Barely two weeks ago, federal environment minister, John Baird, rejected the notion of an international carbon trading market. That, however, was before opposition MPs passed a bill requiring compliance with the Kyoto Protocol and before Prime Minister Harper promised to produce a compliance plan. With those developments and others, an emissions cap-and-trade system may not be far off.
British Columbia recently announced that it would be introducing its own measures to meet Kyoto targets by 2020. Earlier this month, Australia announced that over the next four months, it would be considering a national carbon trading system. In the United States, long a hold-out on Kyoto and global warming initiatives, the tide also seems to be turning: California recently adopted legislation mandating carbon emissions limits and providing for emissions trading, and earlier this year, the newly formed US Climate Action Partnership – a coalition of industry giants including GE, Duke Energy, Lehman Brothers Holdings and PG&E – put their support behind the development of a cap-and- trade system which included setting targets of reducing GHG emissions by as much as 30% over the next fifteen years. At the same time, the US Congress has been sponsoring climate change bills with Democratic senators Dianne Feinstein and Tom Carper having proposed an emissions cap-and-trade bill which is endorsed by an industry group which includes US energy companies, Exelon, PG&E, Calpine, and Entergy. There are also a number of other similar Democrat and Republican bills which have been introduced or are being developed.
Canadian financial markets have taken note of these developments. In early January – before the Conservative’s recent promise to produce a Kyoto compliance plan – CIBC World Markets published a report, The Carbon Wars, in which it perhaps presciently predicted that the US and Canada would introduce legislation aimed at mitigating CO2 emissions and global warming by the end of this decade, noting that there was already significant momentum to follow California’s example and adopt emissions cap-and-trade systems. This was followed more recently by CIBC chief economist, Jeffrey Rubin’s warning to investors that carbon emissions would very soon carry a price in Canada and that the Canadian energy sector would be particularly exposed. Mr. Rubin noted that 40% of the TSX’s total market capitalization would be directly impacted by legislation mandating greenhouse gas (GHG) emissions caps and trading, and CIBC has created a Carbon Cap Composite Vulnerability Index which measures industry exposure to a carbon cap-and-trade system.
To date, without any commitment to Kyoto, CO2 emissions reductions by Canadian and US companies has been voluntary, and participation in carbon trading has largely been through the unregulated Chicago Climate Exchange (whose volumes have incidentally more than doubled in the first six weeks of this year). Given all of these developments, the next few months should be telling as to if and when Canada (and the US) moves to a regulated emissions trading market like that created by the European Union.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
