Hot Topic at TIGER 21 Meeting: Dr. Richard Sandor, Father of the Interest Rate Futures Market Addresses Group on Entrepreneurial Solution to Greenhouse Gas Emissions
July 18 2005 – By past accomplishments alone, Dr. Richard Sandor would be considered a top-notch presenter at any function or gathering let alone for the leading peer-to-peer investor network for high-net-worth individuals, TIGER 21. Sandor is the father of the interest rate futures market, a title he earned in the 1970s as chief economist of the Chicago Board of Trade. However, Dr. Sandor came before TIGER 21’s, one of the nation’s most elite high-net-worth groups not to discuss the direction of the futures market, but rather to discuss a new revolutionary venture that turns allowances for greenhouse gases into a commodity.
Based on the successful program set up in the 1980s to limit the amount of sulphur emitted by companies in an effort to obtain compliance under the Clean Air Act, the Chicago Climate Exchange (CCX) allows companies to trade financial products based on allowances earned for the reduction of greenhouse gas emissions. While voluntary, companies are given legally binding targets for reduction of emissions, including carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons, and sulphur hexafluoride. If they exceed those targets they get credits. If they fail to meet the targets, they can buy credits from those that have reduced emission levels more than required.
While relatively small now, programs for the trading of greenhouse gas emissions have the potential to become larger than all the food commodities markets in the United States, according to Dr. Sandor. In the EU, where greenhouse gas emissions are capped and regulated, credits are traded on several exchanges, with the most successful being the European Climate Exchange (ECX), a subsidiary of CCX, which handles around 80% of the exchange-traded volume at any given day. . Price per ton there was above $28 in June. The overall EU market price at its low end is valued at $60-$80 billion annually.
As companies are awakening to the realities of global warming and the effects of climate change, many are seeing the benefits of green policies. Programs like the one offered by CCX as well as other energy-use reduction programs, can actually contribute to the bottom line rather than just being a cost center. These programs are also creating new business opportunities, something that is of keen interest to an organization like TIGER 21, whose members are (almost) all self-made multi-millionaires, many entrepreneurs themselves.
“TIGER 21 members are keenly aware of the social and political issues that affect their investments, including environmental matters,” said Tommy Gallagher, CEO and Member of TIGER 21 “The importance of this issue, not only financially, but also environmentally was highlighted by the participation of our members. Dr. Sandor did an excellent job showing that greenhouse gas reduction can be driven by the financial markets as well as a desire to do what is right by the environment.”
The CCX is not only catering to large manufacturers – such as current members Ford Motor Company, Bayer Corporation and International Paper – Dr. Sandor related an anecdote about a cow farmer who converts 20,000 tons of manure daily into fuel to generate electricity. He generates enough electricity to power his 1,000-acre farm and 70 nearby houses. The farmer receives a credit for each ton of methane he prevents from escaping to the air. He then sells those credits on the CCX.
Another participant, an MIT professor, developed a way to pull CO-2 from the air by spreading algae on a pond. The algae is then used as biomass fuel - instead of burning coal. These are just two examples of ways that the CCX has created an incentive for entrepreneurs to develop technologies to capture CO-2 credits.
“Our Own Private Kyoto Protocol”
Dr. Sandor likens what the CCX is doing to its own private Kyoto protocol, the international agreement signed by 163 countries that looks to reduce worldwide greenhouse gas emission by 5.2 percent by 2010. In addition, numerous governments have moved beyond planning and are implementing formal greenhouse gas markets, including the E.U., as well as Massachusetts and New Hampshire. A large number of states, provinces, exchanges and multilateral institutions have made detailed preparations for trading.
“At some point in the future, most executives would agree, there will be a cap on the amount of greenhouse gas emissions allowed. At that time, the CCX and its member companies will be well positioned,” said Dr. Sandor. “This is an important point from the standpoint of an individual investor, who should be very aware of the pollution risk of anything they invest in – as in how the companies deal with pollution control, is it accounted for, will it become an uncontrollable expense if regulations are put in place?”
Dr. Sandor points to the success of the cap and trade program for sulphur emissions as proof that the CCX can help reduce greenhouse gas emissions. When the U.S. began regulating the amount of sulphur emissions, U.S. companies were producing 18 million tons annually, it reduced its emissions to 9 million tons today.
In addition to favoring companies that have taken a green view of the environment by their participation in the CCX or through energy-use reduction methods, individual investors should also be considering companies that are addressing the pollution problem by developing solutions to mitigate greenhouse gas emissions – particularly companies in the biomass arena. The market for these companies and their products is positioned to grow exponentially moving forward.
As the market matures and more companies participate and trading volume increases, Dr. Sandor believes it is likely that hedge funds will begin to package the contracts, which will open participation to high net worth investors.
Dr. Sandor believes that the cap and trade system can be extended to other precious commodities, such as water, and even maybe endangered species. “The public goods of air and water are going to be the value proposition of the 21st century,” he says. “The point is that when you price a commodity, you unlock value and change behavior.”