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A Capitalist's Cure for Pollution
by: Russell Wasendorf, Sr.
As the principal architect of the futures contracts on Government National Mortgage Association (“Ginnie Mae”) certificates and 30-year Treasury bonds at the Chicago Board of Trade (CBOT), where he was chief economist in the 1970s, Dr. Richard Sandor is often referred to as the “founder of financial futures.”
As the principal architect of the futures contracts on Government National Mortgage Association (“Ginnie Mae”) certificates and 30-year Treasury bonds at the Chicago Board of Trade (CBOT), where he was chief economist in the 1970s, Dr. Richard Sandor is often referred to as the “founder of financial futures.”
But Sandor did not stop innovating there. He has been coming up with new ideas for markets and financial instruments for many years. One of his most notable ventures has been the Chicago Climate Exchange (CCX), a marketplace set up to trade credits for the emission of greenhouse gases, such as carbon dioxide.
He got the idea back when he was chairman of the CBOT’s Clean Air Committee in the early 1990s. The committee developed the first spot—and futures—market for sulfur dioxide (SO2) emissions allowances. One allowance gave the holder the right to release a ton of sulfur dioxide in a year. (Sulfur dioxide is the culprit in producing acid rain.) The CBOT conducted an annual auction for these allowances for many years, under the acid rain program of the 1990 Clean Air Act. The contract allowed large energy companies to hedge against price swings in the cost of these allowances. The SO2 program was a resounding success, cutting even more emissions than originally planned at a fraction of the cost.
The next innovation was the Chicago Climate Exchange. It began with a feasibility study funded by the Chicago-based Joyce Foundation. The grant was administered by Northwestern University’s Kellogg Graduate School of Management.
The exchange began operating in December 2003. It is a voluntary but legally binding market monitored by the National Association of Securities Dealers (NASD). Trades are done on an electronic platform. The number of exchange members has grown from the original 14 founders to more than 150 current members. New Mexico recently became the first state to join. A random sampling of members includes Amtrak, American Electric Power, Goldenberg Hehmeyer & Co., Rand Financial, Rolls Royce, Motorola and the Iowa Farm Bureau.
Here’s how it works: Starting with a baseline of each company’s average greenhouse gas emissions from 1998 to 2001, each “polluting” member commits to reducing its emissions one percent each year. Members who reduce emissions even further can sell their emissions “credits” to other companies that may be unable to reduce their emissions.
Members include companies in industries from automotive and manufacturing to pharmaceuticals, steel and power providers, as well as financial firms that provide liquidity and environmental organizations and other companies that provide “offsets” in the form of carbon sequestration and forest enrichment. Farmers, for example, can earn credits for no-till farming, which takes carbon out of the air, where it is dangerous, and traps it in the soil.
The exchange covers six types of greenhouse gases: Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluorocarbons (PFCs) and hydrofluorocarbons (HFCs). Its subsidiary, the Chicago Climate Futures Exchange, trades futures on SO2 emissions allowances.
The U.S. is not a signatory to the Kyoto Protocol, an agreement among industrialized countries to collectively reduce their emissions of greenhouse gases. Therefore, the U.S. government imposes no mandatory caps on greenhouse gas emissions. Many members of the Climate Exchange joined in anticipation of mandatory caps being put in place in the near future; their participation in CCX will give them a head start on compliance. In addition, some U.S. states have initiated mandatory caps on their own and joined with CCX’s market to help companies meet those requirements.
In addition, Senators John McCain and Joe Lieberman and, separately, Senators Jeff Bingaman and Pete Domenici have introduced legislation based on the market approach to cutting emissions.
RW: One problem I could see you might run across in talking about the Chicago Climate Exchange and emissions credit trading is helping people understand the concept of a market-based system for reducing emissions, as opposed to a system in which the government imposes limits on emissions.
RS: I think the big conceptual problem here is the notion of what a “command and control” regime for limiting reductions is compared to a trading regime. In a command and control, we simply put a cap on emission reductions so everyone who participates in the programs would have to cut their emissions by the same percentage. Take for example, a ten-percent emissions reduction. And that’s a one-size fits all. It may be very difficult for some people to make the ten percent cut—they would have to lay people off and do things in their business practices that wouldn’t allow them flexibility.
In a cap and trade system, the same cap or reduction is incurred, but it’s flexible: if a particular company can’t make the cuts because it would be far too costly and take too many years, and another company can make the cuts easily, the company that can easily make the ten percent cut does so and sells it to the company that has difficulty making the cut. This allows the difficult cuts to be made later on, and it allows the company to hedge by buying the super-reductions that have occurred from the folks that can make the cuts easily.
