While the financial markets flounder, one exchange in Chicago had a record day this week. The Chicago Climate Exchange hosted its biggest trading day for a particular commodity. It’s not pork bellies or corn futures—it’s a kind of carbon dioxide emission. Carbon trading is growing into what could be a trillion-dollar market—one that could define the future energy economy, and help head off global warming. Just as the industry seems poised for meteoric growth, the Chicago exchange is facing new competition from out of town.
Back in the ‘70s, Richard Sandor came to Chicago with an idea. Why not let traders take bets on changes in interest rates?
SANDOR: I previously had been thrown out of most places, saying it was a silly idea because interest rates weren’t volatile. Then in ’73 the oil embargo occurred, and interest rates went crazy.
That little experiment earned Sandor the moniker, “The Father of Financial Futures” – though he may have joint custody with a few other economists. Anyway, Sandor was working in banking when Congress took up the Clean Air Act. Why would a banker care about air quality?
SANDOR: Somebody said to me, well, you’ve commoditized something people thought couldn’t be commoditized. Do you think it could be done for air?
What he came up with was to set a limit on pollution, effectively slapping a price tag on the right to pollute. If your company cuts emissions more than it has to, you could sell off your extra allowances, then some other company that wants to pollute more can buy your excess capacity. It began with the stuff that causes acid rain. Then in 2003, Sandor launched the Chicago Climate Exchange, trading in greenhouse gas emissions.
SANDOR: Our members are growing. We started with 13, we’re north of 450 now. We’ve come a long way in the road.
But here’s the thing: there is no cap on carbon emissions in this country—the U.S. doesn’t regulate it. So, the Climate Exchange, also called the CCX, made up a voluntary system. That makes it kind of a boutique industry. But now, this idea born in Chicago seems to be catching on…
OBAMA: There is a way of dealing with the issue, by setting up what’s called a cap and trade system.
MCCAIN: Under the cap and trade system the profit motive will suddenly point the other way, toward cleaner fuels.
So, we have rare agreement between the presidential candidates. That makes it more likely that a mandatory cap-and-trade system will be how the markets chart society’s response to global warming. That would also blow this sector wide open, one estimate puts it at a trillion dollars by 2020. But just as Richard Sandor’s big idea seems about to pay off, a well-heeled new competitor is rolling in. Meet the Green Exchange.
WARSAGER: It’s a venture or an initiative within Nymex. The idea was to create a stand-alone platform for trading environmental products.
That???s Randy Warsager, V.P. of Marketing for Nymex—the New York Mercantile Exchange. The Green Exchange has the heft of Wall Street behind it. That may sound dubious given recent developments, but Nymex and its banking, brokerage and hedge fund partners could form a potent challenge to Sandor’s little independent exchange. Sandor says he won the first rounds.
SANDOR: We’ve been competing with Nymex, and they haven’t done anything. They tried in sulfur, they tried in NOx, and they keep on trading less and less. So it’s not that they’re ramping up, they’re actually ramping down.
The Chicago Climate Exchange may have been the innovator, but the Green Exchange can draw on legions of traders who already haunt the Nymex every day. Milo Sjardin studies the industry for New Carbon Finance.
SJARDIN: It’s very close, if you’re already trading on the Nymex, why would you go to the CCX?
So here’s a growth market with huge implications for climate policy – and New York and Chicago are duking it out for primacy. It’s Wall Street versus LaSalle Street, Yankees versus Cubs. But, in a twist, Nymex was just gobbled up by the Chicago Mercantile Exchange – based just around the corner from Richard Sandor’s office. Sandor concedes that’s good for Chicago’s financial industry, but he can’t resist reminding us where the idea for carbon trading came from in the first place.
SANDOR: I think the city has built a great portfolio of new businesses that have been envied and copied around the world. That little barb lets you know that Sandor doesn’t intend to surrender to any bigfooted newcomer – no matter how green. For the rest of us, their skirmish could determine the home of the energy economy’s financial nerve center.
I’m Gabriel Spitzer, Chicago Public Radio.