Canada: Canadian Emissions Trading Schemes: Thought For Investors

Last Updated: November 19 2008

By Gray E. Taylor, Chair, Climate Change & Emissions Trading Group and Corporate Law Partner, Bennett Jones LLP1

This is a chapter extracted from one of Thomson Reuters Marketing Intelligence Report's: Managing Risk in Global Carbon Markets. For more information or to read the full report, please visit www.ifrmarketintelligence.com.

Overview

Canada is due to launch an emission intensity-based emissions trading scheme on 1 January 2010, a scheme that permits access to offsets produced in Canada and/or, on a limited basis, of non-forestry CDM CERS. Risks include the prospect of a US cap-and-trade scheme, likely to be enacted under the first term of the next US president, overtaking and possibly replacing the proposed Canadian scheme, as well as new interest in carbon taxes in the opposition Liberal party. Other planned schemes include an initiative partly implemented in British Columbia and membership in and support for the California-centred WCI from most large Canadian provinces. Alberta, the largest GHG-emitting province, already has the first North American emissions trading scheme.

Speculative investment opportunities are already emerging, for example acquiring futures contracts for credits from the proposed federal scheme on the Montreal Climate Exchange or acquiring cheap GHG emission reductions currently usable only for voluntary purposes, but which may be eligible as compliance instruments in the federal and sub-national schemes.

Canada and market mechanisms

Investors have seen significant volatility in the price of GHG emission allowances under the EU ETS and of related credits from the Kyoto Protocol CDM. In addition, prices for voluntary GHG credits by aircraft travellers and others encompass a broad range, including some surprisingly high levels. Recognising that 'carbon' investing, like other green investment, offers the prospect of an exceptional ROI, investors are interested in opportunities that may exist outside of Europe and the CDM, including in Canada.

Canada is a 'less developed country' (compared to the EU) when it comes to GHG emissions trading and carbon investment structures and entities. However, it should be remembered that Canada was for many years the leading participant in voluntary GHG trading, leaving behind a strong residue of expertise. Support for dealing with climate change through an emission reduction programme built around market mechanisms (rather than a command and control approach) is strong in Canada.

Regulation

It is important to understand the GHG background against which any Canadian GHG investments would be made.

Federal

The Canadian federal government has proposed through its two 'Turning the Corner' policy announcements in 2007 and 2008 a GHG emission intensity reduction system that would be supported by emissions trading between regulated entities and in offsets produced in Canada and/or, on a limited basis, of non-forestry CDM-certified CERS. The scheme is proposed to be launched effective 1 January 2010. Although investors, probably rightly, are concerned about the commitment of the federal government to its plan and fear that the attractiveness of the US-based system likely to be rolled out during the first term of the next US president may deter the 'Turning the Corner' proposals from being implemented. However, the determination of the Canadian public to effect GHG emission reductions and the similarity of the federal government's proposal to the original plan of the official opposition party (which is now enamoured with carbon taxes, however) makes the likelihood of implementation of federal government proposal significant.

For investors, one opportunity tied closely to the 'Turning the Corner' proposal is the ability to trade carbon futures contracts on the Montreal Climate Exchange (MCX). The four MCX-created futures require the delivery in June, September or December, 2011 or March 2012 of one tonne of CO 2 equivalent emission reductions usable in the proposed federal system.

The federal 'Turning the Corner' system also allows entities forced to cut emission intensity to obtain credits by contribution to a technology fund or to invest in CCS technology and projects. However, the credits available from the federal technology investment fund is limited to 70% of a firm's regulatory obligation in 2010, declining to zero by 2018, and prices increase from the same C$15.00/tonne CO 2 e in 2010 to C$20.00 per tonne CO 2 e in 2012 and escalate with the nominal growth in GDP thereafter; the CCS opportunity will be available only until 2018. Consequently a rise in federal offset credit prices would not be surprising over the next decade, including a major jump in 2018 when required reductions in the oil sands will increase dramatically for many facilities, and when credits for CCS and the technology fund are gone.

Alberta, British Columbia and the WCI

Other opportunities exist in Canada as a result of provincial initiatives.

