Eerie evidence of climate change (robins in Alaska, anyone?) has sparked increasing discussion of taxing emissions of carbon, the biggest culprit behind global warming. But how to measure and price such a thing? Most businesses are waiting for rules and hoping they aren't too clumsy, and Congress hasn't mustered the acumen to set workable standards. Fortunately, Richard Sandor has.
Sandor, who pioneered financial futures, has started the Chicago Climate Exchange (CCX), a full-fledged commodities market whose roughly 60 volunteer members -- including Ford, IBM, and the city of Chicago -- trade rights to emit carbon. Each member pledges to reduce carbon output by 1% per year through 2006. If one wants to start a project that uses lots of energy -- say, a new factory -- it buys the right to emit the carbon involved from a counterpart.
"We're an economic experiment," says Sandor, 63. But this understates the case. CCX, by hammering out how to measure, audit, and process carbon trades, promises to alter fundamentally the economics of emissions.
Trading pollution rights is a well-tested concept. The federal Environmental Protection Agency championed the 1990 Clean Air Act by letting companies trade the right to emit sulfur dioxide and nitrous oxide. But those markets, which Sandor helped set up, involved a far smaller range of emissions -- and took three years to happen. As of June 30, after nine months in business, CCX members had swapped more than 1 million tons.
Credit Sandor's meticulousness, optimism, and chutzpah. With a grant from Chicago's Joyce Foundation, Sandor recruited agricultural economists and engineers to develop the complex protocols, assigning responsibility for emissions based on an organization's scale and activities, among other variables. CCX's rules on auditing and accounting for emissions-reduction projects help groups such as the World Resources Institute propagate global standards. They also let executives plug real numbers into spreadsheets.
Soon enough, Sandor's work will take on broader importance. On January 1, the European Union will launch emissions trading to implement legal caps. Although Washington has dithered, Senators John McCain and Joe Lieberman garnered 43 votes last October for a carbon-cap bill. And as its volume increases, CCX's rules could become templates for future exchanges. Sandor is confident enough to consider extending CCX beyond 2006. By then, climate change will be more obvious -- and CCX may help make controlling it more of an industry than a mystery.