Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 11

Blame It on Rio

The day it arrives, it will arrive. It could be today or 50 years later. The only sure thing is that it will arrive.

—Ayrton Senna

In November 1991, the CBOT research department received a call from the United Nations Committee on Trade and Development (UNCTAD), which was planning a meeting in December at its headquarters in Geneva. UNCTAD wanted to take an active role in climate change and was interested in the CBOT's experience with SO₂ emission trading, and its implications for market-based solution to global warming. The organization wanted somebody from the exchange to explain emissions trading and describe how markets are created. Given my experience in creating markets, they thought I could contribute to their efforts.

The meeting was held in a small, spartan room at the UNCTAD headquarters. The modest location did not foretell the intellectual heft of the meeting, and I soon found myself engaged as a serious group of scholars animatedly discussed the role of markets in addressing global warming.

During the meeting, I spoke with Tom Tietenberg and Michael Grubb, who were experts in environmental economics.¹ They were especially interested in the practical process of creating the market architecture for an emissions market. I was told that there was already a broad base of scientists who believed in the imminent dangers of global warming and saw a cap-and-trade program for CO₂ as the solution. However, many did not realize that this required a market ...