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In the late 1980s, economist Richard Sandor (Ph.D. ’67) began pondering whether air could be commoditized—the way pork bellies or oil is on the stock exchange floor. This was when acid rain, the result of excessive industrial emissions of sulfur dioxide into the atmosphere, was killing fish, destroying forests, stripping paint from cars, and threatening human health. Sandor’s idea about placing a value on something everyone in the world viewed as free and as having no monetary value may have come out of thin air, but he had hold of something that could lead to an economic and environmental revolution.

Opportunely, in 1990, the U.S. Congress passed the Clean Air Act, which restricted sulfur dioxide emissions and allowed companies that cut their emissions to levels below the cap to sell their pollution allowances to companies that couldn’t effectively meet the restriction cap. Sandor set up a marketplace at the Chicago Board of Trade for such an exchange. There, electric utilities could combat the expense of reducing emissions by buying pollution allowances from less stressed utilities.

Some environmental groups condemned the transactions as “smut trading,” and representatives of environmental activist organization Greenpeace chanted, “Trading pollution is not the solution.” But while some polluters might not decrease their sulfur dioxide generation, collectively the industry achieved remarkable emission reductions. Sandor’s new market helped halve the emissions of sulfur dioxide in the United States and is credited with playing a role in defeating the acid rain problem. “It showed the efficacy of market-based solutions to environmental and social problems,” Sandor says.

Today the world faces the even more serious environmental problem of global warming, and Sandor believes another economics-based effort will help save the day. In 2003, he cajoled a group of companies and organizations into joining the fledgling Chicago Climate Exchange (CCX), where he is chairman and CEO. In this market, members who have made substantial cuts in their emissions of greenhouse gases, such as carbon dioxide, trade credits to other members who cannot readily cut as much. By enabling these trades, CCX shepherds its membership into a collective reduction of carbon emissions that—though not mandated by the government—is still legally binding. (Members that fail to meet emissions reduction goals face possible disciplinary action or other penalties.)

The carbon emission credits represent atmospheric pollution that didn’t happen, much as children might receive an allowance for keeping their room clean by reducing the amount of clothing on the floor. It’s a simple concept. Yet Sandor’s brainstorm connecting environmental gain with economic market forces has led scores of CCX members—whose combined greenhouse gas emissions are greater than the total carbon output of the United Kingdom or France—to trade about $20 million worth of credits and attain a collective decrease in the amount of harmful gases they produce. Harnessing economic forces to help the environment inspired Time magazine to honor the University of Minnesota–trained economist as one of its “Heroes for the Planet” in 2002.

Born in Brooklyn, New York, Sandor arrived at the University as a graduate student of economics in 1963, straight from the City College of New York. He expected to specialize in international trade and public finance. Eventually, however, he found the study of the economic consequences of patent development and other forms of industrial invention more alluring. After earning his Ph.D., he taught in the graduate school of business at the University of California–Berkeley.

One Minnesota faculty member, Edward Foster, now chair of the Department of Economics, heard news of Sandor’s developing interests at Berkeley. “He had the perception that during the Vietnam War interest rates were growing more volatile than they had been before,” Foster recalls. “People who were buying government securities or any securities that paid interest were facing more risk than they had been.” If something could diminish that volatility and uncertainty, the risk of lending and borrowing would decrease, thus enabling millions more Americans to buy houses and make other purchases dependent upon outside financing.

Sandor took up the challenge. During a sabbatical in the early 1970s, he stepped in as vice president and chief economist of the Chicago Board of Trade and seized an opportunity to transform his analysis of an economic problem into the creation of a beneficial economic institution. In Chicago, he designed the world’s first interest rate futures market, which reduced the hazards of interest-bearing securities by allowing traders to hedge interest rate fluctuations and purchase futures contracts. Traders, for example, could contract to buy and sell Treasury bills at a negotiated future rate of interest. Interest rates were no longer subject to future uncertainties, just as the price of crops and other commodities had long been controlled with futures trading. Sandor has been called “the father of financial futures,” and, today, the market for interest rate futures has grown into the billions of dollars, with exchanges all over the world following Chicago’s example. As a result, the use of capital has grown more efficient and less risky.

Despite Sandor’s track record for applying economic solutions to earthly problems, he confesses that “I would feel moments of misery, frustration, anger, irritation, fear, and defeat” during the 12 years it took to launch CCX. But his success in laying the groundwork for sulfur and carbon trading drubbed naysayers who ridiculed the notion that the creation of a new economic marketplace could help solve an environmental crisis. He takes special pleasure in reminding critics of their predictions of failure, quoting German philosopher Arthur Schopenhauer: “Every truth passes through three stages before it is recognized: In the first it is ridiculed, in the second it is opposed, in the third it is regarded as self evident.”

In 1999, Sandor received a grant from the Joyce Foundation, which supports efforts to improve the environment around the Great Lakes, giving CCX a big boost. In 2001, however, President George W. Bush pulled the United States out of the international Kyoto Protocol mandating the reduction of greenhouse gas emissions. Any organizations that joined CCX would have to do so voluntarily.

In 2003, CCX began accepting members, who had to agree to a schedule of greenhouse gas reductions based on emissions averages from 1998 through 2001. By the end of 2006, members must attain a 4 percent reduction in emissions from the baseline period or buy the necessary credits from other members. By 2010, the reductions must reach 6 percent. Some members have already far exceeded those reductions.

