Canada’s carbon exchanges find little to trade

Despite the continuing uncertainties surrounding the implementation of the Kyoto Protocol, the Montreal Exchange is the latest Canadian stock exchange to announce its intention to travel down the path to greenhouse gas emissions trading.

The Montreal Exchange is partnering with the Chicago Climate Exchange to create the Montreal Climate Exchange. The duo made the announcement during the recent UN Climate Conference in Montreal.

There are several exchanges in existence — or in development — that trade in greenhouse gas emissions, especially carbon dioxide. The Canadian Climate Exchange was created in 2003 by the Winnipeg Exchange; and the Toronto Stock Exchange (TSX) followed suit last summer when it announced that it would launch a similar exchange. The Toronto-based Greenhouse Gas Exchange, which is not affiliated with the TSX, has been trading credits internationally since December 2004 — the only greenhouse gas exchange operating in Canada.

Europe already has several operating exchanges.

“Right now, there isn’t a market for a Canadian exchange to facilitate,” says Steve Tellier, project manager for the Canadian Climate Exchange. “We’re sort of all in this waiting for more things to come on-stream with federal government policies.”

Carbon emissions trading occurs when a company that reduces its greenhouse gas emissions beyond its Kyoto Protocol target is issued a credit it can sell to another company that has not met its target. The trading of these credits is expected to play a big role in helping countries and companies comply with Kyoto. Under Kyoto, Canada is expected to reduce its greenhouse gas emissions 6% below 1990 levels between 2008 and 2012.

Some Canadian companies, anxious about the future prices of carbon credits, have already bought credits on the international market, and in bilateral agreements.

But any credits traded now may not be recognized under the new Kyoto regime — when the rules are finally laid down.

Leon Bitton, the Montreal Exchange’s vice-president of research and development, says the federal government is expected to have the regulatory framework ready in the first half of 2006, along with emissions targets for “large final emitters” (LFEs) — classified as oil and gas, mining, thermal electricity and manufacturing companies. The Montreal Climate Exchange (MCE) could begin trading in mid-2006, he says.

Whether the market will be viable depends on the new regime the federal government puts in place, Tellier says.

The Climate Fund — established by the federal government to buy accredited projects, create emissions credits, and use them either to meet Canada’s Kyoto commitments or sell them to LFEs — should be running by mid 2006.

“I think a lot of us see that as being the first real move towards emissions trading because, at least theoretically, the Climate Fund could choose to buy its credits via an exchange,” Bitton says.

While it may seem like there is a glut of emissions exchanges, Bitton explains that the MCE has distinguished itself by being the first Canadian exchange to offer futures trading.

“European experience has shown that companies that exceed their targets and generate credits are not necessarily selling them in the market place, they’re keeping them, knowing they might need those credits in future years . . . Therefore, what they’re looking for is price-risk management,” Bitton says.

But while the price of a credit — equal to emitting a tonne of CO2 — in Europe has risen as high as 30 euros or $43 (currently it’s around 21 euros or $29), the Canadian government has put a price cap of $15 per tonne on emissions credits for LFEs.

If the market price is too close to $15 per tonne, or higher, Tellier says there won’t be a market. “Definitely, we look at that European price and we do have some concern,” he says.

Even with an artificial cap, Bitton says, the market will adjust and bring in financial players, such as pension funds and banks, as has been the case in Europe.