That’s really the heart of it. We’ve not lost the environmental objective because the same ten percent cut is there. It’s just that some people can cut by more than ten percent and some people may not cut at all. Yet the cuts have been made where they could be made at the lowest cost.
RW: First of all, that works if you can get everybody to participate. But how do you get everyone to participate without a Kyoto Protocol in place?
RS: It is difficult to get people to participate, and you can’t get everybody, but our goal wasn’t really to get everybody. Our goal was to prove that the concept was viable and to get a large enough group of companies to agree on a cut and on the way the cuts would be made, and to make a legally binding commitment that was enforceable by the exchange.
It’s not really inconsistent with American history. If we take a look at the Buttonwood agreement in 1792 which began the New York Stock Exchange, we actually had securities regulation in 1792, but formal government laws weren’t passed until the 1930s. In the case of the Chicago Board of Trade, we had enforceable grain standards by mutual agreement, but it wasn’t until the 1920s that Congress made them the USDA food standards. Typically in this country the private sector moves first and the government subsequently ratifies. So we’re really following American historical concepts.
Our goal is not to get everybody to agree, it’s to prove the viability of the concept, to build an emissions management and reduction system that companies can learn to use, to find energy efficiency and get the bonus of an environmental credit once they do reduce their use of fossil fuels.
RW: Well, you’ve laid out the climate exchange model pretty well, but I’m going to back up because this interview is really about you. You have for many years been the thought leader in the futures industry. Let me back up enough to ask you this question:
What prompted you to come up with the concept of Ginnie Mae futures? I think there’s a lot of similarity between the creation of the Ginnie Mae future and what you’re doing today. When you came out with them everybody said, “What in the heck is that?”
RS: You know, you’ve hit it right on the head, Russ, because I say to people, it is remarkably similar. It is not really novel. I was teaching at Berkeley in the ‘60s, a pretty wild time. You didn’t have to be a genius to figure out society was changing — blue-collar kids coming to school, the whole sexual revolution and the freedom that came along with it.
Up until that time, interest rates were quiescent. They hadn’t really moved from 1945 to 1970 in the post-World War II period—they were essentially stable. And in fact capped and fixed. Between the Vietnam War, the deficits that were being built up in the Kennedy-Johnson era and the breakdown in Bretton Woods, it appeared that we had to find a way to allocate money. We figured that the best way to do that would be to have a price on money—that is, an interest rate. And an interest rate that would put capital to its highest and best use.
RW: What was the reaction at the time? People were skeptical, weren’t they?
RS: It was very radical at the time; I got thrown out of every investment bank in America. They said that was a stupid idea because interest rates don’t fluctuate, and therefore nobody is going to have to hedge, number one. And number two, they said you could never commoditize money; it was impossible. How could you think of either a house in California’s mortgage being the same as one in Elgin, Illinois or one in Atlanta, Georgia? There would be no way to make a mortgage into a commodity because it was fundamentally different depending on the region. So we had a couple of big challenges.
The same, by the way, was true with the Treasury bond futures. People said, you can’t commoditize government debt that has different coupons and different maturities. How do you equate them? One’s a five percent, 18 year; another is a seven percent, 25 year. We invented a notional bond, an eight percent, 20 year, which didn’t even exist in the real market, but we made them equivalent based on maturity and yield.
This is exactly what happened with the sulfur dioxide program. In that case, the structural change was the buildup of acid rain. At that particular time, how could you invent a new commodity—air—that would solve the acid rain problem?
When a power plant burns coal, it lets SO2 out, the sulfur goes into the air and combines with oxygen, and rain comes along and it becomes acid rain. It was a big structural change, a huge growth in the U.S., the buildup of coal-fire facilities and the resulting growth in lung disease.
I got called in the late 1980s and somebody said to me, “Do you think we could commoditize air?” I wrote a position paper for a public interest group in Ohio in which I said, yes, you could, and it required the same sort of skill set. The way financial futures were born was the legislation of the CFTC [Commodity Futures Trading Commision]. Prior to 1975, we defined commodities as tangible. So in the early ‘70s when I was the chief economist at the Chicago Board of Trade, we worked with Congress and said, “Why don’t you just add one more word—‘intangible.’”
