Carbon Markets:

CCX's Sandor gives recommendations for U.S. climate law, talks regulation, oversight of offsets

Five years after its launch, the Chicago Climate Exchange (CCX) is providing tangible evidence to U.S. lawmakers as to how a national carbon emissions trading program might work. How can the blueprint provided by CCX be applied to a national program? During today's OnPoint, Chicago Climate Exchange CEO Richard Sandor, discusses the lessons his organization has learned since its inception. Sandor explains the educational challenges ahead for legislators and he discusses the potential environmental and economic benefits of establishing a national carbon offsets market. He also responds to criticism of his organization's choice of offset projects.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Dr. Richard Sandor, CEO of the Chicago Climate Exchange. Dr. Sandor, thanks for coming on the show.

Richard Sandor: My pleasure, Monica.

Monica Trauzzi: The Chicago Climate Exchange has been around for almost five years now. What are some of the main lessons learned, that you can sort of take to lawmakers as the U.S. tries to create a climate policy? What are your recommendations to lawmakers?

Richard Sandor: Well, I think the first and foremost recommendation, Monica, is it's nowhere near as complicated as people believe. We run an exchange that's got 11 percent of the top Fortune 100 companies, Ford, Honeywell, International Paper, etc.; 17 percent of the Dow Jones industrial average, IBM, DuPont, Intel, United Technologies, Bank of America; 20 percent of the top power companies, AEP, Reliant, NRG, Allegheny, TECO; seven cities, from Chicago to Melbourne; two states; companies in Australia like a utility there, AGL; five Indian members; five Chinese members; nine Brazilian companies. We've taken on reduction targets, etc., etc., and everybody thinks it's an overwhelming thing to do. And the first and most important lesson, it's a lot less complicated than people think.

Monica Trauzzi: How do you make people understand that though? How do you talk to a lawmaker and make them understand that it's not as complicated?

Richard Sandor: I think we can have them speak to all of our members; tell them the benefits that they've gained from energy efficiency, from reducing their carton footprint. Mostly, it's the members and how they've been able to measure and how we've been able to monitor and verify all of their emissions. And, actually, our members were required to cut by 4 percent by 2006 from the 2000 year level. They've cut by 10 percent, not 4 percent, 180 million tons, which is kind of not far from the combined emissions of France and Belgium together in a year.

Monica Trauzzi: And this is one of the concerns that environmentalists have had all along with the exchange and carbon offsets in general, is that they're concerned that there's no real environmental benefit. So, what do you say to someone that comes to you and says, "I understand the numbers, but I don't really think that there are emissions reductions happening here."

Richard Sandor: Well, they would have to be less than enumerate Monica, because there are the numbers. It's independently audited, so I don't know what basis they could say they don't believe it. They're welcome to take a look at the auditing and the monitoring and verification. I think the principal issue here is there're so many anecdotes and there's so much myth and people use anecdotal evidence in making arguments, as opposed to factual evidence. And I think there's a general problem for a lot of folks who tend to be innumerate and while they're very, very capable of articulating an argument, sometimes the numbers are harder to convey and it's a bigger challenge for us. But they are unambiguous. It has worked and so the only thing we say to lawmakers is what can we share with you, what can we tell you? These are the mistakes we've made. These are the things that we've had to recalibrate. These are the things that we think are opportunities in the future.

Monica Trauzzi: And you're confident that it could be expanded on the national level? Because, right now, yes, you do have many companies signed on, but it's on a smaller scale. Are you confident that it could be expanded nationally?

