CIBC's report on the potential impacts of Canadian GHG emissions trading

As reported in the Globe and Mail today, CIBC World Markets' regular Monthly Indicators newsletter includes an article on Canadian emissions trading entitled "Evaluating Carbon Risk in the Canadian Economy". Briefly, they evaluate the vulnerability of Canadian industry sectors to the impacts of a cap and trade emissions trading system, concluding that coal-fired power plants, the oil and gas sector, and metal refining are the most vulnerable. The bottom line of the article is "investors beware: carbon emissions are very soon going to carry a price in the Canadian economy," and affecting 40% of the TSX.

Here is a more detailed summary and as always some pithy comments.

The article starts out with the assumption that Canada will soon have a cap and trade emissions trading system for greenhouse gasses. Their logic is that Canada generally follows American environmental initiatives. California and an alliance of northeastern states (the Regional Greenhouse Gas Initiative) have each recently enacted cap and trade systems, and McCain, Obama and Lieberman's bipartisan bill could potentially create one at the federal level.

Based on this assumption, CIBC has created a "Carbon Cap Vulnerability Index". This rates Canadian industrial sectors based on a weighted average of four factors, as follows:

1. 30%: emissions intensity - kilotonnes of CO2e/dollar of output
2. 15%: energy intensity - terajoules of energy/dollar of output
3. 30%: ability to pass increased costs onto customers: consultant assessment
4. 25%: ability to reduce GHG emissions: consultant assessment

(The consultants in question are Marc Jaccard and ICF Consulting. Marc Jaccard is the Simon Fraser prof who works extensively on climate change policy in Canada; ICF Consulting recently produced the scenarios for the NRTEE's Advice on a Long-Term Strategy on Energy and Climate Change.)

The results of their analysis are as follows:

1. Coal-fired power plants are the most vulnerable because of their high emissions and low-emission competition (hydro and nuclear)
2. Oil and Gas are vulnerable because emissions are projected to triple; on the other hand, they have a lot of potential for abatement (nuclear power for heating, carbon sequestration) and may end up the marginal supplier for world oil markets, therefore able to set prices.
3. Metal smelting and refining are vulnerable because of high emissions intensity and high energy intensity. To make matters worse, they can't pass prices on and their developing-country competitors won't have GHG costs.
4. The chemical sector's vulnerability comes from high energy intensity and little room for abatement.
5. Oil and gas pipelines will likely be a winner, selling surplus credits and/or passing costs onto consumers.
6. Gold mining won't be vulnerable because it can switch to electricity and reduce emissions, but gold refining faces the same problems as the rest of the metals sector.

My comments:
Just two things to say. First, great to see this message getting out to investors (i.e. "take GHG regulation seriously), and interesting to read about it from a market analyst perspective as opposed to an ENGO perspective. Secondly, interesting to see CIBC talking about a cap-and-trade approach, since so far the Liberal's almost-completed system and the Conservative's hinting about their soon to be announced approach are both based on emissions-intensity, not an absolute cap. Would this affect the CIBC analysis? Potentially. The Liberal's approach used sectoral targets (i.e. different targets for each sector), and specifically stated that competition issues would be taken into account. So any export-driven industries were likely to be given weak targets.
I am assuming that the Conservatives will end up using a lot of the Liberal's earlier work on emissions trading, since they don't have much time and they have so far not been shy in recycling existing programs. If this is the case, we may see weak targets for their political constituents (oil sands), political targets (Ontario and Quebec manufacturing) and anyone with an effective lobby.
On the other hand, you never know - maybe Jaccard, ICF and/or CIBC have been talking to Conservative insiders - maybe we will have an actual cap and trade system after all. Let's hope so.

Link to Globe coverage
Link to CIBC news release (click on corporate releases - more info)
Link to CIBC report