This is part 2 of our ESG-focused interview for John Lothian News with Corinne Boone, group head of Americas at AirCarbon Exchange, now known as ACX. In this interview, Boone talks about some market solutions from the past, the work of the Chicago Climate Exchange, how and why policy and regulation lead to market innovation, and how the carbon markets are evolving.
Richard Sandor, the founder of the Chicago Climate Exchange, was involved in the implementation of the sulfur dioxide markets that arose in the United States under the Clean Air Act put in place in 1992 by President George H. W. Bush. Boone said this led to a highly commoditized and successful approach to addressing sulfur dioxide emissions in the United States.
She discussed the pricing and penalization schemes used and the market dynamics that help them work. The carrot in the Clean Air Act was allowing emissions trading. The stick was if you don’t meet specific provisions you would be penalized. This is how the markets work best, she said. Set a policy, set a regulation, allow the markets to work, and back it up with a compliance penalty. That spurs innovation. “Let business get on with doing what they’re good at and addressing these issues through the use of technologies and tools and markets that they’re used to,” Boone said, “this is what happens.”
The Chicago Climate Exchange was established in 2004 with more than 400 members. These progressive companies worked together to demonstrate the viability of the voluntary-based carbon credit market and to create momentum. A compliance regime was expected to develop in the United States over time. But in 2010, a US climate bill failed and a lot of the momentum was lost, Boone said, and the Chicago Climate Exchange was eventually sold. Similarly, Canada had a robust voluntary carbon credit market in the 1990s to engage in transactions and gain knowledge so the carbon markets could be used as a compliance tool. But policy uncertainty reduced these voluntary activities undertaken by forward thinkers like Sandor and Ontario Hydro. Cantor Fitzgerald, which Boone worked for, was a leader in developing the carbon market brokerage infrastructure to facilitate a global carbon market. The founder felt that this was significant and very important in addressing climate change.
Boone discussed the current landscape. Today, the voluntary and compliance carbon markets have great potential to contribute, she said, for a few reasons. First, companies and countries are addressing net zero commitments and there is a need to demonstrate that these commitments are real. The discussion around ESG and greenwashing is necessary as markets evolve. What’s really different now is that we can see the damage that’s happening as a result of climate change.
The International Panel on Climate Change has been reporting on the impact of climate change, but today the damage is visible, in severe weather, floods, droughts, forest fires, and changing temperatures. We can actually monetize the damage because the insurance industry has been able to put a monetary value on the damage.
The second reason is that the financial industry is heavily involved. This includes pension funds, equity funds, activist board members, brokers, and traders and exchanges. Things are coming together, she said. Third, the regulatory bodies are getting involved including the SEC, the EU, and the International Organization of Securities Commissions.
Reporting requirements are coming from the Task Force on Climate-Related Financial Disclosure (TCFD), and the International Sustainability Standards Board. The SEC is issuing its report in June. “None of these things were there in the early voluntary markets,” she said.
Agreement is developing that to have successful carbon markets, we need to demonstrate that carbon credits are real and that they’re high quality, so they can be transacted and delivered and the guarantees can be standardized and traded over smart contracts, using the blockchain for the pure historical ledger.
Boone’s boss from Cantor Fitzgerald, Carlton Bartels, who was killed in the September 11, 2001, attacks on the World Trade Center, said the carbon markets could become one of the largest commodity markets in the world and could become its own asset class. But ultimately, the goal is getting to net zero.
We asked Boone these questions:
- Do you have an example of markets solving climate issues in the past?
- What was the Chicago Climate Exchange?
- What is happening next in this space?