Richard Sandor: The Chicago Climate Exchange, if it was a country, would be the biggest one in the world. Its emissions baseline is 550 million tons, which is bigger than all of Germany combined. Our members constitute 16 percent of the United States large stationary sources. So I mean that's pretty big. And it's also, if you compare it to the European Union, we're 26 percent the size of the E.U., so this is not trivial. Our biggest problem, frankly, is getting the message out and that's why I'm so happy to be here with you and to see you on a pedestal Monica, which you richly deserve. But we need to get our message out and getting the message out is that, hey, this program has been going for five years. I've been personally involved since Rio. It's essentially been 17 years of doing this, five years of actual physical operation, and look at it. What I do find amazing, and I've been involved, and fortunate and privileged to be involved in inventing markets over the last 30 years, and I heard the same thing about the acid rain program in 1990. It wouldn't work and how can you prove it? And what are the difficulties? And it will never fly. And then I've heard the same thing about interest rate futures. I was thrown out of every bank in America saying interest rates don't fluctuate. How can you possibly hedge? It tends to be what Arthur Schopenhauer, the German philosopher, said, "The truth passes through three stages. In the first stage it is ridiculed, in the second stage it is opposed; and in the final stage it is accepted as self-evident." And emissions trading was ridiculed first. Now it's kind of opposed, but now with three presidential candidates ...

Monica Trauzzi: It's being questioned now.

Richard Sandor: Yeah, it's being questioned. And in five or 10 years it will be accepted as self-evident.

Monica Trauzzi: Are we walking a fine line here though, essentially saying if you've got money, Company X, you can pollute, but still pay your way out of trouble and pay your way into being greener or considered greener?

Richard Sandor: Well, there are two things that you can do in stopping greenhouse gas emissions. The first thing you can do, if there is a cap systemically you're going to be lower as a group, which we have in the intending legislation. The fact that it is systemically lower is what we want, right? That's what I want for my kids and I want it for my grandkids. I just want to see reductions. If the path to that reduction is such that because you were better at cutting your emissions than I am, and I have to build some technology and for three years I have to get sites permitted, I have to do environmental studies, etc., and you've already done it and you can cut more than you're required, I can hedge myself by buying your reductions until I install the technology. It's been tried and true. The evidence of doing it yourself as opposed to buying it is something I ask everybody. I think I'm a goodhearted soul. We don't know each other long. You seem like a goodhearted soul. Do you take your own garbage to the garbage dump or do you pay somebody to do it?

Monica Trauzzi: Well, come on, we all have the same answer to that, don't we?

Richard Sandor: Yes. Well, the point is it's the gains from trade. It's David Ricardo as an economist that very often trade goes on because of what is called the theory of comparative advantage. And if somebody is better at it, my concern and my objective, and I think it should be our lawmakers and legislative objectives, is that you reduce greenhouse gas emissions at the lowest possible cost to the economy, that saves jobs. And if trading is the way to do it, and we've demonstrated with acid rain and demonstrated with other things, we should implement it.

Monica Trauzzi: So, when you hear all these people talking about the potential of negative impacts that a cap-and-trade law could have on the economy, what's your response to that? Because there are many reports circulating now that especially pinpoint the Lieberman-Warner bill and the negative economic impacts that that could have. What's your response?

Richard Sandor: Let me go back to the parallels with SO2. We heard the same thing. It would cause electricity prices to go higher. It would be very, very expensive. It would have a negative impact on our ability to compete internationally because power prices were going to be much higher. The fact is real electricity rates are lower today than they were then. The program cost 1 to 3 billion annually, as opposed to estimated at 10 to 20. And the EPA says there will be $100 billion savings per year in medical expenses associated with lung disease. And I say to people who do that go back and look at the arguments. It's phenomenal, because the same arguments are made that were made 20 years ago and I think those same arguments will be invalid and that we're going to take a look at the people who are making these forecasts now and basically say how wrong they were. Now, I think the problem is that it's unforeseen and most models assume that there's a technology constant, that there's no inventive activity, that people don't reorganize. And I think that, from a trading point of view, it's a bad bet to short ...

Monica Trauzzi: But there are technological uncertainties when you're talking about carbon capture and sequestration, things of that nature. We don't know when those are going to be implemented on a large scale.

Richard Sandor: That's absolutely correct, we don't know. But we must assume, I think, that the technology will improve. If you take a look at the Apple computer that Steve Jobs did in '73, if you look at Orville and Wilbur Wright and the first plane they flew, if you take a look at TV productions, if you take a look at HD TV, technology almost always improves. And almost all of the forecasts assume that the technological problems don't get overcome and I happen to be an extreme optimist and I think once you put a price there people change their behavior.

