Coming Soon--Futures Market in Smog Credits

First there were corn and wheat futures contracts, and later came interest-rate swaps and other fancy financial instruments. But now the world’s largest commodity exchange is developing one of its most exotic new investments yet: air pollution permits.

“It’s a totally new animal,” said Michael O’Connell, a spokesman for the Chicago Board of Trade.

The CBOT on Tuesday voted to create a new futures contract that allows investors and utilities to trade rights to emit sulfur dioxide. The proposed new investment is derived from the newly amended Clean Air Act, which allows utilities that cut their pollution below federal limits to sell their unused pollution credits to other utilities that aren’t meeting regulatory standards.

The idea is to give utilities a financial incentive to cut their pollution by installing expensive pollution control equipment or buying cleaner fuel. Those that get their emissions below the federal limit have a new asset that can be sold for cash.

With a futures market for the pollution credits, the argument goes, utilities can more easily sell or buy pollution credits. A futures market would also make the contracts available to speculators who are willing to gamble on the price movement of the pollution credits.

The CBOT’s proposal will go to the federal Commodities Futures Trading Commission, which is expected to take six months to a year to consider it, O’Connell said. Trading could start in 1993, a CBOT spokesman said.

Environmentalists have applauded plans for so-called smog futures, saying that for the first time, a utility’s ability to control pollution would have a direct impact on profits.