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Is it time to bank on the value of ... thin air?


Richard L. Sandor doesn't lack ambition. While U.S. financial exchanges are pushing into new areas like steel futures, often in the face of industry resistance, the founder of the world's first exchange to trade climate products clearly thinks the sky's the limit.

"Why not endangered species?" he said when asked what kinds of products could be traded on exchanges in the future. "Look at anything economists have traditionally called public goods and that seemingly could not be traded. Air, water ... why shouldn't the commodities that make life possible be rationed?"

Take a step back. Sandor isn't suggesting that polar bears and orangutans be listed alongside oil on the New York Mercantile Exchange. Neither is he envisaging a world in which consumers would have to line up for a daily allowance of oxygen. The starting point for Sandor's vision is the idea of scarcity, and theories about how to put an accurate value on the essentials of life.

Sandor's main venture, the Chicago Climate Exchange (CCX), is a case in point. Set up in 2003, the CCX was the world's first exchange for trading permits for greenhouse gas emissions. Exchange members, who include some of the leading corporations in the United States, agree to voluntary but binding targets for emissions and then buy and sell emissions permits on the exchange.

In essence, the CCX puts a price on something—the right to emit carbon dioxide—that previously had been considered free. Those who believe the world needs to act quickly to reduce greenhouse gas emissions, and that a market-based system is the best means of achieving that goal, applaud this kind of thinking.

"As a planet, we emit about 30 billion tons" of carbon dioxide annually, Sandor said at the Steel Success Strategies XXIII Conference in June co-sponsored by AMM and World Steel Dynamics Inc. (AMM, July 1). "If we take the current price of carbon of $40 (per tonne) multiplied by 30 billion to 35 billion tons, we're talking a cash crop of hundreds of billions of dollars...This will simply be the biggest commodity in the world."

U.S. metal industries need to get involved in carbon trading, Sandor said, because—like it or not—it's coming. Both Sen. Barack Obama and Sen. John McCain support some form of cap-and-trade system that would place a limit on the amount of greenhouse gases that companies and industries could emit, and then allow those who emit less to profit by selling their savings to companies who overshoot.

"We have an expression in Chicago If you're not at the table, you're on the menu," Sandor said. "They (steel companies) have to be part of the debate. Sometimes this debate is couched in terms of how much this thing is going to cost. We're couching the debate in terms of lowering greenhouse gases at the lowest possible cost."

The steel industry, through groups such as the American Iron and Steel Institute, opposes cap-and-trade programs in the forms being discussed in Washington. The aluminum industry, while still expressing reservations about some elements, has been more welcoming.

"Those companies who don't get involved early are going to be stuck with high costs," Sandor said. "It's almost a self-fulfilling prophecy."

Despite his enthusiasm—Sandor has the air of someone continually struggling to contain his excitement at the repercussions of his ideas—the man once described as the "father of financial futures" isn't expecting everyone to be converted overnight to the importance of trading the air we breathe. Before turning his attention to the climate, Sandor was one of the most respected figures in U.S. financial markets, including a stint as chief economist of the Chicago Board of Trade, where he was credited with helping to create the interest-rate futures market.

"The development of any new market seems to me to be a generational issue," he said. "I think of the first two to five years of a market as a kind of childhood, five to 10 years as a young adult and 10 to 20 years as the period of maturity. If you look at 2003 (when the CCX was launched) as the starting point, we're just getting into the teen years."

Given the hostility of many in the steel industry to cap and trade and the packaging of core business issues into financial contracts, a brash adolescent in the room might be the last thing many companies want. But if this market reaches adulthood, as Sandor envisages, it could become impossible to ignore.

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