Monica Trauzzi: Recently there was some controversy on Capitol Hill relating to offsets that were purchased through the Chicago Climate Exchange and some Republicans were challenging the decision that was made to use the Chicago Climate Exchange because they were unsure that buying those offsets would actually yield environmental benefits. So, do you think that markets can really solve environmental problems? And why are we seeing so much questioning, even on the Hill, not just from environmentalists, but from lawmakers as well, as to the impacts that buying carbon offsets could actually have?

Richard Sandor: Well, I think, again, we face, Monica, an incredible educational challenge and I think that you're always going to find controversy. There will be people who will say, well, these offsets aren't exactly additional or these offsets aren't quite right. And one will question the details and there is a legitimate basis for questioning some of the details, but the overwhelming evidence is that market-based solutions to environmental problems have worked in the past. And while there may be honest differences about what to include, how you should distribute the allowances, whether you should, you know, if you're in the East you might not be as sensitive to farmers and the role they play. If you're in the Midwest you might not be as sensitive to what goes on in the West and there's lots of regional differences. And lawmakers will properly represent their constituents and probably always say, well, I want coal mine methane and if I'm in a state where I can destroy coal mine methane and generate jobs that way and electricity, I'd think that was a good offset. If I was in a rural state that had big dairy farmers and I thought that they could take anaerobic digesters and take the methane out of that and power milking machines, I'd think that was a good thing. So, I think this will be the push and pull that happened with the SO2 program, where there'll be bonuses, there'll be special interests, but ultimately I have faith in our legislators that they will come to a very workable system. I've always been told that you shouldn't watch two things being made. One is sausages and the other is legislation.

Monica Trauzzi: And we know that in this town. There's also been some criticism about oversight with the Chicago Climate Exchange and that more oversight is needed for voluntary carbon offset markets. Do you think that there is more need for oversight here?

Richard Sandor: Well, we actually did not have to have any oversight. We went to PHENRA, which is based here, which was created in 1938, by an act of Congress which regulates and caught people like Enron and WorldCom and we invited them to do the oversight. So, what we're concerned about is the unregulated market that's out there, because I'm afraid we do this great care to have an independent monitoring agency looking at market manipulation, looking at the quality of our offsets, verifying that the Ford Motor Company's and the AEP -- what scares me is a vast network of unregulated players out there. We saw some fraud in California about four or five years ago and the woman who perpetrated it at that exchange was selling offsets that didn't exist and she's going to jail now. It was a pure case of a criminal act.

Monica Trauzzi: And there have been concerns that the market is a bit disjointed in the U.S. There's no real, cohesive quality to it.

Richard Sandor: There isn't in the Chicago Climate Exchange, where it's go East and the largest. I'm always scared of people who don't adhere to our standards and that's my nightmare, that somebody will do something with offsets that's not regulated as we are, either on a futures side by the CFTC, or somebody that has no oversight like PHENRA. And what will happen is legislators and others will throw the baby out with the bath water.

Monica Trauzzi: We're way over our time here, but I just want to get this last question in. I want to find out what the next steps are for the Chicago Climate Exchange moving forward.

Richard Sandor: The next steps for the Chicago Climate Exchange are we do two things. We operationalize mandated markets, which we do in E.U. We run the biggest exchange there with about 85 percent market share, about $200 million a day. We run an SO2 and NOX futures, which is mandated. The Chicago Climate Exchange, where there is no mandation we invent and try to entice people to do the right thing environmentally and set up a market. So we will operationalize whatever the legislators do. And, for next steps, on May 30 we start the Canadian carbon market in combination with the Toronto Stock Exchange and the Montreal boards and we have announced the Memorandum of Understanding with PetroChina to explore emissions trading in China and we have a nascent effort in India to develop a market there. We're trying to develop a worldwide brand. And our company is ...

Monica Trauzzi: It's a global issue. It has to be addressed globally.

Richard Sandor: It's a global issue and we're a global company. We're listed on the London Stock exchange. Our stock is up 100 percent since the end of last year and our volumes are soaring and I think it is based on the belief that there will be a worldwide market and I hope and believe that we'll be the people to help drive that.

Monica Trauzzi: OK, we will end it right there on that note. Thanks for coming on the show.

Richard Sandor: It's a pleasure.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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