Thus you could trade interest rate futures and stock futures. With Ginnie Mae, we got support from the major people in the industry: the vice chairman of the Fed, the head of the federal home loan board. We built institutions. We taught people how too clear. We brought in Arthur Andersen to look at the accounting treatment. We started a course at Northwestern University.
We did exactly the same thing with sulfur. We worked the legislation so that the Clean Air Act would permit trading, which was very radical at the time. In this case, people would be trading the right to emit one ton of SO2 into the air.
At that particular point, the U.S. had 18 million tons of sulfur dioxide going into the air. The goal was to cut it—and this year, by the way, they cut it to nine million tons. Acid rain has essentially disappeared from the U.S. as a major problem.
What was great about it was that the naysayers had said it was impossible. They said we were only including the big utilities and leaving out a lot of other players, that we had no industrial emitters, that it was too easy to cut that small a percentage.
Well, it turns out that three years ago the EPA and GAO did a study. Number one real electricity rates are lower than they were in 1990. Emissions of sulfur have been cut in half. The government estimated that the cost associated with making these cuts was about $1.2 billion; just the reduction of medical cost associated with reduced incidence of lung disease was $27 billion.
RW: Did the capability to trade SO2 have this impact, or was it the government standard that caused the change?
RS: The cap did it for sure. But I think what people underestimate is the power of price. The price discovery mechanism was critical because prices started at about $280 a ton. People began to figure, I don’t want to do that, I’m going to switch from Appalachian coal to Powder River Basin, and, therefore, I’m going to do even more cutting than necessary.
The result of that was the real rates fell fantastically because the demand for Powder River coal increased. And all of a sudden price signals started changing. Fuel substitution had an impact on real rates, and in fact the cuts became a lot larger than the cap, simply, I believe, because of the price. But the cap was critical, and the fact that the cap was going to get stricter was critical.
RW: I want to go back to a very basic concept here. In my thinking, a futures exchange performs two very important functions, and they are price determination and price dissemination.
RS: Right.
RW: And price determination is something that you created the facility for. How did that first price come about? You commoditized air, but who said, “I think that’s worth $200”?
RS: After I participated in the legislation, my firm, Kidder Peabody, became a trader in the sulfur market, and basically, nobody had any idea where to price the sulfur. We got two utilities to do a trade, and it was driven by price. This is a little exotic, but bear with me. We went to a utility that had hired a major investment bank. They were going to borrow $50 million to build a scrubber. A scrubber is a chemical factory that you build next to a power plant that takes the sulfur out of the stacks. They were going to borrow at 5.5 percent because Henderson, Kentucky was very, very expensive, and they couldn’t really afford it. So we went in and said, “Well, what’s really affordable?” They said, “If we could do this at half the cost then we would do that.” We retorted and said, “How about if we price it at $180 a ton and instead of borrowing at 5.5 percent, our present value 30 years of the credit that you would generate from building a scrubber, you’ll save three-quarters of a million dollars a year in interest, and you won’t have any debt at the end of the period. You won’t have to enter construction finance, and I’ll buy it all up front. Does that fit your budget?”
They said, “That fits even more than our budget. That’s great. We have to build the scrubber over the long run; now you’re giving us a way to do it.” So that was the satisfactory price.
We then went to another utility and said, “We have 30 years of allowances. You don’t have enough acreage to build a scrubber. Your plant is only on three acres, so you need a lot more money. You’re going to have to run this plant, but you’re not going to be in compliance.”
They said, “Well, we don’t have the money.” So we did a financing for them, and it was like a bond—instead of having interest rates it had sulfur coupons. That was the theory — it was just what one buyer and one seller decided. Nobody really knew what the price was when people bought into it; there had been rumors of a $200 transaction between the Tennessee Valley Authority and some utility which had been done over the counter prior to the availability of the registry. My recollection is the number was a couple hundred bucks. We just did it by finding how it would fit the compliance objective of the group.
RW: Let’s go back to the original comparison, Ginnie Mae futures—actually, Ginnie Mae futures for the most part have been replaced by ten-year Treasury futures. Has the futures market for the ten-year Treasury note reduced the volatility of interest rates?
RS: In my opinion, they reduced the volatility of interest rates, number one, and number two, just as important, they provided a hedging mechanism for people that provided interest rate risk. It was not only reducing the volatility, it provided a mechanism to create certainty in the future of an interest rate. Ginnie Maes and subsequently the Treasury notes, I firmly believe changed the entire nature of home ownership in America.
