|November 22, 2007|
Montreal Exchange & New CO2 Futures Contracts
|(By Globe-Net) - This article was prepared by Ms. Barbara Hendrickson, a Solicitor with McMillan Binch Mendelson LLP, and appeared in the on line Journal published by Mondaq.com . It provides a very useful insight as to how the Montreal Exchange plans to launch a futures market for Carbon Dioxide Equivalent Units. It is reproduced in GLOBE-Net with the kind permission of the author. As noted below, the article provides only an overview and readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted. Specific Questions relating to this article should be addressed directly to the author. Ms. Barbara Hendrickson, c/o McMillan Binch Mendelsohn LLP, BCE Place, Suite 4400 Bay Wellington Tower, 181 Bay Street, Toronto, M5J 2T3, Canada, (Tel: +1 416 8657000 Fax: +1 416 8657048).|
IntroductionThe Montréal Exchange ("ME") is seeking securities regulatory approval for the Montréal Climate Exchange ("MCeX") including amendments to several of its own rules1 that would pave the way for a listing and trading of futures contracts on carbon dioxide equivalent units ("CO2e Futures Contracts") on the MCeX2. The CO2e Futures Contracts would permit major industrial carbon dioxide emitters, financial institutions, insurance companies and other market participants to more efficiently deal with the expected introduction of a Canadian market for greenhouse gas ("GHG") emissions by the federal government in 2008. The new rules have been submitted to the Autorité des marchés financiers in Québec for approval on October 5th, 2007, with a thirty-day period for public comments. The CO2e Futures Contracts will trade on the MCeX, which is the product of an alliance between the Montréal Exchange and the Chicago Climate Exchange®, a key player in the international carbon markets.
The government’s GHG reduction plan and the emergence of a Canadian carbon market
The Canadian government published a federal plan in April of 20073 that will require selected industrial GHG emitters to reduce the relative amount of GHG they produce per unit of economic output ("intensity-based GHG emission reduction targets"). As part of this plan, the government will issue Regulated Emitters’ Credits at the end of a compliance year to regulated emitters that reach their industry-based GHG emissions reduction target and reduce the intensity of their GHG emissions below the target established by the federal government. Emitters can then bank the credits for future compliance years or can sell the credits. The federal proposals also provide for offset credits where companies that are not subject to intensity-based emissions reduction targets voluntarily generate credits to reduce their GHG emissions ("Offset Credits"). The CO2e Futures Contracts will be based on these Canadian credits.
Several features of the federal proposals hamper the emergence of a strong Canadian carbon market. Instead of participating in the buying and selling of RECs and Offset Credits to meet their GHG reduction requirements, companies can also comply by contributing to a technology fund ($15 a tonne) or by purchasing international emission credits (CERs or Certified Emission Reductions) under the Kyoto Protocol’s Clean Development Mechanism.4 In addition, it is unlikely that offset credits will be available in the early years at least because of the regulatory uncertainty that still exists about the regime for the generation of those offset credits. Project participants will be hesitant to become involved in the creation of offset credits before this regulatory certainty exists. There is also uncertainty as to how the federal proposal will be integrated with provincial schemes such as the one in Alberta where emitters can meet 100% of their intensity targets through the contributions to a technology fund at $15 a tonne. Nevertheless, the MCeX expects that the federal government’s plan will create sufficient demand for the establishment of a carbon market in Canada in 2008.5
The Features of the Proposed CO2E Futures Contracts
The MCeX is proposing two types of CO2e Futures Contracts, a futures contract with physical settlement and a futures contract with cash settlement. The underlying asset for both futures contracts is a Canadian carbon dioxide equivalent unit (CO2e unit), as issued by the federal government and defined by government legislation. Each CO2e unit allows a holder to emit one metric ton of carbon dioxide equivalent (CO2e). One futures contract will cover 100 such units.
The CO2e Futures Contract with physical settlement will have the following features:
The proposed operation of the MCeX will provide a valuable tool for industrial GHG emitters and other market participants to manage risks related to their GHG reduction obligations under the federal government’s proposals. While there is still some uncertainty regarding the details of the federal plans, and while some of the features of the plan may not be optimal for fostering a strong market, the creation of the MCeX represents an important step forward in the emergence of a Canadian carbon market.
1 The Montréal Exchange is proposing the following changes: Addition of new article 6815B to Rule Six and new articles to Rule Fifteen (Sections 15931-15950 and 15951-15970) and amendments to articles 6005, 6801 to 6808, 6812, 6813 and 6815 of Rule Six and article 15001 of Rule Fifteen.
2 Montréal Exchange, "Request for Comments - New Product: Futures Contracts on Carbon Dioxide Equivalent (CO2e) Units", (October 5, 2007), online at http://www.mondaq.com/redirection.asp?article_id=54490&company_id=1031&redirectaddress=http%3A//www.m-x.ca/f_circulaires_en/MCeXcirculaireBourseAnnexe_en.pdf. .
3 Environment Canada: Regulatory Framework for Industrial Air Emissions, online at: http://www.mondaq.com/redirection.asp?article_id=54490&company_id=1031&redirectaddress=http%3A//www.ec.gc.ca/doc/media/m_124/report_eng.pdf.
4 United Nations Framework Convention on Climate Change: "Clean Development Mechanism", online at: http://www.mondaq.com/redirection.asp?article_id=54490&company_id=1031&redirectaddress=http%3A//unfccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php.
5 Supra note 1 at 4.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2007 McMillan Binch Mendelsohn LLP