Good Derivatives: A Story of Financial and Environmental Innovation

Chapter 15

Conceiving a New Kind of Exchange

The man with a new idea is a Crank until the idea succeeds.

—Mark Twain

The process of going electronic, demutualizing, and going public had reinvented the face of futures exchanges. Unlocking exchange value was its own form of financial innovation. Now that I knew how to both invent new products and unlock value, it was time to use these skills to create a new exchange with new products.

At the beginning of 1999, I found myself in an uncomfortable position with only one ball left in the air—CO₂ emissions trading. I had left the CBOT behind, along with insurance derivatives. In addition, my work on unlocking Liffe would come to fruition and demand less of my time. With my newfound focus, I began a full-time adventure that would occupy me for the next decade.

I worked on two major projects at Environmental Financial Products in 1999, and both had begun two years earlier. The first was brokering a CO₂ offsets trade. I normally eschewed brokering but made an exception in this case because it gave me the opportunity to better understand offsets. The second was writing a feasibility study for a business that sought to monetize the carbon sequestered in trees.

The Largest Voluntary CO₂ Offset Trade in History

In 1997, Mike Walsh from EFP met Bernie Zahren, whose firm, ZAPCO, was in the business of operating landfills. While decomposing, the garbage in these landfills emitted methane—a harmful greenhouse gas. Bernie's business captured this ...