The energy transition is well underway globally, creating opportunity for investors. One core lever within finance, the carbon cap-and-trade markets, benefit from a history of success in similar pursuits. A founder of these original versions, Dr. Richard Sandor recently spoke to the power of cap-and-trade markets, and their design for success.
Dr. Sandor played an instrumental part in getting the first emissions-focused products off the ground. Dr. Sandor served as chief economist for the Chicago Board of Trade in the 1970s and assisted in creating the financial futures market. Taking this knowledge of futures, Dr. Sandor then applied it to emissions related exchange-traded products. He helped create the first sulfur dioxide and nitrogen oxide credits and went onto broaden this focus to greenhouse gas and carbon dioxide credits.
Dr. Sandor was recognized by TIME magazine as “Hero of the Planet” and was later dubbed the “Father of Carbon Trading.” KraneShares hosted Dr. Sandor at their institutional carbon roadshow recently.
The History of Cap-And-Trade Programs in the U.S.
The genesis of environmental cap-and-trade systems developed as a need to solve for acid raid in the 1980s. It’s created when sulfur dioxide and nitrogen oxide combine and proved a major climate crisis in the 80’s. Impacting everything from aquatic ecosystems to infrastructure erosion and respiratory problems, acid rain posed a serious threat.
And thus cap-and-trade programs were created, after much wrangling between environmentalists and politicians. It was agreed upon that using the market to solve for the crisis would be the best solution. The program received bipartisan support in Congress, with the Bush administration signing on to the most aggressive trajectory for sulfur dioxide reductions.
Fears of skyrocketing prices and economic impact proved unfounded. The cap-and-trade programs worked to tackle acid rain emissions components without economic disruption.
“According to Dr. Sandor, the estimated benefits of the SO2 and NOx program exceeded the costs by a factor of at least 30 to 1,” KraneShares wrote. “Although there was some initial pushback, it quickly proved to be the greatest environmental success story of our time.”
A key benefit to cap-and-trade programs is that they allow companies to pursue solutions, driving innovation but allowing for flexibility to tailor those solutions to individual business models. This innovation leads to a host of new technologies, such as we’re seeing today.
“In California, $11 billion from carbon credit sales have been designated towards half a million projects that fight climate change and cut pollution since the program’s inception,” explained KraneShares. What’s more, the funding earned from these programs also goes towards public initiatives to improve emissions.
The Innovation Road Is a Long One
Financial innovation takes between 20-40 years to mature fully, according to Dr. Sandor. An idea is in its infancy in the first two years before maturing slightly between 2-5 years. Years 5-20 Dr. Sandor likened to a young-adult phase of life before fully maturing between 20-40 years. Dr. Sandor noted that carbon markets are currently around year 19.
“Financial innovation does not happen overnight but is instead built up through an evolving process,” KraneShares wrote.