Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 18

Chicago Climate Exchange

Building the Institution

The more rational an institution is the less it suffers by making concessions to others.

—George Santayana

As we embarked on this new journey, I knew it was going to be different. I was somewhat armed by my previous experiences in designing new products in commodity, financial, and insurance markets. I had also played an advisory role in launching and restructuring exchanges and had even helped to shape futures regulation. However, all this was done within an existing institutional framework that carbon as a commodity lacked. I never had to invent a product, start an exchange from scratch, and construct the regulations around it. We had to create the supply and demand of a product that didn't exist, as well as construct the web of institutions to support this new market. The enormity of the task promised to challenge my entire skill set. It was made even more formidable because I had no blueprint to follow. After all, it had been more than a century since anyone had started a successful spot or commodity exchange.

A proof of concept for emissions trading was going to require much more than creating an innovative financial instrument or a new exchange. Since the United States was not a party to the Kyoto Protocol, there was no legal mandate to reduce carbon emissions. Finishing the Chicago Accord, our voluntary mandate, was like finishing the Kyoto Protocol without the force of law. This made recruiting a critical mass ...