Carbon Could Be No. 1 Commodity: Exchange Chief

Carbon trading is set to become the world's largest commodity market, Richard Sandor, chairman and founder of the Chicago Climate Exchange, told

“Carbon, when it becomes worldwide, will be unambiguously the largest commodity in the world,” Sandor said in an interview. “The world emits 35 billion tons; it’s priced at $20; that’s $700 billion. Put a 10-20 multiple like you do on futures, [and] you’re talking about $10 trillion at maturity.”

Sandor, who was a major player in the formation of the interest-rate futures market, created the Chicago Climate Exchange [CCX] as a market-based solution to global warming. Time Magazine named him “Hero of the Planet” in 2002, and the “father of carbon trading” in 2007.

“In ’89-’90 someone came to me and said, ‘you commoditize interest rates, do you think you can commoditize air?’” he said. “You could cap the emissions that any utility has, and if they go below that cap, they can sell their emissions, their rights to emit— and if you can go above it, you can buy someone else’s. So it drives compliance.”

The exchange is the world’s first and North America’s only voluntary, legally binding greenhouse gas cap-and-trade system, providing third party verification by the Financial Industry Regulatory Authority [FINRA]. Its subsidiary, the Chicago Climate Futures Exchange is the world’s first environmental derivatives exchange that trades carbon dioxide, sulfur dioxides and nitrogen oxides.

Although the United States remains one of few industrialized nations not following the Kyoto Protocol, an international treaty intended to reduce global warming, the country’s voluntary emissions market remains sizable. At 700 million tons of carbon, CCX is about one-third of Europe’s cap-and-trade program. In fact, that amount is larger than Germany's industrial footprint, according to the exchange.

However, this comes at a time when the U.S. climate bill sits on the brink of collapse, which could also have repercussions for the voluntary market.

“A lot of the voluntary investors were getting in because they wanted to get ahead of the curve,” said Terence Gallagher, an independent carbon strategist. “And now people are on the sidelines waiting to see what’s going to happen so you’re going to see less people willing to take the plunge and get into the voluntary market.”

The Senate was expected to unveil legislation today but the bill became stalled after a key GOP ally pulled his support because of an unrelated immigration reform dispute. The CCX has no comment on the situation at this time.

Another hurdle facing the carbon market is fragmentation on the national and international levels. While Europe currently has two types of credits which are generated in Kyoto signatory countries, the United States is divided between the Regional Greenhouse Gas Initiative [RGGI] and the California Action Climate Reserve, said Gallagher.

“There’s too many markets,” he said. “It’s not there until we get a standard product that’s tradable across all different countries.”

China, another nation often scrutinized for its large carbon footprint has also taken considerable interest in emissions trading, said Sandor.

“I have more ease in explaining cap and trade in China at universities, than I do in the United States,” he said. “There is an undergraduate emissions trading club in Peking University.”

In fact, the CCX has partnered with China’s largest oil and gas producer and supplier CNPC and the City of Tianjin to develop sulfur dioxide emissions and water pollutants markets. The exchange has also teamed up with China’s central bank to establish a research institute in Chicago and Beijing to advance corporate and industrial use of emissions markets.

“They have their eye on the ball,” said Sandor. “I had lunch with the chairman, Governor Zhou, and he’s like their Ben Bernanke. And Governor Zhou knows more about cap-and-trade than half or 75 percent of the people I know anywhere. So when a central banker can talk chapter and verse about emissions trading, it’s telling you something.”