You know we recently had the 30-year anniversary of Ginnie Maes. Thirty years ago, there were 6,000 savings and loans in the United States, 14,000 merchant banks, and 16,000 credit unions. It took you 90 days to get a home loan, nobody would give you fixed price on it, and you had to go through a huge underwriting process. You really had difficulty; there was red lining against single women and minority groups.
All of a sudden we commoditized it, and the red lining went away. Now, you have to have strict formal standards, and today we have 800 savings and loans versus 6,000. You can get a mortgage in 24 hours — you hit the web, you get a certain rate and you close. I think the value of capital market inventions is often significantly underestimated. The example I use is, how many people do you think have heard of the Polaroid camera? If you take the Polaroid camera and compare it to the invention of mortgage-backed securities, there’s no question, they created trillions of dollars of home ownership and a company that had billions in sales. Take the impact of the long-playing record which everyone I grew up with thought was a great invention. It isn’t even here anymore! Mortgage futures and Treasuries are, and if I asked the average person, do you know what an MBS is, I’m sure most people would not know. But the MBS is infinitely more important than a Polaroid camera.
Ken Arrow, who won the Nobel Prize in Economics, was at a commodity conference I moderated in the ‘70s. They were talking about options, and he said that what really is sad is that people don’t recognize that the financial inventions like double-entry bookkeeping, the invention of the limited liability corporation, were more important than the steam engine.
The vibrancy and the property rights associated with developed countries are often underestimated, I think. We look at goods and mortars and physical inventions, but the ability to have a trading system and a banking system, the ability to hedge interest rates, the ability to own stocks and the certainty with regard to property laws, the dissemination of prices, the ability to hedge—these have enormous value in society.
RW: I remember that in 1979-80 Treasury bonds had a price under 55 — I think interest rates on Treasury bonds were over 12 percent. Yes?
RS: Yes.
RW: We’ve never seen anything close to that. And at about that same time the financial interest rate markets became very active, very viable, very much in vogue. And today we’re concerned about the Fed raising interest rates just slightly above five percent almost across the border—I mean the yield curve is basically flat at this point, and to think that I’m going to lend somebody money for 20 years based on an overnight interest rate is almost inconceivable, but it’s possible to do that because you have a hedging mechanism. You’ve taken the volatility out of the market.
So now let’s take a look at that in comparison to the Climate Exchange. We know that the futures market reduces volatility. In circumstances such as this where any increase in emissions is a very negative thing, if you have a way to hedge that, you can spread the risk of increased emissions. So if you have a futures market for climate conditions, doesn’t it decrease volatility in price and at the same time accomplish the overall objective of reducing emissions? Am I making a parallel there that works?
RS: I think you are so dead on that it’s scary. Let me go back to your earlier point about price formation and then price dissemination. We now have a carbon market; it trades about $2.50. That doesn’t sound like a lot of money—and what does it really mean?
I got a call from an MIT professor who had an idea; he built ponds, he threw microorganisms on the ponds, it was algae. The algae did photosynthesis; it took carbon out of the air like a tree would, breathed out oxygen, and it was like a sponge. Relative to its weight, it took enormous amounts of carbon out of the air. I said, “OK, how can I help you, professor?” He said, “Look, if I can reduce carbon emissions by 50 million tons [priced at $1.75 a ton at that time] can I sell those on the exchange?” And I said yes. He said, “That means I can make $75 million a year!” And I said, “That’s right, professor.”
So six weeks later a business plan comes from this MIT professor. He’s promoting revenue projections. It was almost like he was having visions of being Jet Rink in the movie “Giant” — he was going to hit oil, and he would drive a truck across the state!
I said great. Three months later he had raised $10 million from one of our other offices, unbeknownst to me. And I’m told three months ago he just entered into a contract, and he’s changed his process — all from a $2.50 price. So it’s already affecting inventive activity and technology and capital formation.
I got another call from a Minnesota dairy farmer. He has a lagoon of animal waste; it’s terrible, I’m sure his wife doesn’t like it — it stinks! It fouls the local water, and there are potential water violations. So he takes a tarp, covers the methane, tracks the methane that’s coming out of the lagoon, feeds it into a generator, generates electricity, powers the milking machines. Then he comes to us and says, “Can I sell the carbon credits? Methane is 21 times more potent than carbon. Can I sell these on the exchange?” He worked with a group called Environmental Credit Corp., which is a brand-new company, just created by new investment. It goes around America to dairy farmers in California and Washington. We are going to announce a new one soon, as well. That farmer made $10,000 or so. It doesn’t sound like a lot but to the average dairy farmer in Minnesota…the average person makes $55-60,000. Now we have a new business model and new capital flowing into investments, and we added some new manure digesters. Basically his model is 80-percent milk and 20-percent environmental services. Another company raised $20 million for investing in these digesters under the theory that there is a quicker payback from the investment as a result of it. So even this tiny little experiment is creating big changes.
