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Sailors take warning.

Sailors take warning.

I’m doing a lot of research on derivatives markets for the Complete Idiot’s Guide to Options Trading, and it is fascinating how many different derivatives products are out there on an almost endless number of underlying assets and securities. One of the great experiments was the Chicago Climate Exchange.

The Chicago Climate Exchange was founded in 2003 by Richard Sandor, a veteran of the Chicago exchanges. His plan was to allow for active trading in carbon credits generated by cap-and-trade regulation. Regulators would allow companies a maximum amount of greenhouse gas emissions. Companies that use less could sell their credits, and companies that used more could buy them. it is a free market approach to a vexing environmental problem.

The exchange was set up as a voluntary program in anticipation of forced regulation, but the regulation never happened and trading dropped off to nothing by 2010. The Chicago Climate Exchange was then acquired by the Intercontinental Exchange, where it handles trading in voluntary environmental offsets and waits for regulation to make it a big business.

Greenhouse gasses and carbon emissions are a huge issue. We all know that, even if it is fashionable in some circles to deny it. The beauty is that there is a market-based solution waiting for use.

The financial services industry is a creative one. That can be used for good or for evil, and the Chicago Climate Exchange is one of the good ideas.