Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 10

Environmental Finance

My salad days, when I was green in judgement.

—William Shakespeare, Anthony and Cleopatra

Phil Senechal was a member of the Coalition for Acid Rain Equity (CARE), a not-for-profit public interest group advocating cap-and-trade. He wanted cap-and-trade to be included in the proposed Clean Air Act and its amendments (CAAA) that were being drafted by Congress in 1990. Phil was politically savvy and very likeable. He owned a business that sold lime, a critical mineral in the chemical process known as scrubbing, the process that removes sulfur from the power plant emissions, thereby preventing it from escaping into the atmosphere. When sulfur enters the atmosphere, it combines with the oxygen to produce SO₂, and the SO₂ then combines with clouds and rain to produce acid rain.

Phil came to the Banque Indosuez office one day and asked, “I know you've commoditized interest rates. Can you do it for air?”

The Acid Rain Problem in the United States

As a result of the significant increase in coal-fired electricity in the post—World War II period, the United States had reached annual SO₂ emissions of about 18 million tons. Most of it was concentrated in the Midwest and Northeast, where environmental and health effects were acute. Lung disease was increasing, rivers were being acidified which threatened the marine ecosystem, and forests were being defoliated. Not surprisingly, the public had begun clamoring for a reduction in emissions.

There were two policy ...