Richard Sandor: Carbon trading, holy cows and sacred groves

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The Carbon Supermarket

Richard Sandor has a new book out. He’ll tell you that markets are the solution before he hears the problem. Pollution? Climate change? Water shortages? Species extinction? Just create a new market and the problem will go away.

Or not. One of the markets that Sandor helped create is the carbon market. He set up the Chicago Climate Exchange (CCX), which started trading in October 2003. Trading stopped at the end of 2010. Carbon emissions continue to increase, just as they had while CCX was trading. And Sandor pocketed about US$98 million from the deal from the sale of the CCX to Intercontinental Exchange.

Sandor’s book includes a chapter titled, “The Fall of the Chicago Climate Exchange”. At the end of the chapter he sums up the lessons learned from the history of the CCX, particularly the crash of the price of carbon from US$7.4 in mid-2008 to US$0.5 by the end of 2010. Predictably, Sandor doesn’t admit failure (after all, he did very well out of the CCX).

The system in fact was working as designed. The market, through CCX pricing, was reflecting the total lack of political will to meaningfully manage global warming. Markets have eyes.

In April 2012, Sandor gave an interview with Todd Henderson, Professor of Law at the University of Chicago, to promote his new book, “good Derivatives”. The full interview is available here.

There are some revealing comments in the interview. In his book, Sandor writes that he had to “create the supply and demand of a product that didn’t exist, as well as to create a web of institutions to support this new markets.” In the interview he comments that,

“In the final analysis, anyone who’s been involved in markets knows that unfortunately, or fortunately, there’s two motivators: Fear and greed. And we really appealed to both sides of that equation. To the people who were afraid it [government regulation of GHG emissions] was coming and they would be unprepared. The greed part was that they could make money by doing it better than anybody else.”

Sandor is chairman and CEO of Environmental Financial Products, a company that specialises in “inventing, designing, and developing new financial markets with a special emphasis on investment advisory services.” In the interview, Henderson asks Sandor which markets he would be looking to create ten, twenty years in the future, if he were 30 years old today. Sandor replied,

“I think water is simply the most important commodity of the 21st century. It will in effect change whether we live or die. And we don’t have enough water either quantity-wise or quality-wise. I don’t think if you look and read deeply, I think that Tibet is not about religion, it’s about water. It’s where the rivers for that, that basically people thirst for in India and China. And that’s a water issue.”

Of course, Sandor’s solution is to put a price on water. As if their is no global debate about the privatisation of water. As if the protests in Cochabamba, Bolivia and elsewhere around the globe had never happened. The market, or more accurately traders in Chicago, will decide how much people should pay for water.

Sandor’s book includes a description of an attempt to establish a tree plantation as a carbon trading project. It’s an honest account of the difficulties involved in setting up plantation projects (regardless of the carbon trading element of the project) and the importance of free, prior and informed consent:

Holy Cows and Sacred Forests

Doing business in any new country requires great respect and acknowledgement of its culture and social systems. This is even more important in a country such as India, with its rich and complex set of social dynamics and cultural fabric.

Sometime back in 2006, CCX made several attempts to register forest carbon from India to our forest offsets portfolio. We had been very successful in recruiting Brazilian forest companies to CCX and were eager to extend the success to India. Murali [Kanakasabai, one of Sandor's colleagues] traveled to Mathura to discuss this opportunity with the local district forest officer… Mathura, located about 90 miles from New Delhi, was a holy city famous for its Krishna temple. The city was believed to be the birthplace of the Hindu deity Krishna, and Hindu mythology was filled with tales of a young Krishna herding his cows in lush forests. Mathura’s bustlign streets were filled with pilgrims and saffron-robed sadhus (Hindu holy men) and hawkers selling trinkets for Hindu rituals. The entire business in the city was somehow tied to the Krishna temple.

The discussion with the forestry department went smoothly. We discussed a pilot to initially demonstrate that the concept could be extended. A new plantation site was identified near the hillock of Govardhan as the pilot location. The site had year-old plantings and could easily be transformed to suit CCX forest carbon requirements. Murali suggested the continued development of the plantations. CCX would revist the plantation in about six months’ time to measure the trees. When Murali returned to Chicago, we initiated the process of introducing Indian forestry tons to CCX. There was much work to be done.

Three months into the process, Murali received a frantic call from the forest officer. His plantation was being destroyed by an army of cows. Apparently, the local sadhus were insistent on releasing cattle onto the plantation. The Govardhan hills were part of the area that Krishna was believed to have roamed with his cows, and the sadhus would have nothing less than free-roaming cattle in these sacred forests. Of course, the cattle were devouring the young plantation. To add to the destruction, people were releasing monkeys into the forest in an attempt to appease the Hindu monkey god, Hanuman. When the forestry officer tried to disperse the crowds of sadhus, they became violent and started blocking the highway. This was something our experience designing carbon markets had not prepared us for. We had planned for many project risks, and had lined up detailed strategies and contingency plans, but had not anticipated being taken over by saffron-robed Hindu holy men. Confronted with that, we ended our first attempt to register forest tons from India.

