June 2, 2008 / 1:02 AM / in 10 years

Activity light in debut of Montreal carbon market

TORONTO (Reuters) - Just three contracts changed hands during the debut of Canada’s new carbon emissions market on Friday, but the operator said it sees strong potential for growth in a country that is among the world’s biggest polluters.

Montreal Exchange, Canada’s main derivatives market -- which was bought this month by Toronto Stock Exchange operator TSX Group -- launched the market so that polluters, speculators and investors have a platform on which to buy and sell carbon credits.

With Canadian energy and power producers facing mandatory greenhouse gas reductions in less than two years, the exchange said the time is right to help establish carbon prices.

“There’s unquestionably the advantage of being the first mover,” Luc Bertrand, chief executive of Montreal Exchange and deputy CEO of TSX Group, said in an interview.

“Before we get the kind of traction that it should have, we will have to do a lot of work to educate people.”

Four contracts are listed on the new Montreal Climate Exchange, a joint venture with Chicago Climate Exchange, an arm of British holding company Climate Exchange Plc. Friday’s trades came immediately after the opening bell.

Emissions trading has grown in recent years, especially in Europe, as governments attempting to curb climate change restrict the greenhouse gases corporations produce.

Since 1990, Canada’s emissions have risen faster than all of the other Group of Eight industrialized nations. The government’s proposed system to regulate industrial emissions is not finalized, but is due to come into effect in 2010.

On the new platform, heavily polluting companies can buy credits from those that produce lower emissions than allowed by law. Each credit contract is an entitlement to emit one tonne of carbon dioxide, or a government-approved equivalent.

Florence Dagicour, a carbon-markets lawyer at Fasken Martineau in Montreal, said companies trading on the Montreal market should have enough time “to not only reduce emissions, but to hedge their carbon risks” before 2010.


Bertrand and some observers said speculators would play a key role in the market as they do on larger carbon exchanges such as those operated by NYSE Euronext and Nasdaq OMX.

TD Securities, the investment banking and trading arm of Toronto-Dominion Bank, said it was the only Canadian market maker involved in the new emissions-trading venture.

That seems to confirm the findings of a consulting firm’s report earlier this year, which said Canadian banks are generally international laggards when it comes to carbon emissions trading.

European and U.S. financial institutions have gained experience from a European Union emissions trading scheme that started in 2005, but PricewaterhouseCoopers said in March that “few Canadian banks have even made public mention of positioning themselves for the realization of a regulated emissions trading market in Canada.”

While the European market is about 2 billion tonnes, Canada will represent 300 million tonnes, which is “quite a significant size,” said Philippe Rosier, president of Paris-based carbon trading and advisory firm Orbeo, another market marker in Montreal.

“A lot of companies who are partners in this market are already present on the EU ETS,” Rosier said, citing Rio Tinto’s Alcan division as an example. All European market players are looking “at the tremendous potential in North America,” he said.

Canada has committed to the United Nations Kyoto Protocol, a pact that requires it to reduce greenhouse gases to 6 percent below 1990 levels by 2012 -- a goal the country’s Conservative government says it cannot meet.

Instead, the government wants to reduce emissions by 20 percent by 2020, based on 2006 levels. Mandatory reductions would start in 2010 under the plan.

Some provinces, however, have taken a lead in attempting to reduce emissions. Quebec, Manitoba and British Columbia have joined a regional cap-and-trade scheme with several U.S. states, which may interfere with the Montreal exchange.

Observers say another possible complication is Canada’s federal technology fund, which will sell credits to industry and invest the proceeds in the development of clean energy.

($1=$0.99 Canadian)

Additional reporting by Lynne Olver; Editing by Peter Galloway

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