Economics, innovation and persistence

4/20/2009 - Richard Sandor, chairman and CEO of the Chicago Climate Exchange (CCX), which helps companies minimize their greenhouse gas emissions through a cap and trade system, delivered a guest lecture at the Kellogg School on April 14.

In his presentation, held at the James L. Allen Center, he discussed climate change implications for enterprise risk management. He also detailed the evolution of the business environment that led to the creation of the CCX as well as the growth, development and benefits of the organization itself.

Calling the rise of CCX something of a “case study” for market innovation, Sandor said his organization’s history also holds lessons about risk management.

“While the first time I had a go at this [venture], it was about interest rate risks and interest rate risk management, [but] the whole subject can be generally thought about in the context of risk management within the environment,” he said.

Sandor, a Kellogg faculty member, credits the school with helping him achieve professional success and make a broader social impact. “A lot of the dreams that I’ve been lucky to realize are owed to Kellogg,” he said. “I’ve had the privilege of using this wonderful platform and minds like yours to try out new ideas for 34 years,” he told the audience of Kellogg students gathered in the school’s executive education facility.

Known as a pioneer in the financial futures markets and named a “Hero of the Environment” by TIME Magazine, Sandor, one-time chief economist at the Chicago Board of Trade, explained how wealth creation moved from the manufacturing arena in the mid-1900s to commodity trading in the 1970s. Over the decades, commoditization spread into other areas. “[T]he next big value creation in the 21st century is going to be…the commoditization of air and water,” he predicted.

Sandor became interested in the sulfur dioxide cap-and-trade system, instituted to control acid rain, in the late 1980s. In this system, the government sets limits on emissions and then those companies most able to reduce their emissions economically have an incentive to sell “carbon credits” to other firms that cannot reduce their pollution as easily.

During his Kellogg lecture, Sandor explored how this concept might be applied to address pollution on a global scale and how a new commodity market could be created. Compared to the commoditization of interest rates, Sandor quipped, doing the same for “six gases is pretty simple because we know what their global warming potential is.”

Despite numerous financial and political obstacles, Sandor said he persisted to build the CCX. He envisioned a voluntary organization, but had to determine how to convince companies to commit without legislation. He described how he and his colleagues worked with 30 companies to arrive at a consensus, before getting them to sign a “soft letter of intent” to make the commitment meaningful.

According to Sandor, CCX now boasts 455 members from a broad range of industries, both within the United States and abroad. Collectively, CCX member companies have reduced approximately 400 million tons of carbon, Sandor noted.

He said he found that companies wanted to join CCX because of opportunities, such as a desire to be part of the solution to climate change. But they were also interested for reasons associated with risk.

“If you want to manage policy risk, physical risk, competitive risk, legal risk and reputational risk, you need to be looking at this issue from a corporate governance point of view,” Sandor said.