Market News

 March 14, 2007
Canada has $12B carbon market: CIBC

 Toronto, Canada -- A new report from CIBC World Markets describes a future Canadian market for greenhouse gas emissions credits that could be worth $12 billion annually. The study also examines the inter-provincial transfers that would be created by such a market, with emissions-heavy economies in Alberta and Saskatchewan transferring wealth to hydroelectric provinces such as Quebec and Manitoba.

The report provides an interesting and fairly detailed analysis of how a federally-legislated Canadian cap-and-trade system for greenhouse gases (GHGs) would look. The picture that emerges is one of inter-provincial transfers of wealth based on each province's electricity supply mix and emissions intensity.

The report establishes a market price of $30 per tonne of GHGs, higher than the $15 limit the federal government appears to be ready to establish in its soon-to-be-released plan. The $15 figure is simply too low to induce changes in economic behaviour, asserts CIBC World Markets chief economist Jeffrey Rubin, while $30/tonne is "widely seen as a minimum price needed to stabilize emission growth".

Based on that price, the 55% of Canada's emissions that come from identifiable industrial and commercial sources would have a market value of over $12 billion.

Because of the differences in industries and power sources among the provinces, such a market would result in some "pretty hefty" transfers of wealth, says CIBC. The report finds that "electricity generation is often the single most important determinant of a province's potential exposure to carbon emission costs".

Alberta, Saskatchewan and Nova Scotia, which rely on coal for at least 60 percent of their electricity needs, are likely to be buyers of credits. The two most GHG-intensive economies in the country are Saskatchewan and Alberta, which account for 60 per cent of national GHG emissions growth since 1990 and are likely to continue that trend with expansion of the oil and gas industry.

On the other side, the provinces of Quebec, Manitoba, Newfoundland & Labrador and British Columbia generate most of their electricity from hydro power. As a result, they could benefit substantially from carbon trading.

"It remains to be seen how a cap and trade system for carbon would be implemented in Canada, with the specifications of the system - including critically, the initial allocation of credits and the resulting price of carbon emissions - determining the scope of regional impacts," says Mr. Rubin. "But with an already-skewed distribution of GHG emissions looking to become even more unbalanced in coming years, it's easy to envision a healthy inter-provincial trade in carbon permits."

Intensity targets will see emissions rise

The report notes the general consensus that even with sharp improvements in emissions intensity (emissions per unit of economic output), Canada's GHG emissions will continue to rise. Canada's emissions intensity has actually declined by 14% from 1990 to 2004, an average reduction of more than 1% per year, but growth in GDP led to the substantial rise in total emissions.

That trend will likely continue and could see Canada's emissions reach 45% above its Kyoto Protocol target by 2012, even with further improvements in intensity. As of 2004 the country was 35%, or around 200 Megatonnes (Mt), above its target.

One area which may see tremendous growth in emissions is the oil sands industry in Alberta and Saskatchewan. Even with continued reductions in intensity, industry growth could push emissions from around 30 Mt today to more than 100 Mt over the next decade, says the report.

Download the full CIBC report here (PDF).

Emissions strategy expected soon

The CIBC report indicates that, if certain aspects of the federal government's emissions plan remain as rumoured, it may do little or nothing to reduce Canada's rising GHG profile. Specifically, intensity targets and a price of $15 per tonne would be relatively ineffective, CIBC's analysis indicates.

Reports from Ottawa indicate that a 'discussion paper' on the climate change plan will be released by Environment Canada in late March or early April, following the Quebec election on March 26. Details including near and medium term targets, a technology fund, and emissions trading are being considered, but little information has been shared. Previous government announcements have favoured near-term intensity targets followed by hard caps after a decade, while the $15 per tonne price first proposed by the previous government seems to have been adopted.

For More Information: CIBC World Markets