Richard Sandor is credited with inventing the market for financial futures, pioneering insurance derivatives, setting the benchmark for American interest rates, but his contribution to the public good, he said Thursday, is carbon trading.
The entrepreneur and economist had already developed a market for sulfur pollution in 1991 when the United Nations asked him if he could do something similar for carbon pollution in time for the 1992 Earth Summit in Rio de Janeiro.
“So I wrote a paper and went to Rio,” Sandor said, “and I sat on the beach with a Caipirinha after doing this, and i looked out on Ipanema and I said, ‘I could do this. I know how to do this. Maybe I could put some of the work that I’ve done to really public good and deal with this imminent threat.’”
At the time, Sandor chaired the Chicago Board of Trade Clean Air Committee, which developed those first markets for sulfur dioxide (SO2) emission allowances. He went on to found the parent company for carbon markets in Chicago, Europe, China, Canada and Australia. (He now serves as chairman and CEO of the American Financial Exchange.)
Carbon markets have attracted their share of skeptics, and Sandor defended them Thursday against two common criticisms—the first, that they’re ineffective:
“Two things that combine in environmental markets are cap and trade,” he said in a webinar hosted by three institutes at the University of Chicago, including one with his name on it. “So the first thing it does, it puts a cap on emissions. So by its very definition it solves the problem. It’s just a question of how efficient the road is to that lower emissions level.”
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Polluters who exceed the cap on emissions can purchase allowances, or offsets, from enterprises that reduce pollution—a second source of common criticism:
“It’s often criticized because it says you’re letting the polluters get away with polluting,” Sandor said, “and we’re saying, ‘Well, the least-cost provider of the solution ought to be incentivized to provide the solution, rather than punishing the person.’
“If the goal is to reduce emissions then we as people who get harmed by emissions should not care how it is being done if the societal good is being served.”
Carbon offsets allow people to create what he considers “negative emissions,” whether they consist of credits for reforestation or methane capture or other ways of reducing pollution.
“Very often people use command and control, and the idea was to punish the polluter,” he said of regulation. “The market-based environmental markets are to reward the people for not polluting, and there’s a very, very different moral lens (through which) these are looked at.”
The moral impulse to punish the polluter may result in a less efficient path to the goal, he said, in this case to reduce carbon pollution and mitigate climate change:
“I think, as Isaac Asimof said, ‘Never let your morality get in the way of doing the right thing.’ And I think that you’ve got to be careful about getting morality confused with solving the problem. The job is to solve the problem; it’s not necessarily to punish.”
The stick, in Sandor’s view, will prove more costly than the carrot.
“I believe that they (markets) are the least-cost way of stopping pollution.”
Watch Sandor speaking on “Innovation: From Idea to Reality”