CCX’s steadily growing membership now stands at 200 and includes electric utilities; such companies as Ford, Dupont, IBM, Motorola, and Amtrak; such municipalities as the cities of Berkeley, Boulder, and Chicago, plus King County, Washington, and the state of New Mexico; six educational institutions, including the University of Minnesota; and organizations in China, Costa Rica, and Brazil. And they have joined without being forced to, for a variety of reasons: to increase shareholder value, make their carbon reduction efforts more public, become eligible for insurance discounts and future lawsuit protection, establish reputations as green organizations, gain a head start on any government emission mandates to come in the future, and prepare for mandatory emissions reductions that have been or will be mandated in other parts of the world.

“The world is the limit,” Sandor declares. “CCX wants to be active in every emerging environmental market, domestic and international.” (Its European subsidiary, the European Climate Exchange, is the most successful exchange in the European Union Emissions Trading Scheme, which controls 85 percent of the world’s exchange-traded volume of carbon allowances.)

Like any commodity, carbon emission credits—each representing the right to emit one metric ton of carbon dioxide or its equivalent in other gases—fluctuate in price. (For comparison, the typical American automobile emits two to four metric tons of carbon each year.) In a recent month, 3 million credits were traded, and during 2006, the price of a credit has ranged from about $3.75 to $5.00. This price is far cheaper than what it actually costs to cut emissions by 100 tons, and it is just a fraction of the exchange rates in Europe, where carbon emission reductions are mandatory among nations that have signed the Kyoto Protocol. If the law in the United States regulates future greenhouse gas emissions, prices are sure to rise.

The University of Minnesota joined CCX in 2003. “I learned about CCX and advocated that since the Board of Regents was adopting a sustainability policy, it would be smart to join the Climate Exchange,” says Bob Elde, dean of the College of Biological Sciences and chair of the University’s Initiative on Renewal Energy and the Environment. “What we do makes a huge difference. It’s a great education opportunity for the U, as well as an economic opportunity.”

The University has built up several hundred thousand dollars in emission credits mainly by upgrading its heating systems to burn coal more efficiently. When cashed in, some of those credits will fund future emissions reductions. Plans are under way to introduce a new energy source, oat hulls, that would replace some of the coal currently used. Any emissions reductions have to be verified by the National Association of Securities Dealers, a third party that audits the reports of all CCX members. “They’re tough,” says Jerome Malmquist (B.A. ’74), the University’s director of energy management. “If the figures don’t match, those guys will find the needle in the haystack.”

Sandor considers this verification system essential to CCX’s success. “Many [nonmember] organizations make reduction claims that are not backed up by audit,” he says.

Some environmental activists have reservations about Sandor’s innovation. J. Drake Hamilton, science policy director of Fresh Energy, a St. Paul organization that advocates clean, efficient, and community-friendly energy, applauds his work but fears that CCX is offering too little, too late. “The timeline of the problem of global warming is very short,” she says. “Scientists say we have 10 years to seriously turn the problem around. We need to be on track to attain a 70 percent emissions reduction by 2050. I’m concerned that a program like this, relying on voluntary participation with extremely modest goals, will get in the way of nationwide efforts to put in place comprehensive limits on the production of heat-trapping gases. We need federal laws mandating the reduction of emissions on a set timetable.”

Hamilton also dislikes the private nature of CCX, the anonymity with which emissions trades are conducted and that CCX’s audit information is not made public. Sandor, however, sees CCX as a prelude to government involvement and a partner in future legislation, as in the past with sulfur dioxide emissions. “Many regulatory movements have been done privately and locally before federal involvement,” he says, citing meat inspection and stock exchange regulations as examples. He is proud of the green enterprises that CCX has encouraged, including the dairy farm of Dennis Haubenschild, near Princeton, Minnesota. By trapping methane from manure pits and using the gas to power electric generators that run his milking machines, Haubenschild accumulates about $10,000 in emission credits a year. “He now has a business model that’s 80 percent dairy, 20 percent environmental services,” Sandor says.

There is no denying the significance and originality of Sandor’s thinking, and he himself has become a hot commodity in national and international media. 

“As a contribution to the world’s economy, it’s been enormous,” Edward Foster says of Sandor’s work. “He has provided a huge service to people participating in all of these markets. His contribution has been abstruse and technical, and some people roll their eyes over it. But he has benefited all of us by using a clever market mechanism to reduce air pollution.”

Sandor, who turns 65 this September, considers himself an environmental economist and believes many environmental and social problems are open to solution through commoditization. “There are markets in water, endangered species, and health care possible in the future,” he says. “All you have to do is construct a commodity to be traded.” Air and water offer the best possibilities, he maintains. “When I was at the U, we were taught that there was an ample supply of air and water, and that it should be free. But now clean air and water are scarce resources.” Introducing these precious assets to commodities trading might help preserve them by giving them tangible value—a process that Sandor has shown to work in the past.

Can the technique solve problems in education, public safety, or social problems? “The potential is vast,” says Sandor, who seems disinclined to retire. Perhaps he wants to create one or two more markets.

Jack El-Hai is the author of The Lobotomist: A Maverick Medical Genius and His Tragic Quest to Rid the World of Mental Illness.