Using Black-Scholes to limit global warming

February 9, 2007

An industry panel at Columbia Business School recently expanded the idea of performativity to an interesting non-financial context. The panel, devoted to Carbon Trading, included four notable speakers who painted an inspiring collective portrait of environmental improvement. This progress is to be done on the basis of the existing financial formulae, artifacts and social structure of Wall Street.

Interestingly, all the speakers agreed on one thing: while fixing the environment is today’s key economic challenge, good intentions are not going to suffice. A mainstream approach is necessary, including mainstream technology and the mainstream profit motive. Carbon trading is their proposal.

The industry practitioners at the panel explained the day-to-day problems of running a “green finance” company. Eron Bloomgarden, country director at EcoSecurities, discussed the challenges involved in emission reductions. Say you plant a forest in Sub-Saharan Africa: will it be there in ten years? Neil Cohn, founder and managing director of Natsource, analyzed how the price of securities in environmental markets gyrated up and down on even small changes in regulation.

The panel also had two academics. Satyajit Bose, an ex-arbitrageur turned professor of environmental economics, gave a rousing vision of just what is needed to succeed. “Imagine all the tools that we have developed in the equity and fixed income markets,” he said. “What would it take to import them to carbon trading?” His answer was that the market needs more depth and liquidity, but it can only achieve this if the political definition of the securities is more stable.

Geoff Heal, the other academic, is professor of economics at Columbia Business School. His project, perhaps the most tantalizing, is to create a new security that solves the “other half” of the complex environmental challenge of today. While carbon trading has allowed for developed countries to cut their emissions, it has no such effect at developing countries. The problem there, by contrast, is that existing securities provide no incentive to keep developing countries from cutting down their tropical forests – a habit that feeds hungry mouths, but has nefarious environmental consequences. Heal’s idea is simple: create a new security that rewards poor countries for leaving their forests alone.

The panel, organized by MBA student Cai Steger and a long list of the self-organizing student clubs of the business school. But not even its long list of organizers explains the massive attendance (with more than 150), the excitement in the air and, indeed, the rush of the students to give their business cards to the speakers (hey, after all, this is a b-school event). As one of the speakers rightly said, the scene was not that different from the early stages of the emergence of the Internet.

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