Alberta implemented in 2007 a system similar to the federal government's 'Turning the Corner' system, through a legally binding regulation enacted in June 2007, the Specified Gas Emitters Regulation. It is expected that this emissions intensity regulation will be in place for the foreseeable future and it authorises the use of offset credits created by projects in Alberta outside of the regulated industries as well as emissions trading between regulated entities that reduce their emissions intensity to below the target prescribed by the regulation – i.e., 12% below the emission intensity on average in 2003, 2004 and 2005. As Alberta also permits regulated entities to purchase offset credits by contributing C$15.00 per tonne of CO 2 e to a technology investment fund (which the government indicates will then invest in technology that will reduce GHG emissions), the practical limit on Alberta offset credit prices is C$15.00 per tonne CO 2 e; it would not be surprising, however, to see that price forced higher by the public over time.

British Columbia has an entirely different system built on a carbon tax which applied as of 1 July 2008 and which is soon to incorporate a cap-and-trade system which permits offsets and other initiatives, some of which have trading elements.

British Columbia, Manitoba, Ontario and Quebec all belong to the WCI, an initiative centred on California but being aggressively implemented in British Columbia and publicly strongly supported by Ontario and Quebec. The WCI calls for hard caps on GHG emissions and a trading system amongst the members (seven US states and the four Canadian provinces) with the intent of reducing GHG emissions on an absolute basis by 15% below 1990 levels by 2015. A first draft of the design requirements for an emissions trading system for the WCI was published in July 2008 and there is some cause for optimism that the WCI programme will be rolled out effective in 2012, perhaps in addition to or even in substitution for the 'Turning the Corner' system. Under the draft WCI design, offset credits and allowances from other WCI and non-WCI jurisdictions will be usable to meet WCI requirements.

Market participants

The uncertainty related to the actual implementation of the 'Turning the Corner' plan and the levels of emission reductions to be required in Alberta have made rational decision-making by affected businesses difficult. However 'first-mover' advantage, particularly if flexibility can be built in and capital costs minimised, has been sufficient to ensure that those businesses that know they have a long-term GHG emission problem (e.g. oil sands producer Suncor, fossil fuel producer Encana and coal-fired electricity generators like TransAlta, Ontario Power Generation and SaskPower) as well as aggressive niche players (e.g. financial institutions like Front Street Capital and RBC, credit aggregators and on-sellers like Terra Verde, Zerofootprint and Blue Source and service providers like Deloitte, PWC, ICF, and the MCX) and a few informed industrial entities like Invista have been prepared to take some steps to participate.

Yet where massive amounts of capital are required such as for CCS and clean coal, initiatives have been slow (e.g. the plans of ICON and ASAP), halting (SaskPower's cancellation and then recommencement of its CCS project) or delayed (the announcements by Sherritt and Nexen of their coal-fired electricity generator and upgrader, respectively, being put on hold, pending resolution of the GHG regulatory issues). RBC Capital Markets recently announced that it has opened a carbon trading desk, thereby presumably giving access to Canadians who wish to participate in GHG trading markets wherever they may be. As indicated, to date that is largely a European (EU ETS and CER/ERU) phenomenon but with the MCX in existence and other exchanges such as Nymex and BlueNext perhaps coming on line to permit trading in carbon credits, access to the Canadian markets should be broadened.

Investment opportunities

Offsets

Investors should be open to the possibility that by purchasing good-quality GHG emission reductions before these are accepted as credits in any regulatory system, they may have the opportunity to convert the emission reductions into a higher value compliance credit or, if not converted, still be able to sell the reductions in the voluntary market to corporates that want to be 'green', or to air passengers, etc.

It is getting easier to predict what reductions can be made acceptable as compliance credits. For example, the WCI's draft system design identifies a priority list of offset project types for development as follows:

  • Agriculture (soil sequestration and manure management);
  • Forestry (afforestaton/reforestation, forest management, forest preservation/conservation, forest products); and
  • Waste management (landfill gas and wastewater management).

