a 2 billion ton baseline in the European Union’s (EU) Emissions Trading Scheme…

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