We are beginning to see a dramatic change in just the inventive activity and the change in business practices. Now that does not include Ford Motor Company, which all of a sudden is looking at inventive activity and looking at electricity in a whole different way. It doesn’t include American Electric Power possibly mixing its fuel use between coal and nuclear. It doesn’t include International Paper, which may be changing its product. It doesn’t include what IBM might be doing to change the way it uses adipic acid, which is a greenhouse gas. It doesn’t include the way DuPont has changed processes in the making of nylon which created huge assets on their balance sheet that they can monetize.
This price formation and dissemination and the ability for these companies to make a change in ’03 and sell ‘06 credits is an extraordinary, valuable proposition. The Chicago Climate Exchange was an experiment; it can no longer be considered an experiment. We have a year 2000 baseline now; people have to cut emissions six percent by 2010. We testified on Tuesday before Senator Jeff Bingaman’s (D-NM) energy committee. We spent yesterday meeting with four or five senators in the United States. This is a functioning market.
RW: Let’s talk a little bit about the typical SFO reader. He is a speculator. He does not have greenhouse gas, doesn’t have a lagoon and doesn’t have any of those things. How do you get the speculator involved?
RS: I’ve got to be cautious, so let me try to do this in the third person, if I can.
I’ll tell you what some of our speculators say. We now have over 150 members in the Chicago Climate Exchange and the Chicago Climate Futures Exchange, which now trades SO2 allowances. It’s the same education process that we had with Ginnie Maes and with Treasury bonds. The comment in New York at the time was, “Ah, it’s just a bunch of grain traders in the Midwest. They don’t know what Fed funds are, they don’t know what housing starts are, and they don’t know what M1 is!”
Well, we go around, we hold two dinners a week, we hold regular seminars, we bring in groups of five to ten, we go to companies and to local prop shops like Marquette and Goldenberg Hehmeyer. We go to people in the milk pit, we go to people in the bean pit, and we get members out of that. We spend hours educating them, and we do exactly what we did with interest rate futures.
Now, what’s the theory in place? The credits in Chicago are priced at $2.50, and where there is a mandatory market and not a voluntary market, the credit is set at $30. Some of our members think that this is a political option; there are three bills in Congress: Carper, McCain-Lieberman, Bingaman-Dominici. Schwarzenegger is arguing in cattle for them, and Governor Pataki has just announced an emissions trading market in New York. People are very intrigued by $30 prices and $2.50 prices in Chicago. That is what the speculator tells us. For the record, it’s very important to qualify that I have no opinion about whether they are worth 50 cents or $30. I can tell you they have traded as low as 80 cents and they’ve been as high as $2.70; they are trading at $2.50 now.
Every time there is a piece of news about climate change, for example Russia signing the Kyoto protocol, Pataki’s announcement last month — it seems to put upward pressure on the process. To answer your question, the other thing that we do is exactly what we did with the GNMAs—they were always cheap on the Board. It’s exactly what we did with sulfur, and we are doing the same thing with carbon.
When you start a market, education is critical. So in about 1975 Northwestern became the first place where you could learn under an MBA curriculum about financial futures. In 1992 I started a course at Columbia University in environmental finance and taught SO2 trading; it has since become part of the curriculum. And on May 1 I start teaching a course at Kellogg on environmental finance and carbon trading to the newest and the best MBAs. Part of the process is that we have reached probably 5,000 MBAs. We’ve given lectures in Chicago, Minnesota, at the University of Texas, Yale, Columbia. We basically go and try to hit thousands of MBAs so that by the time they get out of school and even become professional speculators at corporations, they’ve learned it as part of their graduate curriculum. And the same thing happened with interest rate futures. The whole notion of hedging in the ‘70s and ‘80s was foreign, but then these young kids started marching out of universities and saying, “Wait a second — I learned about things like bond options in my class, and I learned that you could restructure synthetically an entire bank in 15 minutes and change the duration of your liabilities and assets. That same process is now going on with emissions trading and finding and comparing physical and capital equipment versus hedging. We are doing the same thing that we did before. It’s nothing new.
