Richard Sandor : Courses and Seminars
The Law and Economics of Natural Resource Markets
Market-based mechanisms such as emissions trading are becoming widely accepted as cost-effective methods for addressing environmental concerns, especially as societies move towards a carbon-constrained future. In the last decade, we have witnessed the expansion of environmental finance to new products - carbon dioxide spot and futures contracts, sulfur dioxide futures and over-the-counter water contracts - that are now fully integrated financial instruments for hedging and speculation. These mechanisms also have potential benefits to address issues in other pressing matters such as water quality, fisheries and biodiversity protection. Like their commodity, equity and fixed-income predecessors, environmental markets did not start by spontaneous combustion. Their successful evolution required the development of specific legal and institutional infrastructures. Financial innovation in general, and the development of the first organized greenhouse gas market in particular, should be of interest to economists, lawyers, policy makers and members of the capital markets. The seminar will look at financial innovation utilizing the Coasean framework. The study of his work indicates that price mechanism use costs (the sum of infrastructure and transaction costs) have three components: (1) property rights and government regulation; (2) institution-building to minimize transaction costs; and, (3) minimization of per unit transactions costs. The course will draw on practical examples from the lecturer’s career to explain the origin and evolution of other markets as a guide in the development of new environmental markets. The historical evolution and current developments of market-based mechanisms to address environmental issues will be carefully analyzed. Special attention will be given to the analysis of the cap-and-trade program on sulfur dioxide (SO2) established by the Clean Air Act of 1990. A significant part of the course material will be devoted to discussion of the emerging market for greenhouse gas emissions both in the United States and abroad. Other environmental markets (smog, renewable energy, water quality and quantity, catastrophe insurance, sustainability indices and biodiversity) will also be featured. The seminar will also draw on guest lecturers with expertise in environmental finance, energy and economics. Grading will be based on the writing and presentation of a case study during the last class (80%); attendance and participation will account for the balance of the grade.