Friday, February 13, 2009

Capital Markets Darden Style (with Yiorgos Allayannis)

Yiorgos Allayannis is reason alone to come to Darden. It may be Darden urban legend, but I have heard tell that his classes cure hangovers. From the minute you sit down, you will be on the edge of your seat.

Having worked in sustainable development over the summer on an avoided deforestation project, I couldn't miss Yiorgos' class on cap and trade, which he taught as part of his Capital Markets elective class. I also thought this was an opportunity to try and capture the flow of a case-taught finance class at Darden.

We started from 30,000 feet, and asked 'Is there a problem?' The overwhelming class response was YES, with 60 YES votes and only 3 NOs.

Some of the other comments raised were:
- Even if there is not a problem, business is aligning behind this issue, so get on board!
- Even if we're not sure there is a problem, can we risk doing nothing?
- What happened to the ice over Greenland?

Then we asked, 'Whose problem is it? Developing or Industrialized Economies? Or is it everyone's problem?'

Molly and Gaurav Gupta had a great volley over the contentious issues of externality, equality and leadership. Molly's argument was that China, because of the pollution it creates as the leading producer of GHG emissions, needs to come to the negotiating table. China's pollution is having an effect on the health and well-being of countries outside its own borders, and if not everyone agrees to participate in Cap and Trade, there will be a flight of factories to non-participating countries like China where energy costs are lower.

Gaurav argued that it is the responsibility of developed countries, historically the grossest polluters with the largest demand for products produced in China and the highest GDPs to reduce worldwide GHG emissions.

Next we shifted gears to ask 'What can we do about it?'

Three solutions were discussed to some length--Cap and Trade, Tax, and Investments, with a surprising amount of attention given to the third--investments into the infrastructure to distribute cleaner energy products, such as wind, to the populous areas of the US that need energy (from Nantucket to NYC); and into investments that drive down the cost of new technologies to make them cheaper and thus more available. We also touched on the nuclear debate after a surprising admission came from the back row--Marshall Croft apparently ran a nuclear reactor for a year! An expert in the room!

Here there was a great interruption from Davide. He commented that 80% of our energy use is from non-renewable sources and that in recent years our energy use has doubled. Thus, it is not just a question of clean tech, but a question of reducing our energy consumption and the way that we use resources.

Finally we started talking about the Cap and Trade system. (Let me take a moment to say that I was really impressed by the enthusiasm and intelligence my classmates had brought to the discussion thus far. I think we would have begun discussing the structure of cap and trade far earlier if it were not for the overwhelming participation around the earlier discussion, which I believe was fundamental to talking about this new market mechanism.)

Here is an aggregation of my classmates definitions: In a cap and trade system a Government sets an explicit aggregate limit on the amount of production (of GHG, in this case). There are two companies, A and B. Each receive a certain number of allowances to pollute based on their previous levels of pollution, and based on the. Usually an allowance is some measurable quantity, such as one metric ton of carbon. A invests in technology that reduces their emissions below their previous levels. B does nothing. A can sell its unused allowance to Company B.

Patrick Connell interjected with the concern that Cap and Trade will create a divide between companies that can afford to modernize and those that cannot. This being a capital markets class, this was entertained, but not seriously. We believe in free markets! If a company cannot compete in the market, they will fail (unless of course they are the Big Three...)

Chris Brandriff brings up another great point. He reminds us that the end goal of cap and trade is to reduce the emission of the greenhouse gases that are warming the planet.

There are advantages in taking a leadership role to get us toward this goal. Yiorgos provides California as an example. Investing in the carbon markets can spur growth in clean tech and allow California to be part of the discussion in setting the future standard. He asks, "Do you want to wait and be the last one, or the first and lead the charge to make the market efficient?"

We began talking about the dynamics of the new market -- how can you tell when a carbon credit is real? Has one ton of carbon, that would have otherwise existed in the atmosphere, been removed? How can credits be measured and verified? I was able here to share my experience working with avoided deforestation in Indonesia and my understanding of additionality. A great way to tell whether a project has been successful in reducing the upward trend of CO2 emissions is to understand whether it could have existed in the absence of carbon markets. If it could and would have been taken on anyway (positive NPV, mandatory by law), it should not receive credits.

I recomend that all my classmates or anyone interested in these issues read WRI's short (2-page) fact sheet on cap and trade for more on additionality and other issues discussed above.

It was truly an awesome class. It was informational and encouraging. I'm off to polish my resume and start networking to see if I can find employment doing project finance and project management in the new carbon economy.

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