Montreal Climate Exchange

MONTREAL -- Four years ago, when he helped create the Montreal Climate Exchange, Léon Bitton thought it would be only a short time before the federal government introduced binding cap-and-trade legislation, allowing Montreal to become the centre of environmental finance and emissions trading in Canada.

Today, Mr. Bitton, vice-president of research and development for the Montreal Exchange, and Ann McCarthy, vice-president of business development of the Montreal Climate Exchange - and its sole employee - are still waiting. Both say they are confident that federally regulated cap and trade in Canada is inevitable, but with the developments at the recent Copenhagen climate talks and the results of the recent U.S. Senatorial elections in Massachusetts, they may be waiting much longer before any serious trading can begin on the fledgling exchange, if at all.

Meanwhile, in the budget presented Monday by President Barack Obama, the US$646-billion in revenue from a cap-and-trade system to curb greenhouse gas emissions has been dropped - signalling pessimism that Congress will pass a climate bill with this provision.

When asked if they expected a delay this long, Ms. McCarthy burst into a little laugh, before quickly composing herself. "No," she said adamantly. "No, absolutely not."

"There is a lot at stake here," said Mr. Bitton.

"Because of the economic implications," Mr. Bitton said, "we understand government has to set targets that don't hurt the economy. The market didn't anticipate [the long wait] either."

What was expected, however, was for the Harper government to have introduced clear, short-term emission intensity reduction targets and compliance mechanisms, as outlined in its March 2008 plan, called "Turning the Corner." That plan has been delayed.

"The economic downturn and the renewed engagement by the U.S. Administration has required that we fine-tune our approach to tackling climate change," an unidentified spokesperson from Environment Canada said via email.

Created in 2006 as a joint venture with the Chicago Climate Exchange, it allows companies that earn greenhouse gas credits through environmental programs to use the Montreal market to sell them to carbon-emitting firms. The exchange has had the infrastructure ready since May 30, 2008, but since then it has traded only about 130,000 tonnes of carbon, an amount Ms. McCarthy admits is "small." In Europe, where cap-and-trade is law, the carbon market trades 18 million tonnes of carbon a day.

"No, there are not daily trades [on the Montreal exchange]," Ms McCarthy said. "There is minimal activity because the participants are waiting for the regulatory framework from the government."

Currently, the head of a company in Canada that is a heavy emitter who thinks government will enact binding cap-and-trade legislation before June 2011, the date of the latest contract, could buy a contract on the exchange for carbon credits at $2 per tonne of C02 deliverable by June 2011. In Europe, a carbon credit, which represents 1 tonne of carbon dioxide, was selling Monday for about four times as much, at 13 euros.

It's a good bargain, said Mr. Bitton, but with no regulation, there is no underlying value for these assets, and hence, very little activity on the market. Heavy emitters aren't interested in spending money on a theoretical ton of carbon dioxide that at the moment has no real value, said Ms. McCarthy.

Canadian industry may never get into the carbon trading business at all, says Christopher Green, professor in Economics at the McGill University School of Environment, and co-author of an assessment paper for a technology-led climate policy prepared for the Copenhagen Consensus on Climate project.

"Copenhagen allowed a new beginning," Mr. Green said. "It moved the centre of power in terms of where climate policy is going to be made, away from the United Nations and the European Union, and moved it towards a rather funny group of emerging economies like China, Brazil, India, South Africa ... and the U.S. sort of joined up with that."

He said he believes China's and India's emission reduction policy will focus on creating low carbon- or non-carbon-emitting technologies without making date-specific or absolute commitments to reducing emissions.

"If the U.S. were to do the same, that wouldn't be a bad basis for climate policy, said Mr. Green, who is a fervent critic of cap-and-trade and an advocate of this so-called, technology-led policy.

According to Environment Canada, however, Canada will have a cap-and-trade system for reducing greenhouse gas emissions, but will follow the U.S.'s lead.

"Canada will work on its own cap-and-trade market, one that is designed for specific Canadian industrial sectors," Environment Canada said in the email. "We will do this in a way that can be easily integrated into a North American market for carbon permits." But the department adds that "it makes no sense" to proceed on a Canadian plan that is not harmonized with one in the U.S. because of close integration of the two economies.

In a speech to Calgary business leaders Monday, Federal Environment Minister Jim Prentice said Canada will not adopt a federal cap-and-trade program or implement specific regulations for certain industries, such as the oil and gas sector, unless the U.S. goes that route.

Cap-and-trade in the U.S., at least at the federal level, seems to be on hold indefinitely.

The winner of the recent Senatorial elections in Massachusetts, Republican state senator Scott Brown, opposes cap-and-trade and his victory means Democrats will no longer control the 60 Senates votes needed to overcome filibusters.

"Before the elections in Massachusetts, I would say passing the cap-and-trade legislation in the Senate was 50-50," said Kevin Grandia, manager of environmental blog, DeSmogBlog, and a contributor to The Huffington Post. "Now I would say it's definitely an uphill battle and put it at 80-20."

Adele Morris, fellow at the Washington-based think tank, the Brookings Institution, agrees.

"I'm not declaring cap-and-trade dead," she said. "I think that for it to get out this year a lot of stars would have to align in a fairly unlikely way."

But Mr. Bitton and Ms. McCarthy remain undeterred.

"The question is not if there will be a cap and trade system, but when," Mr. Bitton said.

Ms. McCarthy added that even if there is no federally regulated plan, several provinces and U.S. states can form cap-and-trade accords between themselves, such as is occurring in the Western Climate Initiative (WCI).

WCI partners include Quebec, B.C. Ontario and Manitoba in Canada and several U.S. states, among them California, which have recommended what they call a "broad"cap-and-trade program. Mr. Bitton said the Montreal Climate Exchange is ready to service this market.

Despite the political developments in the U.S., Ms. Morris and Mr. Grandia agree with the heads of the exchange that at some point, carbon in North American will have a price. "I don't think there is an alternative to [a price on carbon] Ms. Morris said. "There is nothing that is even close to a substitute [for addressing climate change].

gvaliante@nationalpost.com

FACT BOX

How the cap-and-trade system would work

• The Montreal Climate exchange benefits primarily heavy emitters and green project developers as a way to hedge.

• A green project developer will create a wind farm, or another technology that reduces greenhouse emissions. They will have to get certification from government that their project is acceptable. The amount of greenhouse gasses their project reduces will be quantified and they will be issued credits accordingly. For example, if their project reduces 1,000 tonnes of greenhouse gas emissions per year, they will receive 1,000 carbon credits from the government.

• The developer can then sell a future contract on the Montreal Climate Exchange. He is hoping that the price of carbon falls when the contract expires so he makes money.

• A heavy emitter whose greenhouse gas emissions go over the limit imposed by government must buy carbon credits to offset his emissions. For example, if his company emits 1,000 tonnes more carbon dioxide into the atmosphere than is permitted, he must purchase 1,000 carbon credits to fall in line with government regulations.

• The heavy emitter will purchase a contract on the exchange, hoping that the price he pays for the carbon credits the day he buys them, increases when he is forced to use them, saving him money.

gvaliante@nationalpost.com

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