Alberta has approved (or is close to approving) protocols for the following types of projects: acid gas injection; afforestation; beef feeding (edible oils); beef feeding (reducing days-on-feed); beef lifecycle; biofuel; biogas; biomass; compost; energy efficiency; enhanced oil recovery; landfill bioreactor; landfill gas; modal freight shift; pork; solar thermal; industrial and commercial green building projects; waste (non-incineration); low-impact water-powered electrical energy; road rehabilitation; run-of-the-river electricity; solar electricity; tillage; waste heat recovery and wind-powered electricity.

The Canadian federal government on 9 August 2009 indicated that 40 protocols for offset projects would be eligible to be 'fast-tracked' to facilitate their use in 2009 (with credits issuable back to 1 January 2008 for projects operating before protocol approval as follows: edible oils in cattle feeding regimes; reducing days on feed of cattle; reducing the slaughter age of cattle; decomposition of agricultural materials; capturing and combusting methane from manure management systems; manure management systems; innovative feeding of swine and storing and spreading of swine manure; tillage system management; waste gas or waste heat or waste pressure-based energy systems; energy efficiency for buildings – commercial; energy efficiency for buildings – residential; waste heat recovery; energy efficiency; afforestation; forest management; industrial fuel switching from coal or petroleum fuels to natural gas; switching from coal and/or petroleum fuels to natural gas in existing power plants for electricity generation; acid gas injection; enhanced oil recovery; coal-bed methane; coal mine methane and ventilation air methane capture and use for power (electrical or motive) and heat and/or destruction by flaring or catalytic oxidation; aerobic composting; aerobic landfill bioreactor; water treatment methane capture and destruction; biomass to energy from biomass combustion facilities; electricity generation from biomass residues; run-of-river power generation; solar power generation; wind power generation; new primary district heating systems; grid-connected electricity generation from renewable sources; gravel and lightly surfaced road resurfacing; freight modal shifting; recovery and utilisation of gas from oil wells that would otherwise be flared; non-incineration thermal waste management; catalytic reductions of N 2 O inside the ammonia burner of nitric acid plants; biofuels productions and usage.

Projects

Finding projects to invest in is not particularly easy. One source of information is the CleanProjects Registry of the Canadian Standards Association where frequently projects are listed. Although the Clean Projects Registry is not an exchange, the opportunity to identify buying opportunities and to make arrangements outside of the Clean Projects Registry to acquire the GGH emission reductions is substantial. Given the growth of willingness of investment dealers and others to acquire such credits, a 'buy-and-hold' or 'buy-and-flip' strategy could be a good one.

Public markets

GHG Emission Credit Participation Corp filed a preliminary prospectus in 2007 seeking to raise approximately $100m in Canada to invest in carbon credits and projects. Its failure to close may have been the result of attempting to market in the summer but may also have been a result of the very limited understanding of carbon investing in Canada. In the current circumstances, does another opportunity exist?

Given that there is a significant risk of the federal plan not being implemented, could investors play that risk by shorting MCX futures (which are likely to be significantly diminished in value if the system does not succeed), particularly if hedged by the acquisition of low-cost offsets which could be converted into credits through the 'Turning the Corner' offset system in the event the federal plan is implemented.

Direct participation in public companies with carbon upside but with attractive value even in the absence of carbon credits is also an option. Renewable energy, biofuels, energy efficiency, waste management and agricultural technology improvements may make sense in any event and the carbon credit component could thus be seen as icing on an already sweet cake. For example, the market may place little value on the carbon sequestration opportunity available to large timber companies which can increase the CO 2 sequestration aspect of their assets through forest management and thereby generate value. Faced with the market price and the mountain pine beetle epidemic (an insect infestation that is causing widespread mortality of commercial pine tree species) that is causing CO 2 emissions from forests in Canada to increase regularly, investors might find such entities as deserving of attention.

Conclusion

While Canada is clearly in a risky early stage of GHG emissions control regulation and market development, the above may show that shrewd investors have opportunities to apply their hard-won knowledge and skills learned from other GHG systems and in other jurisdictions in Canada and profit from the exercise.

Footnote

1 Article completed 23 September 2008

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions