Chapter 16

The Twenty-First-Century Lighthouse

Research is what I'm doing when I don't know what I'm doing.

—Wernher Von Braun

The EFP offices were small and cramped. My paltry office was right next to Mike Walsh's even smaller office. The entry area held three desks, two of which were staffed by assistants. Rafael Marques worked at a small desk in the reception area across from the desk of my new assistant, Mary Ann White. Mary Ann was smart, assiduous, and adventurous. After graduating with honors in business from Illinois State, she had gone to live and work in Japan. Somehow, the cramped space didn't matter because we were all so energized about embarking on an epic journey. Something monumental was about to take place.

I was enthusiastic about Paula DiPerna's suggestion to apply for a grant from the Joyce Foundation. They were a renowned, nonprofit foundation that had previously funded environmental projects and enjoyed an untarnished reputation within the environmental and public policy communities. Private funding would have provided cash, but it would not have ratified the intellectual and moral significance of the project. The approval of the president and board of directors of a major foundation, on the other hand, did.

An academic partner would further enhance the credibility of our research. I met with the dean of the Kellogg School to gauge the university's interest in becoming the recipient of the grant and hiring EFP as a subcontractor. EFP was a for-profit company and couldn't accept money from a foundation. The dean welcomed the idea.

Spreading the Light

Paula advised us to give our presentation an educational flavor. We had to start with the basics. We explained why free markets might fail when there were positive or negative spillover effects associated with an economic activity, for example, burning coal. A persuasive case had to be made about why cap-and-trade, one form of flexible mechanism, was superior to other policy measures that dealt with climate change, such as command-and-control. In cap-and-trade, the amount of pollution was capped. Entities that had an excess or shortage of allowances could trade. Trading allowed the aggregate reductions to be made at the lowest cost. We made sure to provide an in-depth discussion of the practical differences between taxes and subsidies and cap-and-trade.

We had to demonstrate that a voluntary mechanism was both feasible and viable, as validation from the success of the Acid Rain Program alone was insufficient. We also had to rationalize that the upper Midwest was the right place to launch a pilot program.

Chicago was a strategic choice geographically, given the Joyce Foundation's focus on the Great Lakes states in the Upper Midwest. Together, Minnesota, Wisconsin, Illinois, Indiana, Michigan, and Ohio make up a gross domestic product of over $2 trillion, comparable to the economy of France. This region also had a diverse mix of utilities and manufacturing companies, with sufficient economic breadth and diversity to facilitate a proof of concept. Utilities such as Alliant in Wisconsin and AEP in Ohio, industrial corporations such as Ford and DuPont, and pharmaceutical companies such as Abbott Labs and Baxter were either headquartered in the Midwest or had significant operations within the six states. The Midwest was also home to a significant agricultural and forestry sector, and a new climate exchange would benefit from the region's human capital in soil science and forestry. The Midwest's proximity with Canada was also advantageous. We envisioned international trading and the possibility of attracting Canadian companies to this pilot program.

Chicago was a natural home for the Climate Exchange, as the city already housed the two largest exchanges in the United States—the CME and the CBOT—and had a critical mass of human capital capable of managing an exchange, along with a large population of market makers and traders. The CBOT also had the experience of conducting annual auctions of SO₂ allowances under the EPA's Acid Rain Program.

Ronald Coase's article on the lighthouse¹ guided me throughout the project. Economists had always assumed that market failure would occur in the case of public goods,² for example, with lighthouses, and to a larger extent, air and water. Since people benefited from the existence of a public good and were not easily charged for it, it was unlikely that the private sector would want to provide such a service. The logic stemming from economic theory, however, was historically untrue. Lighthouses did in fact arise as commercial entities, although they ultimately became public entities. Extending this idea, a voluntary pilot program essentially played the role of a commercial lighthouse until public policy would mandate a national cap-and-trade program for greenhouse gas (GHG) emissions.³

Ramping Up

We worked industriously with members of the Joyce Foundation to finalize our proposal, and submitted it on October 6, 1999. Named the “Feasibility and Design of a Voluntary Midwest Greenhouse Gas Reduction and Trading Market,” the proposal called for a two-phase implementation period, Phase I and Phase II, and a budget of $346,000 and $760,100 to be allotted to EFP in two separate installments. There was no guarantee of a second grant until we were able to substantiate, with sufficient evidence, the program's likelihood to succeed.⁴ From then on, we would have to raise our own money. EFP's budget covered internal staff salaries and allocated funds for consultants, seminars, and travels. The foundation also gave us an additional budget for outside vendors, which was to be used for registry and accounting design, accounting and tax treatment assessment, legal issues, administration, and monitoring and verification methods.

Paula was anxious to keep her board informed of our project. The Millennium Grant was larger than all the previous grants given by the Joyce Foundation, and was in a sense her debut as president of the organization. At Paula's request, we appeared before the board of directors of the foundation on December 6, 1999, to explain the proposal. Overall, the questions and feedback we received were favorable, signaling the enthusiasm and support for our idea.

Parenthetically, a little-known Illinois state senator, Barack Obama, was then also a member of the board. When he became U.S. President in 2009, much ado was made in the press about his being a member of the Joyce board when, in fact, he remained mostly silent during the presentation, occasionally nodding approvingly. Four years after the grant was made, we met again at a social event, where he congenially recalled who I was and what I was doing. After that, I encountered Mr. Obama again at the Commercial Club, where he was making a speech. I told him I was the guest speaker for the following week, and that he was a tough act to follow. He flashed his charismatic smile and said, “You'll do just fine.” I saw him one more time after he became President, and took the opportunity to ask about the status of U.S. environmental legislation. He smiled and responded, “After health care.” To this extent, the press's conspiracy theory about the collusion between the Chicago Climate Exchange (CCX) and President Obama is unfounded and absurd. As a matter of fact, he never mentioned CCX while his opponent Hillary Clinton praised our efforts in her primary battle with Senator Obama. True, President Obama had campaigned on the importance of developing a comprehensive energy and environmental policy for the United States. He had also supported cap-and-trade. However, all the other candidates in the Democratic Party, did so, as well as the Republican nominee, John McCain.

Paula called me to say the presentation was terrific. In a unanimous vote, the board of directors had approved the grant for the pilot program. Mike, Rafael, and I were ecstatic. I went home that night and had a celebratory dinner with Ellen.

Guided by Voltaire's philosophy, “The perfect is the enemy of the good,”⁵ we wanted the market architecture to be workable, but did not strive for perfection. Our intention was to underpromise and over-deliver. The CCX feasibility study began in earnest in 2000, with our small but hardworking research team. In the course of completing the study, EFP held a number of group meetings to flesh out the implementation of the proposal. The team was highly disciplined and rarely, if ever, missed a deadline. Our business days ended somewhere between 6 and 7 P.M., and we picked up the where we left off at 8 A.M. the following day. Mike led efforts to develop first drafts for the various elements of the study. Once a draft was near completion, I reviewed it and provided specific comments or criticisms for the next redraft. The collaboration was seamless.

Preliminary Market Architecture

After we were able to demonstrate that the pilot program was feasible, we began to construct the skeleton of the supporting market architecture. The starting point was determining the baseline year and the reductions that would occur until a terminal year in the program, in other words, from what year, by what amounts, and by when. For inspiration, we referred to a paper we had written and presented during the Conference of the Parties (COP) meetings in Bonn in 1999, which called for a simplified approach to the clean development mechanism.⁶ We borrowed from its simplicity and its standardized approach and adopted a rules-based rather than project-based approach to market architecture. This reduced transaction costs.

For our architecture, we had to determine a baseline year from which emission targets would be referenced, and outlined a targeted reduction schedule. Although the Kyoto Protocol used 1990 as its baseline year, we realized that companies would possibly find it difficult to have data going back that far. The choice of 1990 was the result of political negotiations, and not sound economic reasoning. The year 1990 was a high point of emissions for Europe, making it a lenient baseline for countries to reduce their emissions from. It was the year that the UK had switched from coal to gas. West Germany was absorbing East Germany and the Russian economy was on the brink of a meltdown. We also wanted to pick a year of high emissions to make cuts easier in the early years of the program. Accordingly, we thought 1998 would be a reasonable baseline. It was a starting point and not gospel. We wanted a reduction schedule that would not only be attainable but would accurately price carbon.

Academics and policy makers were searching for a price level that could effectively change emissions behavior. The debate was not a new one. The prevailing theory set forth that companies would either choose to buy allowances or install emission-reducing technology based on the cost of each option. In other words, if the price of allowances were lower, a firm would purchase allowances instead of install emission-reducing technologies and vice versa. As mentioned previously, this reasoning is flawed. It was the price expectations that mattered and not the current prices themselves. Just as one buys a stock based on its expected price at some point in the future, so too will companies change their purchasing behavior according to the expected price of allowances, and not, contrary to common belief, the current price. Nevertheless, the popular misconception continues. Although obtaining allowances was much cheaper than installing scrubbers under the Acid Rain Program, many utilities chose to buy scrubbers instead of allowances.⁷ We sought a reduction schedule that would cause price tension, thereby building in expectations of prices that would change behavior. It was more art than science.

The agreed-upon reduction schedule was 2 percent below 1998 in 2002, 3 percent below 1998 in 2003, 4 percent below 1998 in 2004, and 5 percent below 1998 in 2005—the final year of the pilot.

We also had to identify which greenhouse gases to include in the pilot. We could limit our trading activities to CO₂ exclusively, or we could include some, if not all, of the other five greenhouse gases.⁸ Daniel Burnham, the architect and urban planner who helped redesign the City of Chicago, once said, “Make no little plans; they have no magic to stir men's blood.”⁹ EFP was already in the business of trying to be transformational. If we were going to fail, it should be for some major objective. This was important because we wanted the program to be as broad and to include as many sectors of the economy as possible.

The next challenge was to determine whether we should assign allowances at the point of production or of consumption. There were three basic choices: upstream, downstream, and microlevel. The goal was to achieve our targeted emission reduction levels at the lowest cost possible. The upstream option distributed the allowances to the producers of energy such as coal mining companies and oil producers. There were a limited number of upstream producers and so this approach was easier and cheaper to administer. However, the effectiveness of such a regulatory regime would rely on upstream producers to hike up their prices and influence consumer decisions through the passing on of fuel prices. They may not have had the incentive to do so because it could hurt their profit margins. Alternatively, we could go to the opposite extreme and monitor the micro players, such as individual consumers. This could be cost-prohibitive, as the number of players to monitor and administer were simply too great.

Given these considerations, the most intuitive choices were downstream, or intermediary, market players. The industries and firms we targeted consisted of a combination of downstream activities. This included power generation, refineries, manufacturing, importers, and vehicle fleets. Micro-level activities in the offset area, designed to attract farmers, landfill operators, and the like were also included. Not only was the downstream option ratified by the Acid Rain Program, it allowed us to influence decisions made on the consumer level without having to directly monitor them.

Our choice was based on the assumption that companies responded to price signals to change their behavior. We had to consider the administrative and transaction costs associated with our choices, and the effectiveness of allowance prices in stimulating innovative ways to reduce emissions. We also had to attract enough market players to guarantee that prices would be competitively determined.

The tradable instruments would consist of emission allowances as well as offsets produced by targeted projects. We further specified that targeted offset projects would include methane destruction from landfills and animal waste, renewable energy, and reforestation.

The decision to use an electronic platform and not open outcry was easy. Although the exchanges in the United States had not gone electronic, it was obvious that it was going to happen. The electronic platform had to facilitate continuous trading as well as accommodate bilateral over-the-counter (OTC) contracts. We recommended annual auctions to facilitate price discovery, an idea we borrowed from the EPA auctions in the Acid Rain Program. The indicative market architecture is summarized in Table 16.1.

Table 16.1 Preliminary Market Architecture for the Chicago Climate Exchange

Source: Table ES-1, “Executive Summary First Draft Report,” Environmental Financial Products LLC, ES-3.

The exchange system included allowances and offsets and would be compatible with the terms proposed by U.S. legislation regarding the official accreditation of early emission reduction actions. We wanted the exchange rules and procedures to serve as a paradigm for future proposals in early reduction credit and to influence future legislation of the same thread.¹⁰

Now that we identified the architecture and were thinking about recruiting companies, we needed a name. After throwing around some potential names, we settled on the Chicago Climate Exchange for two reasons. “Chicago” evoked the city's legacy of financial and commodities futures trading. Its name would resonate with investors. We chose the word “Climate” because it reflected not only emissions, but weather-related products, allowing us to expand our horizons.

Once we had the flexibility to establish exchanges in other locations, we could easily substitute “Chicago” with the name of any other region or city. It is funny to think that while others might have hired the services of a professional advertising or branding firm, we did this in about 30 minutes in a small office. Climate Exchange would eventually emerge as a new brand, synonymous with the environmental markets, and be referred to generically around the world.

Educational Outreach

After seeing our interim progress report, Paula exclaimed, “This goes beyond my expectations! We have to start promoting the study right away.” She suggested that we present our findings at a sideshow at the Sixth Conference of the Parties for the UNFCCC being held in The Hague, Netherlands. The years that Paula spent by the side of the legendary French explorer, Jacques Cousteau, had taught her to think big.

An officially sanctioned sideshow was the best way to inform interested parties of our progress. Since the Joyce Foundation was a major U.S. foundation, we assumed that there would be no problems in securing an official role in the meeting. In this we were proven wrong, but the rejection only made us more determined. I suggested to Paula that we hold our own unofficial event. We both knew that it might not attract a lot of the attendees from the UNFCCC but thought it was worth a try. Paula and Rafael handled the logistics for the event, which was scheduled for November 14.

According to UN rules, for-profit organizations could not attend unless they participated as observers under the umbrella of an NGO. For example, a private, for-profit U.S. company could attend as a delegate under the U.S. Chamber of Commerce. Initially, we thought that we could enter under the umbrella of the Joyce Foundation, a nonprofit. However, Joyce was not a UN-registered organization. Rafael worked frantically with the Joyce staff to achieve this. In the end, we managed to secure a table located by the entrance of the main conference hall, which fortuitously gave us good visibility. Paula, her team, and Rafael helped to hang the cardboard CCX logo behind our table and organized the information brochures into neat piles. The traffic was good and we were able to attract a lot of curious minds. We were a motley group compared to the big companies and brokers present. While we had cardboard cutouts, the big corporations threw lavish dinners and disco parties. We only had our ideas. But as Victor Hugo said, “Nothing is as powerful as an idea whose time has come.” This was our time.

EFP and the Joyce Foundation co-sponsored our non-sanctioned event in the basement of a hotel in The Hague, quite a distance away from the official UNFCCC meetings. I had just flown in from a World Business Council for Sustainable Development (WBCSD) conference held in Japan and was bleary-eyed and nervous about having enough energy to motivate the attendees. Additionally, I was worried about the turnout because the attendees had to make a special effort to attend this event. Would there be enough attendees to create the perception of a high level of interest in our research?

To my relief, people started to trickle in well before the event started, and very soon only standing room remained. I saw many old friends from the Earth Summit in Rio, and many new faces who would later gain recognition in the international carbon markets. Paula spoke on behalf of the Joyce Foundation, and I spoke on behalf of CCX. We were encouraged by the positive feedback we received. It was a ratification of our belief that CCX could contribute to the international process to address climate change.

The recount for the 2000 presidential election was going on while we were in The Hague. George W. Bush ended up narrowly defeating Al Gore in the elections. But this didn't necessarily translate into the death of cap-and-trade. After all, his father, George H. W. Bush had endorsed the SO₂ emissions trading program. A Republican administration could create a favorable policy atmosphere for CCX. CCX was a voluntary program that the Republicans could embrace and use as a segue into a federal program. I was wrong.

It had been a hectic year for speeches and presentations. I had spoken at events in London, Zurich, Boston, and New York. The team had also made 10 trips of their own, presenting in Paris, Amsterdam, and numerous American cities like Missoula, Houston, and Denver. We steeled ourselves for another end-of-the-year blitz. I told Ellen about the upcoming schedule and she retorted, “What's new?” Till this day, Eric, my son-in-law, still laughs about Penya's first call to me after they had gotten back from their honeymoon. Penya had had to go through my travel agent to find out where I was.

Our reputation grew steadily in the following months, and we used this advantage to educate policy makers. I was invited to testify at a hearing at the U.S. Senate Committee on Agriculture, Nutrition, and Forestry on March 29 of the following year.¹¹ The American Farm Bureau had been opposed to U.S. participation in the Kyoto Protocol, and expressed concern that a cap-and-trade program would unduly punish the agriculture industry.

I first learned about the power of the farm lobby from a great teacher of mine, Oswald Brownlee. He had joined the Minnesota faculty after writing articles opposing Iowa's ban on coloring margarine in the 1940s. At the time, margarine producers were changing the natural color of their product from gray to yellow in order to make it resemble butter. I was struck by how the government had imposed a ban on colored margarine, instead of allowing the market determine whether there was demand for margarine that was processed to look like butter. The farmers had influenced the state legislators, and the ban became law. To succeed, we needed the harness the power of the agricultural sector. Our participation in the hearings would provide a platform for explaining the potential benefits of cap-and-trade to the agricultural and forestry sectors.

One of the benefits attributed to soil sequestration was the additional source of revenue it would provide for farmers. Our research had led us to believe that we could accurately determine the level of carbon sequestered as a result of low-till or no-till practices.¹² There were also standard models for particular species of trees, whereby one could measure the amount of carbon sequestered in the soil by measuring the height and diameter of the tree. While there were some technical questions, our testimony was well received.

Using low-end estimates of $20 to $30 per ton of carbon, paying farmers to sequester 200 million metric tons of carbon equivalents (MMTCE) per year could add $4 billion to $6 billion of gross income to the farm economy—and possibly up to 10 percent of typical net farm income.¹³ The increase in net farm income would also increase the value of agricultural land. I told the committee that farmers could grow two crops, one above ground and one below ground.

I didn't read the prepared testimony, and spoke as if I was teaching—a method I was accustomed to. The testimony turned out to be an eye-opener for many of the senators. A fellow director at American Electric Power (AEP) came up to me after the presentation and said, “I try to get all of my clients to speak to the senators the way you did.” As I had great respect for her, the compliment buoyed me.

The EFP team continued to publish articles to further educate the public and market the exchange. Several publications were completed throughout 2000. Concurrently, our media outreach continued. We wanted to validate the impression that CCX was a thought leader in the field. There were 27 pieces published in newspapers and magazines across the United States, Europe, and Japan, and six pieces of electronic media coverage from online news sources such as the Environmental News Service.

Public speaking at conferences and industry-related events were also critical. I was invited to speak at the World Economic Forum in Davos, Switzerland, as well as a panel at the Milken Global Conference that was sponsored by the United Nations Foundation. Additionally, I testified twice before the U.S. Senate and met with Senator Richard “Dick” Lugar from Indiana. I had worked with him many times before on a committee of futures industry professionals that regularly met to discuss issues in the futures market. Dick, too, recognized carbon credits as an important source of farm income.

Table 16.2 provides a list of EFP's media outreach and public speaking efforts during this period.

Our network grew further. The team met with a bipartisan group of senators and staff members from the Senate Agriculture and Environment committees. We also spoke with the senior staff at the White House Council for Environmental Quality (CEQ), and were graciously received by the EPA administrator, Christine Todd Whitman.

Refining the Preliminary Market Architecture

While marketing the CCX concepts throughout the world, we continued to refine the preliminary market architecture of the proposed pilot program. This entailed addressing a number of legal and accounting issues, as well as refining details regarding monitoring and verification, and the industries to be targeted. Our lawyers confirmed that we could use a rulebook, rather than a set of contracts, in order to bind them to their reduction targets. All we needed was a simple letter that stated that said entities that joined the exchange would abide by the rules. PriceWaterhouseCoopers provided the guidelines for companies on the accounting treatment of the allowances that were submitted.

It remained for us to develop the final legal structure and governance of the exchange and write a full-scale rulebook. Finally, we had to identify project verifiers for offset credits generated by offset projects in the agriculture, forestry, and waste sectors, as well as choose vendors for the registry and electronic trading platform.

Table 16.2 Media Outreach and Public Speaking

EFP had been plagued by difficulties ever since we received the first grant. The whole notion of a private Kyoto Protocol was anathema. The dot-com bubble had burst around the time of our grant application, and the decline of Internet stocks had dragged down the entire stock market. Foundations and other investors suffered major losses. After the crash, President Bush reversed his position on climate change and denied U.S. participation in the Kyoto Protocol. Expectations of a coming U.S. legislative effort to establish a domestic cap-and-trade program was dashed on the rocks. This meant that our efforts to recruit companies to a voluntary pilot program would be a continuous uphill battle.

We had to decide if it was best for EFP to continue the research with no certainty about funding, or simply wait for our second grant. We took the risk and continued our research and recruiting efforts. We didn't stop the countdown. There was really no turning back. It was just like the days of financial futures, when I simply had too much invested in the launch.

Concurrently, there were a lot of exciting events taking place in our family that year. Penya gave birth to Oscar Sandor Taub on March 29, 2001. We were in the midst of preparing the feasibility study for the Joyce Foundation, and it was a wonderful interlude. I now spoke of the impact of climate change in terms of my grandchildren and not my grandchild.

The feasibility study was delivered on April 28, 2001. There was one year, eight months, and six days left until the planned launch of January 3, 2003. Over 200 pages long, the study concluded that a voluntary pilot program to reduce and trade GHG emissions in the Upper Midwest was feasible. Satisfied with our results, the foundation agreed to finance the second phase of the study, which would be focused on producing a more detail-specific plan for a voluntary GHG emissions reduction and trading system.

The payment from Joyce allowed us to continue recruiting companies to join the voluntary, but legally binding, pilot program. But how were we going to persuade companies to make reductions if there wasn't a law in place mandating it? It seemed like a Herculean task back then, and it still does today. Within three weeks of receiving approval of the grant, a terrorist attack destroyed the World Trade Center Towers, and our country lost more people than we had lost on December 7, 1941—the “Day of Infamy.”¹⁴ The United States soon went to war in Afghanistan. These two events shocked the country and justifiably put climate change on the back burner. We could not stop the countdown then, but it would be remiss of us not to do it now.

I went into withdrawal for a few months after 9/11 because of the friends I had lost. Rick Ferina, then CEO of Calyon, was scheduled to leave on Sunday, September 10th, but changed plans to fly in the morning of 9/11 only to arrive shortly after the tragedy. I almost lost him. His young secretary had gone to New York earlier to see the city for the first time. Somehow, our limited interaction made it even harder for me to contemplate her death. Calyon's New York office was in the World Trade Center and included a number of my former colleagues from Drexel.

I had hired Steve Goldstein at Centre Financial Products. It turns out that Steve was the son-in-law of my closest friend in college, whom I had lost touch with over the years, This provided an opportunity to renew the friendship. Steve had two small children with my friend's daughter and eventually started an Internet company, which failed. I became close to Steve and tried to look after his best interests. Steve called me at the end of August to say, “I have worked out of my financial difficulties and am tired of being an entrepreneur. I am starting a new job at Cantor Fitzgerald in the first week of September.” I could hear the smile in Steve's voice over the telephone and sensed his renewed optimism. He was known in the office for his upbeat attitude. Steve's new position was located at the World Trade Center, and he lost his life on 9/11. It is staggering to imagine how many other people had similar stories about friends and colleagues lost in that tragic event.

Recruiting Members to Design the CCX

The recruiting effort really began in 2001 when EFP started inviting companies from a wide range of industries to participate in the design process of CCX. By April 28, 2001, we had recruited 27 entities to form the design committee. What follows is the list of member companies. The momentum was building. The number of entities involved in the design of the program would increase dramatically by the time we held our first committee meetings in January 2002.

Entities Enrolled in the CCX Design Phase

While giving public presentations and speeches, we began detailed dialogues with targeted participants. Through these dialogues, we were able to identity 102 firms that were possibly interested in joining CCX. They were chosen based on three well-defined criteria: whether they submitted voluntary reports on their greenhouse gas emissions to the Department of Energy, participated in other voluntary public or not-for-profit programs, or included significant reports on climate change issues on their websites. Many of these companies did not have a significant Midwest presence. However, the 27 companies that did join the design phase represented a cross-section of industries, including power generation, automobile production, forest and paper production, oil exploration, petroleum refining, chemical manufacturing, and technology.

A letter was written, to be signed by officers from all interested parties, that anchored the commitment of each company to participate in the design phase of CCX. The terms of the letter did not bind them to participate in the exchange. This was a soft commitment to join, and a company had the right not to do so if joining the exchange was inconsistent with the company's strategy. Recruiting members to help with the design phase was therefore a way to ensure a member base of founding members when the time was ripe to launch CCX. It was assumed that most companies would want to join a program that they had previously helped to design. We learned later on that this was not necessarily true. AEP, the largest coal-burning utility in the United States, was a leader in public policy. I had met the CEO of AEP at a White House conference on climate change. The company's participation in the design phase of CCX would send a very important signal to the industry and help attract other utilities. Dupont, a U.S.-based chemical company, was very interested in CCX from the outset and would become an important opinion leader. Its representatives had attended many of my speeches, so recruiting them posed no major challenge.

EFP held individual or small group meetings with 26 separate entities in order to get feedback on our initial architecture. For technical expertise, we consulted a group consisting of the World Resources Institute, Gas Research Institute, forestry experts, soil scientists, and civil engineers. We met with potential technology and service providers and interviewed six potential providers of electronic trading platforms. We also needed a clearing entity to guarantee the financial performance of the buyers and sellers for CCX. There seemed to be no insurmountable problems in these two areas.

We wanted to be fully prepared for our first meetings and needed to present a comprehensive term sheet that detailed the market architecture of CCX. Some of our proposed monitoring and verification protocols were theoretically possible but impractical, requiring us to develop alternatives. The exchange could become a reality only if the transaction costs were kept at a minimum.

Finalizing the Preliminary Market Architecture

After about 50 corporate and municipal briefings with members in the design phase, we were able to finalize our preliminary market architecture before we headed into our official design committee meetings. Our original list of advisory committee members underwent a dramatic expansion. Table 16.3 lists the advisory committee members as of December 15, 2001.

Additionally, we modified some of the features of the original term sheet so as to incorporate the interests of the design committee members. For example, we had discovered interest from emitting entities in Canada and Mexico. We experienced geographical creep in offsets as well. We added Brazil because it was a democracy, had a stable economy, and a diverse range of potential mitigation efforts in forestry, clean energy, and renewables. Its time zone was also close to that of Chicago's. Mexico City and the City of Chicago were also added to our list of members. We felt that cities had a great desire to show environmental leadership, and with their buy-in we could more easily recruit companies that operated within their jurisdiction. Between the utility and industrial members, the geographical coverage of the program had the potential to be larger than that of several G-7 countries combined.¹⁵ All the members were excited about the commercial opportunities offered by CCX and the idea of participating in what could be a transformational event.

I completed 2001 with a small sense of satisfaction and a large sense of exhaustion. Our small team of four economists and two assistants had somehow overcome almost all of the political and industrial challenges we faced. We had delivered on time, produced hundreds of pages of term sheets and meeting summaries, and developed a full-scale marketing program. Mike was fantastic as the research leader, and Rafael assumed additional responsibilities conducting research and managing relationships with the press and committee meetings in January 2002. My adrenaline was flowing, but I was also feeling somewhat apprehensive. The countdown clock stood at 11 months and 24 days. We only had 358 days left to meet our internal target and launch the program on January 2, 2003.

Table 16.3 Chicago Climate Exchange Advisory Board Members