The photograph above is from a cartoon by Kate Evans called, “The Carbon Supermarket”. She was interviewed recently in Scientific American. As an antidote to Richard Sandor here it is:

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5 Comments

  1. If carbon trade is not the solution to climate change mitigation, then what option is there for us in the developing countries to look forward to. We need money to conserve our environments and improve our levels of living. REDD+ and carbon trade provide us that opportunity now.

    There may be problems of free, prior and informed concern, low carbon prices in our countries but these things should not deter us from pursuing REDD+ and carbon trade. I beleive it is up to every developing country to develop holistic approaches to REDD+ and carbon trade so that it is done in more honest and transparent way to address climate change as well as improve peoples lives.

    If people are critical of REDD+ and carbon trade, they should provide alternatives. I see alot of NGOs being critical of REDD+ and carbon trade, but they do not provide alternatives. If you do not want me to trade carbon show me something else that I have to do to address climate change and improve my standard of living.

  2. @ Nalau Bingeding

    If I am not mistaken, NGOs worldwide have for decades been saying that important ways to protect forests include: giving local people stronger control over the lands they inhabit; promoting small-scale forestry activities and enterprises; rooting out corruption and improving governmental mismanagement of forest resources; ensuring better planning and zoning of forest areas; reducing the collateral damage done by economic development activities; and reducing unnecessary consumption of forest products and those coming from destroyed forest land.

    You are obviously new to these discussions, as you seem not to be aware that there is a very long history of such proposals – and an equally long history of most governments and international agencies paying far too little attention to them (with some honorable exceptions).

    But it is nevertheless a great shame, as indicated by your comment, that the last five years of propaganda, ‘up-talking’, and sheer misinformation, perpetuated by Sandoristas such as the the staff of the World Bank’s Forest Carbon Partnership, and the likes of Kevin Conrad, have stupefied so many people into thinking that carbon markets are the only way to protect forests. This cohort of would-be carbon profiteers has systematically raised false expectations amongst poor country governments that riches would follow, if they would only ‘buy in’ to the carbon trading myth.

    History will, I believe, judge that the last few critical years of discussions about how to pay for forest protection have been almost entirely wasted because of this overwhelming carbon trading ideology.

  3. @Nalau Bingeding – Thanks for this. I have two things to add. First, (as @A Witness points out) carbon trading is not the only way to finance REDD. See this briefing: “Alternatives to carbon markets to finance REDD”.

    Second, as The Munden Project argues, very little of the money from carbon trading is ever likely to reach local communities. In the interview mentioned in the post above, Sandor describes a biogas project in India. Families received only US$20 a year (I don’t know what’s happened to the project since the Chicago Climate Exchange stopped trading carbon).

    Richard Sandor: “In India, the poorest province is a province called Kerala. And basically in Kerala the young women would go out and forage for wood and do things like that. And they really were robbed of going to school, robbed of educational abilities etcetera. So we came up with a programme where they took the animal waste, put it into what’s called a digester, the methane would rise from the cow dung and they would pipe the methane into the house and it would be used for heating and cooking.

    “They weren’t using these digesters that a multinational organisation had given them for free. So we said, look if you do that you can sell the avoided emissions of methane into the atmosphere. Methane is 21 times more potent than carbon. And so we started a pilot programme where the farmers would take the animal waste produce methane and use it. It stopped the girls from going out, it allowed them to go to school and the farmers made US$20 a year. Now you may not think that’s much, but in a dollar a day, you know, part of India, 20 or 30 bucks a year is a lot. They came in. Well we grew from 13, from 3,000 to 15,000 to the last year we had 100,000 rural poor families that we were putting US$20 a year into their budget.

    “And that’s from a price of carbon of two or three dollars.

    “So you can have incentives like that which will change behaviour dramatically. And I think that’s what we don’t emphasise enough. The power of price to change behaviour.”

  4. Shub Niggurath

    chris
    Are you sure of the story you’ve quoted above?

    The cows and monkeys story doesn’t sound plausible at all.

    It might simply be that former grazing grounds were given over the CCX team to raise plantations and the locals insisted on letting their cows graze as they had done before.

  5. @Shub Niggurath (#4) – Thanks for this. All I’m sure about Sandor’s story about cows and monkeys story is that it’s an extract from Sandor’s new book. I quoted it because I think it’s a good illustration of what can go wrong with this kind of technocratic tree plantation carbon project.

    CCX saw a business opportunity. The official from the forestry department saw an opportunity to establish a monoculture tree plantation. There’s no mention of whether anyone bothered to ask the people living around the land where the trees were to be planted about how the land is currently used, who uses it, what local regulations govern the way the land is used and so on.

    Sandor’s comment about this fiasco sums it up: “This was something our experience designing carbon markets had not prepared us for.”

    If anyone has more information about the Mathura project, REDD-Monitor would love to hear from you…

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