Faculty Findings

Improving Air Quality through Efficient Markets

“The pressure on public and private companies to become more sustainable is increasing day by day,” says Gerard Pannekoek. “Yet there are very few initiatives in the corporate world that really send a message out there regarding sustainability, whether that relates to the environment, labor practices or other issues we have.”

Pannekoek, who joined the Mendoza Management Department faculty as a professional specialist last fall, knows the territory. As president and chief operating officer of the Chicago Climate Exchange from 2002 to 2005, he helped create the world’s first registry and trading system for reducing greenhouse gas emissions.

“The basic principle behind this idea is that as long as you can commoditize something, you can trade it, and as soon as you can trade it, you really bring the advantages of capital markets into a particular issue,” says Pannekoek. Nearly 300 companies have joined the Exchange. It represents the first voluntary but legally binding commitment by a cross-section of North American corporations to establish a rules-based market for reducing the pollution that causes global warming.

Pannekoek got involved with the project when a former boss and long-term mentor, Les Rosenthal, introduced him to Richard Sandor. A former chief economist at the Chicago Board of Trade, Sandor is known as “the father of carbon trading” for inventing the system through which companies that can afford to reduce their emissions sell pollution rights to those who can’t. “For those that have the ability, at low cost, to reduce emissions, it gives them motivation—now they get financial rewards because they have allowances to sell,” explains Pannekoek. Similarly, members that can’t easily reduce their emissions can buy allowances or “offsets” to compensate. Since both sides have a financial incentive to behave responsibly, Pannekoek says, “technically, everyone can be a winner.”

Some companies choose to participate in the Chicago Climate Exchange of their own accord; others have joined because of stakeholder pressure, says Pannekoek. Early on, he says, the idea of carbon trading met with resistance from those who believed that “in environmental issues, there absolutely should be no commercial interest. And that was one of the revolutionary parts of this concept. We said the capital markets and ultimately, the capitalistic world, are going to solve this. You have to get the commercial, for-profit interests in there; otherwise, it’s not going to work.”

Has it worked? Pannekoek measures success by participation. The Exchange now includes corporations, states and municipalities, universities and others who have pledged to reduce their total emissions by a cumulative 93 million metric tons of carbon dioxide—or by 6 percent by 2010.

Pannekoek, who is Dutch, brings a wealth of real-world experience to his international management and MBA-level entrepreneurship classes at Notre Dame. He consults for an energy hedge fund, and has held senior executive positions at ABN AMRO, Sakura Dellsher, Quantum Financial Services and the Netherlands Chamber of Commerce. He says that students are increasingly curious about business models that harness the power of markets for the public good. “Sustainability, ethics and the environment are becoming more and more important,” he says. “They’ve become boardroom issues and investor issues—so the College should continue to try to be on the forefront of that, I think.”

—Elizabeth Station is a writer based in Evanston, Illinois.