RW: You and I talked about this one time. I have a home in Florida, and Florida is the wettest state in the U.S., yet there are restrictions on water use. Our water bills are far more expensive down there than here in Chicago or at our home in Iowa. The problem is that they have a lot of water but it’s not drinkable. How do you start trying to deal with that kind of issue — that is, water pollution? Are there plans to go in that direction?
RS: Yeah, there really are. We have two grants now, one from the state of New Mexico where the issue is water quantity rather than water quality. You’ve got alfalfa farmers in the eastern part of the state using 650-acre field water that produces a crop worth $250,000 that is subsidized and that has to use energy to dry to it out. Intel uses the same amount of water for $3 billion for a chip plant that produces 500 million in local payroll, generates hundreds of millions in one of the poorest states in the country and yet that alfalfa farmer can’t sell that water to Intel for expansion rights. We are trying to take a case where water and agriculture are worth $500-$1,000 an acre fee, and a study we are about to release says that same water is worth roughly a million dollars in industrial use. If that doesn’t tell you there’s a market…! Any good speculator in this city or any of your readers would say, “Wait a second, I’ll find a way to make good money in between that spread!”
We are also developing a market to maintain the water levels in the Great Lakes. Maybe it’s not a problem now, maybe you think it’s a little crazy, like sulfur and carbon were a little earlier. But the Great Lakes have 1.5 percent water that comes in from rain and tributaries. Population around the Great Lakes goes up by 2.5 percent per year, there is no median of water outside of the lakes. The underground aquifers are running out in the western suburbs — they suck out lake water from Lake Michigan. What happens when the population around the lake goes up by 50 percent and all of the underground water supply is gone? You have to think about things like that. It’s early, but I’ve found that the only way to be on time is to be early.
Once it’s there it’s too late. You have to do what you did with interest rates, I started working on that in the late ‘60s, it was first launched in ’75, then ’77 for bonds, then ’82 for notes and bond options, and by the time we got through, I had 15-20 years on them. I started in the environmental area in the late ‘80s, and sulfur has just about matured in the last 10-15. I started in carbon at the Rio summit in ’92, and I expect the market to be mature by 2012.
Let me give you one last hypothesis that I think is critical in the water proposition and in the way we look at the world. When I grew up in the post-WWII period, wealth was created in the U.S. by manufacturers. General Motors was the biggest company in the world, it had a million employees, lots of stuff like that. Your readers know that in the ‘70s it was an inflation-driven world, the money was made by Cargill, Bunge, Continental Grain, the Bodean dealers like Phillips Brothers. The people who dealt in commodities created the vast wealth, and in fact Phillips Brothers bought Solomon Brothers. That was the wealth proposition.
In the ‘80s I think there were several factors that marked wealth creation such as financial futures — the whole restructuring of the banking and savings and loan community, the preservation of capital in that sector — the commoditization of the mortgage market and mortgage changes in the savings and loan business, the development of junk bonds, and the financing of CNN and the cellular telephone — all by commoditizing debt and turning it into a financial instrument.
The 1990s was high tech and software, and my fundamental belief is that the 21st century is going to be driven by what are called public goods — air and water. They’re precious, and in a planet that’s got India growing and China growing, we have to find a way to allocate. In the case of air it’s maybe trade changes; in the case of water it’s even potentially more conflicts. But we’ve got to find market-based solutions for what economists call the commons. How do we take these great resources we have and stop having a free buffet? People look at air and water and they overeat! They go to a barbecue, it’s free drinks and free ribs, and what do they do at a barbecue? They overeat.
I think America has a big chance to really lead the way — and funnily enough, we have the European Climate Exchange. We’re expanding in Montreal. We’re working on a market for endangered species, fish quotas, things like that, and we hope to be working in the medical arena.
I think it’s very exciting. These are the commodities of the future. Right now, the value proposition, and rightfully so, is that SO2 allowances in many instances are worth more than the generating equipment. You have old, dirty equipment, and people buy the factories for the credit, shut them down and then build more efficient, less sulfur-emitting markets.
So we’re finding now that the right to emit is actually worth more than the factory, and that’s good because it motivates people to buy factories, shut them down and then build more efficient plants in their stead. We may find all these environmental credits to have long-term substantial value. Right now these markets seem to be working.
RW: Fantastic. Thank you so much for speaking with SFO.