How to Save the Planet and Make Money Doing It

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Keith Bedford / Reuters

The fact that Earth Day is approaching on April 22 got me wondering who's had the most positive impact on the planet in recent history? Here's a surprise: one of the world's most influential environmentalists isn't an environmentalist at all. Nor is he an activist, a conservationist, or even someone who seems to spend a lot of time in the wilderness. He's an economist. His name is Richard Sandor, and more than anyone else, he invented the idea of emissions trading — a financial technique of capping and trading pollutants — which may be our best hope for beating climate change.

The 66-year-old Sandor, who began his career as an economics professor at University of California, Berkeley, made his name pioneering the development of financial futures at the Chicago Board of Trade in the 1970s, an accomplishment that gave him a reputation for seeing value where others couldn't. (Financial futures effectively bet on shifting interest rates, allowing traders to hedge the risk of interest rate changes.) That experience made him confident in challenging financial orthodoxy. "I was tossed out of banks across America," says Sandor. "They said interest rates wouldn't change, that financial futures were pointless." They were wrong — financial futures are now a multi-trillion-dollar industry, and Sandor is a very rich man. (Hear Sandor talk about the emissions trading market on this week's Greencast.)

In the late 1980s he turned his attention to air pollution. At the time, one of the biggest environmental threats facing America was forest-killing acid rain, due chiefly to rising levels of sulfur dioxide (SO2) and nitrogen oxide (NO) from coal power plants, factories and cars. The answer was simple — reduce those emissions — but the way to get there wasn't. (Any similarities to where we stand on global warming are purely intentional.) The government could simply mandate reduced emissions, or force power plants to install expensive SO2 and NO scrubbers, but that might not be efficient. To Sandor, the answer was clear: markets. He wrote a position paper for a green group arguing for the creation of a cap-and-trade system for acid rain, one that would put a government-mandated limit on the level of pollutants power plants and factories could emit, but allow companies that came in under the limit to trade their excess capacity to companies that exceeded their caps. The market drives companies to be ever more efficient in cutting pollution, because pollution becomes a recognizable cost. "You commoditize the air," says Sandor. "Once you place a price, you move industry and innovation."

For many environmentalists, the idea of essentially recognizing a company's right to pollute — even while requiring them to reduce that pollution — was anathema, as if it made some form of pollution O.K. But you can't argue with results — emissions of SO2 and NO have dropped drastically, as has acid rain. Emissions trading worked because by pricing the air, it helps drive innovation towards pollution control and efficiency, funded in part by the value of the emissions trading market. (Companies that spent to lower their emissions beneath the cap could recoup that investment by selling their excess emissions credits.) Just as importantly, it did so on the cheap, at a cost considerably beneath early estimates.

Sandor's idea was so successful that he was asked to the Earth Summit in Rio de Janeiro in 1992 to help design a program to finance reductions in carbon emissions. Sandor remembers the time fondly. "It reminded me of my days at Berkeley," he says. "There was more tie-dye than at a Grateful Dead concert. I was sitting on the beach and having a caipirinha, and I said, 'We could do this.'"

Sandor advocated an emissions trading program similar to the one he'd put forward for acid rain, and his thoughts helped shape the Kyoto Protocol, which requires developed nations to reduce their emissions and created a carbon trading and offset market to speed that process along. In the late 1990s he began formulating the Chicago Climate Exchange (CCX), a private emissions trading market, to take advantage of the changes he assumed would be coming when the U.S. ratified Kyoto. Of course, that never happened, but Sandor still launched the CCX in 2003.

Despite the fact that CCX is entirely voluntary — meaning the U.S. companies that participate in it aren't being forced to make emissions cuts — the market has been a success. Today, he notes, CCX has more than 400 corporate members, who last year traded 23 million tons worth of carbon emissions — up from 10.3 million in 2006. Over in London, where Sandor opened up a European Climate Exchange — and where companies labor under Kyoto-mandatory carbon caps — trading has been strong, and the company itself is worth over $1 billion. "Carbon cap and trade is not a thing of tomorrow or a thing of today, but a thing of yesterday," says Sandor. "It's been working and going on now for five years without a hitch."

But to truly drive the massive global carbon emissions cuts needed to avert dangerous climate change, a voluntary market like CCX will never be enough. What's needed is a mandatory carbon cap in the biggest carbon market of all — the U.S. If and when that happens, we may see carbon emissions drop as rapidly as SO2 and NO has fallen under Sandor's acid rain market — without emptying our national wallet. "I'm optimistic," says Sandor. "The potential [cap-and-trade] legislation is moving in the right direction. If we design the building right, it won't punish the economy." On this Earth Day, as we grapple with worsening climate change, we should take time to recognize an unlikely hero for the planet.