Economist discusses using financial instruments for good at University of Oklahoma
With the onset of the global recession, the public reputation of the finance sector has taken a major hit. So naturally, said economist Richard Sandor, it's difficult for some to view the sector as a potential driver of public good.
Derivatives are like hammers. They can be used to crack somebody's skull, or they can be used to build houses.”
That idea was the driving force behind the Chicago Climate Exchange, Sandor said. The exchange turned emissions into a commodity. Any entity that produced carbon emissions below a certain level could sell their emissions rights to another entity that produced more emissions. The system gave corporations a financial incentive to reduce their emissions.
The idea was shouted down as too complicated and difficult to understand, Sandor said, particularly in the halls of Congress. But he noted that an elementary schoolteacher in New York state taught the concept to her class by handing out permits to chew gum at school and allowing students to trade them.
“I can't do it in the Senate or the House,” he said. “I should come with chewing gum.”
In the future, Sandor said, the most important commodity will be water. A combination of the effects of climate change and the depletion of surface water will make control over water resources increasingly important, he said.
Sandor proposed a system in which each person is allowed the 20 to 30 gallons of water per day that are needed for hygiene and hydration. Those who use less than that amount will be able to sell water credits to other users — for example, to golf courses in Albuquerque, he said.
Financial instruments like derivatives are only useful if they're used well, Sandor said. When they're regulated, transparent and traded fairly, they can be a tool for solving some of the world's most challenging problems.
“Derivatives are like hammers,” he said. “They can be used to crack somebody's skull, or they can be used to build houses.”
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