Carbon trading not viable, yet: Rubin

It’s no secret that the environment is one of the hottest topics on everyone’s agenda today, but if you’re looking for proof then the Conference Board of Canada’s got it.

The organization released the Carbon Disclosure Project 2007: Canada 200 report on Wednesday, which found that 88% of the 315 global survey respondents thought climate change presents business risks, while 86% see financial opportunities.

“Canada’s largest companies are more aware of the business risks and opportunities presented by climate change, more likely to act to manage their greenhouse gas emissions, and more responsive to investor requests for information,” says David Greenall, Principal Research Associate at the Conference Board.

But these stats don’t mean that companies, or this country, are dramatically reducing green house gas emissions just yet. In fact, Jeff Rubin, the chief economist and chief strategist at CIBC World Markets, says Canada’s involvement in the Asia-Pacific partnership “represents the lowest common denominator in response to global climate change today.” He also points out that while Canada’s emissions intensity has gone down 14% between 1992 and 2004, absolute levels of emissions have soared.

So what’s the problem? Rubin says business need to realize that the market is the solution, not the problem. “In order for environmental progress to be sustainable it must become economically viable, but that’s not going to happen until markets are incented to act.”

However, things can’t move forward until the market is given context, and that’s not happening because the Canadian government has refused to implement any hard reduction targets for greenhouse gas emissions.

Rubin’s optimistic that hard targets will soon be implemented, though, mainly because of activity south of the border. He says more than half of the state legislatures in the U.S. have already passed carbon caps, and there’s legislation seeking an “absolute reduction” in emissions between the next two to three years. By then, Rubin expects the American federal government to jump aboard the hard cap train.

“It’s clear that whatever the outcome of the 2008 U.S. elections are, the next administration in Washington will pass a national cap and trade system for carbon emissions in the U.S.,” says the economist. “And when it does, it will demand the compliance of its geographic neighbour and chief trading partner.”

When the States does eventually get around to imposing a cap and trade system, Rubin thinks the country will “get it right,” unlike in Europe, where carbon credits initially traded for 30 Euros a ton but fell to virtually nothing. “That’s what happens when you hand out 10 times more emission credits than there are emissions,” explains Rubin.

Rubin thinks the carbon emission trading system is a much better market tool than carbon taxes. That’s because the trading system is based on direct environmental targets. With carbon taxes, “we don’t know at the beginning if they’re set high enough or to low to achieve the desired environmental target. In the cap and trade system, the government sets the emission reduction target and the market sets the price at which that target will trade,” he says.

Setting that price will, in part, be up to the Montreal Exchange, which last December announced it was launching the Montreal Climate Exchange. Luc Bertrand, president and CEO of the MX, says that investors and industry need a carbon price that will help them plan and execute their emission reduction strategies. “This is a price that emerges from a single market place,” he says.

He too thinks that mandatory government set targets is the way to a robust market. And when the market is developed? “Companies will adjust to new environmental realities cost effectively and it motivates them to further reduce their greenhouse gas emissions,” he says.

Companies who can’t meet their targets will be forced to buy carbon units and therefore create market demand. Bertrand says when economic value is attached to the reduction efforts, companies will be encouraged to reduce emission below their targets. They’ll do this through new technology and by promoting energy efficient solutions, and then sell their carbon units to higher emitters.

“It’s with this synergy between buyers and sellers or between supply and demand that will create a market and generate a price signal that will help companies achieve their greenhouse reduction targets at the lowest possible cost,” Bertrand explains.

Adds Rubin, “We need governments to mandate absolute reductions in carbon emissions now and let the market do its work.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(10/10/07)

Bryan Borzykowski