Pricing Pollution

If the California system is designed to reduce greenhouse gasses at minimum cost, it can be done reasonably. If it's done to punish the polluters, then it will be prohibitive. The goal in California should be to do this rationally. Look at the success of the sulfur market. Imposing caps on acid-rain pollutants was supposed to wreck the American economy. The American Medical Association did a study on the reduction of acid rain and found that it led to savings of $27 billion in health-care costs. The point is that when you price a commodity, you unlock value and change behavior.

So the rewards go to whoever figures out how to take carbon dioxide out of the atmosphere?

Exactly. Markets have eyes. As price signals change, we are seeing behavioral change. We are seeing inventors coming out. Our latest member is a Minnesota dairy farmer; we send out a price signal. What's important? The diary farmer has a problem with lagoons of animal waste. He learns he can cover it with a tarp and capture the methane; you burn the methane, you power the milking machines. As a result of the milking machines not emitting methane, a greenhouse gas, he gets a credit on the exchange; he can sell the credit for $10,000. You can say that's not a lot of money, but farmer makes $55,000 in milk, $10,000 in clean air. That's a value proposition. A professor at MIT gets an idea to get algae and spray it on a pond; it does photosynthesis and takes carbon dioxide out of air; he skims the algae, and uses it as biomass fuel and he burns that instead of coal. He raises $10 million from another [CCX] member to commercialize it. The city of Oakland [Calif.] just went through the act of measuring their greenhouse-gas emissions and found that with efficiency measures Oakland can become a seller of credits instead of an emitter of carbon dioxide. I think there will be billions in inventive behavior. Thirty years from now, the fossil-fuel economy may not be there.

This sounds pretty optimistic compared to the doom and gloom normally associated with global warming.

The Chicago Climate Exchange is showing you how to get paid not to pollute. We are showing that if you align financial incentives with social objectives, you create value.

Correction: The original version of this report incorrectly stated that the Chicago Climate Exchange started trading in 2005, not 2003.

© 2006