Pricing Pollution

When we were developing financial futures, people used to say, "That's a crazy idea; you can't price money. Interest rates are fixed." Well, the principle was that interest rates drive money to its highest and best use. The financial futures market is now worth trillions. Well, I think I've found two more crops bigger than money—they are air and water; there is no planet without them. We are now facing a very similar issue, which is how should we price air and water so that they can be used most efficiently? I think that will awaken financiers and traders; it's already awakened a lot of people. The public goods of air and water are going to be the value proposition of the 21st century. The pricing of air will spur inventive activity.

And how large is this carbon market?

The European Union [carbon] market, which is mandatory [under caps set by the Kyoto protocol] is in its pilot stage. It covers about 40 percent of entities that emit greenhouse gases. Some industries are covered, but other sources, such as cars and aviation are not. Well, that market is now 2.2 billion tons of carbon dioxide. At full market, it would trade $60 [billion to] $80 billion annually at a low price of $15 a ton. [On May 16, the European market price (ECX) was just over $20 per ton.] At the high price, which used to be $35 a ton, that's $150 billion annually. Let's put that in perspective. The United States is the world's largest food grower. At the low end, that's twice the value of all food-commodity markets in the U.S. This promises to be the single largest commodity in the world. I would think that this market could be bigger than crude oil.

Legislation has been introduced in California that would establish a mandatory cap on greenhouse gases, similar to the requirements in Europe. What impact would that have on establishing an overall U.S. market?

We've already seen the northeastern states establish a carbon cap for utilities. If California goes with a multisectoral approach that covers all industries, then it's the driver, the model for the rest of the country, just as California did when it required seatbelts. It would have a significant impact.

Business groups in California are already complaining that if they are forced to measure and limit their greenhouse-gas emissions, it will be cheaper to just move across the border and produce in another state where there are no such limits.