Author: Owain Johnson, Global Head of Research, CME Group
My recent book "40 Classic Trades in the Environmental Markets: Real-Life Examples of Innovative Trading" tells the stories of 40 traders from the worlds of carbon, bioenergy, water and environmental finance. Part of my motivation for writing the book was to show that properly managed environmental markets can deliver real results.
Championing markets still sometimes feels provocative when so many environmental activists assume that markets simply replicate the capitalist dynamics that helped create an environmental crisis in the first place. This is unfair: properly designed and regulated markets have delivered and continue to deliver great outcomes. After all, governments have tried different approaches – taxes, penalties, direct interventions – but so far markets have proved to be the most cost-effective and politically acceptable way of delivering environmental improvements.
The modern environmental markets were built on the runaway success of the U.S. acid rain programme of the early 1990s, which delivered major environmental and health benefits at half of the expected cost. Two of the pioneers of that market – John B. Henry and Richard Sandor – describe in the book how this early win helped drive the adoption of market mechanisms around the world in different areas of environmental concern, from carbon to water to transport fuels.
Exchanges were involved from the very beginning: the first environmental auction was held for acid rain permits by the Chicago Board of Trade, later CME Group, while exchanges like ICE, which acquired the pioneering Chicago Climate Exchange, and Germany’s EEX have played an outsized role in developing the carbon markets.
Exchanges continue to drive innovation. One of the most recent stories in the book is Omar El Nemr’s story of how the first domestic African voluntary carbon trade happened on the Egyptian Exchange (EGX) following capacity building by the UN Sustainable Stock Exchanges Initiative (UN SSE) and building on the success of COP-27 in Sharm el-Sheikh. Exchanges provide the transparency and the oversight that are crucial to making sure price signals reach decisionmakers, while the availability of hedging instruments on exchanges allows firms to protect themselves against adverse price moves.
Every trade on an exchange – whether for carbon, biomass or biofuels – creates a price signal that tells companies about the price of emitting pollutants or of using hydrocarbons, relative to cleaner alternatives. Behind that activity sit the traders themselves who develop and sustain environmental markets by their buying and selling, their risk management and speculation. We meet 40 traders in the book, and I was impressed by their ingenuity, hard work and creativity. Many traders are well paid, but this is far from ‘easy money’, as their discussions of the impact of stress reveal.
The environmental markets depend on the activity of these individuals and on the support of exchanges to thrive. We discuss the first trades in areas such as U.S. acid rain, European and Chinese carbon and Brazilian ethanol, and then show how large and sophisticated these markets have become.
The 40 traders describe the challenges of operating in the environmental markets, but also the benefits. When properly managed and regulated, markets deliver tremendous value to their stakeholders and to the environment.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect those of the United Nations, the UN SSE or its co-convening organizations. References to the author’s book, companies or organizations do not imply endorsement. This article is provided for informational purposes only.