Unit of Carbon, Chicago Climate Exchange: $1.65; Unit of Carbon, European Climate Exch: $18; Creating Capitalist Markets to Save the Planet: Priceless

During the Net Impact conference I attended a panel on Environmental Markets. The panel was of particular interest to me because some of the key ideas presented were in direct opposition to the thoughts of Hunter Lovins, a recent speaker at UC Berkeley’s Capitalism Next series. Hunter Lovins is a proponent of natural capitalism, the idea that as natural resources once considered nearly free become scarcer, for profit businesses should and will calculate the value of those resources as costs associated with their operations. She praised emerging environmental resource markets and a realization of her ideals. I was surprised, however, that she de-emphasized the role of government in inciting businesses to value natural resources. The Net Impact conference panel on environmental markets sought to explore why environmental commodities markets are emerging and what is driving companies to join them. In particular, given Ms. Lovin’s comments about the Chicago Climate Exchange (CCX), I was interested in hearing Megan Morgan from the CCX speak about its emergence.

I should probably start with an overview of the Chicago Climate Exchange. CCX began in 2000 as a grant to Dr. Richard Sandor, an economist at the Kellogg School of Management, to assess the feasibility of a cap and trade market in the U.S. to reduce greenhouse gas emissions. CCX trading began in 2003 with 13 charter members that sign legally binding agreements to reduce greenhouse gas emissions. Organizations that reduce more than the requirement may trade credits for money to those organizations that do not. Today, 11% of Fortune 100 companies participate, and similar carbon trading market has also been launched in Europe.

Given Ms. Lovin’s belief that a change in government policy is not needed to spur creation of natural markets, I was quite surprised to discover that the panelists thought just the opposite. According to the Net Impact panelists, the sole emergence of the CCX is because companies are anticipating government regulation. They believe that joining a voluntary carbon market will give them a competitive edge once regulation is created. For example, 25% of the largest U.S. coal emitters participate in the CCX. Megan Morgan quoted a coal industry CEO as saying his company joined CCX because, “We want to have a seat at the table rather than being eaten for lunch.” Companies are joining the CCX because:

• Regulation of carbon is increasingly becoming part of a dialogue for U.S. politicians. If or when regulation is passed, participants feel they will have a competitive edge over peers who have not yet taken steps to reduce their carbon emissions.
• Europe has begun to tax polluters, and many U.S. executives prefer a cap and trade system that would financially reward companies that find innovative ways to cut carbon emissions. Voluntarily joining such a system is a way of demonstrating support for such a model and of influencing future legislation.
• Being unprepared once carbon regulation is passed will impact return to shareholders.
• The initial audit companies participate in after joining CCX causes many companies to identify energy saving opportunities that save them money.
  

So, it seems that contrary to Ms. Lovin's belief, our government does set the tone for when and how businesses will choose to confront climate change. We can see from the emergence of the CCX that even the threat of a cap and trade system can spur creativity. I look forward to seeing what policy the Obama administration will implement in the coming years, and I truly hope that it will incentivize U.S. companies to find new and creative ways to cut carbon emissions.

On the founding of FedEx...

I haven't had much time to write lately, but today while reading a case about Federal Express for my marketing class, I came upon a great quote. Fedex was, as of the writing of this HBS case in 1983, the largest venture capital start-up in U.S. history with $90 Million in financing. The founder of FedEx, Frederick W. Smith Jr., said about the early financial difficulties of the company:

"The biggest asset we had going for us was our naivete. God takes care of fools, you know."

So that's my little tidbit of interest for this week.