Richard Sandor has a new book out. He’ll tell you that markets are the solution before he hears the problem. Pollution? Climate change? Water shortages? Species extinction? Just create a new market and the problem will go away.
Or not. One of the markets that Sandor helped create is the carbon market. He set up the Chicago Climate Exchange (CCX), which started trading in October 2003. Trading stopped at the end of 2010. Carbon emissions continue to increase, just as they had while CCX was trading. And Sandor pocketed about US$98 million from the deal from the sale of the CCX to Intercontinental Exchange.
Sandor’s book includes a chapter titled, “The Fall of the Chicago Climate Exchange”. At the end of the chapter he sums up the lessons learned from the history of the CCX, particularly the crash of the price of carbon from US$7.4 in mid-2008 to US$0.5 by the end of 2010. Predictably, Sandor doesn’t admit failure (after all, he did very well out of the CCX).
The system in fact was working as designed. The market, through CCX pricing, was reflecting the total lack of political will to meaningfully manage global warming. Markets have eyes.
In April 2012, Sandor gave an interview with Todd Henderson, Professor of Law at the University of Chicago, to promote his new book, “good Derivatives”. The full interview is available here.
There are some revealing comments in the interview. In his book, Sandor writes that he had to “create the supply and demand of a product that didn’t exist, as well as to create a web of institutions to support this new markets.” In the interview he comments that,
“In the final analysis, anyone who’s been involved in markets knows that unfortunately, or fortunately, there’s two motivators: Fear and greed. And we really appealed to both sides of that equation. To the people who were afraid it [government regulation of GHG emissions] was coming and they would be unprepared. The greed part was that they could make money by doing it better than anybody else.”
Sandor is chairman and CEO of Environmental Financial Products, a company that specialises in “inventing, designing, and developing new financial markets with a special emphasis on investment advisory services.” In the interview, Henderson asks Sandor which markets he would be looking to create ten, twenty years in the future, if he were 30 years old today. Sandor replied,
“I think water is simply the most important commodity of the 21st century. It will in effect change whether we live or die. And we don’t have enough water either quantity-wise or quality-wise. I don’t think if you look and read deeply, I think that Tibet is not about religion, it’s about water. It’s where the rivers for that, that basically people thirst for in India and China. And that’s a water issue.”
Of course, Sandor’s solution is to put a price on water. As if their is no global debate about the privatisation of water. As if the protests in Cochabamba, Bolivia and elsewhere around the globe had never happened. The market, or more accurately traders in Chicago, will decide how much people should pay for water.
Sandor’s book includes a description of an attempt to establish a tree plantation as a carbon trading project. It’s an honest account of the difficulties involved in setting up plantation projects (regardless of the carbon trading element of the project) and the importance of free, prior and informed consent:
Holy Cows and Sacred Forests
Doing business in any new country requires great respect and acknowledgement of its culture and social systems. This is even more important in a country such as India, with its rich and complex set of social dynamics and cultural fabric.
Sometime back in 2006, CCX made several attempts to register forest carbon from India to our forest offsets portfolio. We had been very successful in recruiting Brazilian forest companies to CCX and were eager to extend the success to India. Murali [Kanakasabai, one of Sandor’s colleagues] traveled to Mathura to discuss this opportunity with the local district forest officer… Mathura, located about 90 miles from New Delhi, was a holy city famous for its Krishna temple. The city was believed to be the birthplace of the Hindu deity Krishna, and Hindu mythology was filled with tales of a young Krishna herding his cows in lush forests. Mathura’s bustlign streets were filled with pilgrims and saffron-robed sadhus (Hindu holy men) and hawkers selling trinkets for Hindu rituals. The entire business in the city was somehow tied to the Krishna temple.
The discussion with the forestry department went smoothly. We discussed a pilot to initially demonstrate that the concept could be extended. A new plantation site was identified near the hillock of Govardhan as the pilot location. The site had year-old plantings and could easily be transformed to suit CCX forest carbon requirements. Murali suggested the continued development of the plantations. CCX would revist the plantation in about six months’ time to measure the trees. When Murali returned to Chicago, we initiated the process of introducing Indian forestry tons to CCX. There was much work to be done.
Three months into the process, Murali received a frantic call from the forest officer. His plantation was being destroyed by an army of cows. Apparently, the local sadhus were insistent on releasing cattle onto the plantation. The Govardhan hills were part of the area that Krishna was believed to have roamed with his cows, and the sadhus would have nothing less than free-roaming cattle in these sacred forests. Of course, the cattle were devouring the young plantation. To add to the destruction, people were releasing monkeys into the forest in an attempt to appease the Hindu monkey god, Hanuman. When the forestry officer tried to disperse the crowds of sadhus, they became violent and started blocking the highway. This was something our experience designing carbon markets had not prepared us for. We had planned for many project risks, and had lined up detailed strategies and contingency plans, but had not anticipated being taken over by saffron-robed Hindu holy men. Confronted with that, we ended our first attempt to register forest tons from India.