Options Industry

NYSE Carbon Neutral: Is That Still Cool?


It was announced recently that NYSE Euronext had achieved carbon-neutralityfor the third year in a row, the only global exchange that can claim that designation. (see how they did it:carbon-neutral-2012 ).

While impressive, it seems quaint and out of place as environmental responsibility does not seem to have the same cache as it did a few years ago. It made me think of the first time I interviewed Richard Sandor, the inventor of interest rate futures and emissions trading.

He had just recently launched the Chicago Climate Futures Exchange and was spelling out his strategy on how to create contracts for and grow the carbon trading market. The idea of trading pollution, or more precisely credits to pollute seemed extremely odd at the time but he assured me that it was no odder, in fact less of a stretch, than when roughly 25 years earlier he pitched the idea of futures on interest rates. It was odd because interest rate futures were the most liquid futures market sector at the time but that wasn’t the case in 1975 and Sandor pointed out that he was kicked out of every major bank in New York and told interest rates don’t fluctuate. The point was carbon trading wasn’t any more revolutionary—in fact it was less so—than interest rate futures were when he was inventing them.

And Sandor had achieved success with cap and trade model having helped to successfully cut Sulfur Dioxide emissions in half on the east coast (every wonder why you don’t hear about acid rain anymore? It was defeated with the help of Sandor’s work on emissions trading).

However, it was also a time where his project just took a serious blow with the new George W. Bush Administration killing the Kyoto Accord. This would have mandated carbon restrictions, which would have been the catalyst for growth of his new venture by mandating reductions in carbon emissions.

Sandor wasn’t worried because he thought the arch of history tilted towards more environmental protection and that there was enough concern over global warming in the general public that he could make a go of an exchange with members voluntarily committed to lowering their carbon emissions. He told me that despite the setback, the longer term trend in our nation was towards restricting pollution and that would eventually take hold. While he may still be correct in his assessment—depending on how you measure trends—the forces denying the need for carbon sequestration has grown, not diminished in the past decade.

Sandor made the case for the need of legislation in creating new contracts in a talk for the Marketswiki Intern series put on this summer by John J. Lothian & Company, but at the time told me that there was great momentum for curbing greenhouse gasses and numerous reasons why U.S. industry would embrace it even without a regulatory mandate. He was right to some extent though his U.S.  venture did not take off nearly as well as its European counterpart, which had the appropriate legislative mandates in place.

He pointed out that industry would want to be seen as being friendly to the environment and that the market would embrace environmentally friendly firms and vote with their dollars.

There was evidence of this as he had many volunteer members of his exchange, investment collectives and indexes had begun to rate firms based on their “green” quotient, government was generally supportive and individual states and regions worked on putting together their own mandates but many of those efforts were pushed to the backburner with the financial crisis in 2008. And the Congressional election of 2010 brought into Congress a group who unapologetically deny global warning, which appears dangerously close to becoming the official policy stance of the Republican Party.

We seem further from the point of using markets to reduce carbon emissions today than a decade ago when I first spoke to Sandor,  when perhaps more opposition came from left leaning groups suspicious of market based solutions to environmental problems. But an economic crisis, like the one we have been in the midst of since 2007, tends to sharpen everyone’s focus on the economy.

The idea of passing legislation is farther from happening then ever so I wonder what the value will be for the NYSE Euronext badge of carbon neutrality?  Several years ago the NYSE had been accused of being stuck in the past and slow to advance technological solutions so the idea they are on the forefront of green initiatives is a good thing and it certainly fits in with the forward looking philosophy of soon to be new parent Intercontinental Exchange (ICE), which is the owner of Climate Exchange Plc., having bought it from Sandor and his team for roughly $600 million.

We pointed out in an earlier post that market based solutions are usually better for all than proscriptive rules. Sandor made that case back in the early 2000s when it was all he had to hang his hat on after Kyoto was squashed. Perhaps he was right but it will take the media to pay attention to what firms in important industries are working to be part of the solution and for interested citizens and groups to identify good and bad actors.  And of course,  the cost associated with carbon emissions need to be real in people’s minds, which unfortunately may take an environmental disaster or two.

To read more from Dan, visit his website at dancollinsreport.com

 


About Dan Collins


Dan Collins is a 25-year veteran of the Futures industry and founder of the Dan Collins Report. In 2001 after working on the trading floors of Chicago’s major futures exchanges for 12 years where he serviced all levels of customers, he went to Futures Magazine where he became Futures main industry reporter and responsible for Futures’ Managed Money coverage. He is the Former Managing Editor and was responsible for overseeing all content that went into Futures and futuresmag.com while continuing to cover Managed Futures. He interviewed and wrote the cover Q&A section featuring many of the leaders of the exchange, regulatory and investing world. For 12 years he wrote the monthly Managed Money section pointing out trends in the industry as well as researching, selecting and profiling all of the managers featured in the Top Traders of the Year and Top Emerging Manager (Hot new CTAs) annual features. He also has interviewed many of the back page profiles in futures since 2001 and selected all of the profiles since 2005. He has profiled close to 200 mangers in that time. Read more at Dancollinsreport.com.

Author's web site: http://www.dancollinsreport.com/


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