U.S. and Canadian governments will introduce national cap and trade systems to curb greenhouse gas emissions: CIBC World Markets

Oct 10, 2007


    Setting a price on emissions is the best way to sustainable reductions

    TORONTO, Oct. 10 /CNW/ - CIBC (CM: TSX; NYSE) - The next U.S.
administration will implement a national carbon cap and trade system to cut
greenhouse gas emissions and pressure Ottawa to do the same, forecasts Jeff
Rubin, the chief economist and chief strategist at CIBC World Markets.
    Speaking at the launch of the Conference Board of Canada's latest Carbon
Disclosure Project in Toronto today, Mr. Rubin stated that growing public
pressure and the existence of trade and cap systems in most U.S. states will
force the next administration in Washington, Democrat or Republican, to
implement a hard national cap and trade system to deliver absolute reductions
in carbon emissions.
    "When Washington adopts firm and hard emission reduction targets, you can
rest assured that it will require that its major trading partner, Canada, do
the same," says Mr. Rubin. "Just as most environmental legislation in this
country finds its genesis in earlier U.S. state legislation, Ottawa's carbon
polices for tomorrow is being drafted by U.S. state legislatures today." Mr.
Rubin notes a cap and trade system is the best way to achieve a sustainable
reduction in greenhouse gas emissions in our economy because it turns to the
market for solutions. "For environmental progress to be sustainable it must
first become economically viable. I for one believe that the market mechanism
should be and will be the principle means for sustainable reductions.
    "But for that to happen the market must first be incented to act. The
principles of profit maximization must be realigned with the task of
decarbonizing the economy. That realignment is not possible as long as carbon
emissions have no price and are effectively free to the emitter. What is still
lacking today is a regulatory framework in which market forces can act." He
told the audience of institutional investors, corporate executives and
government policy makers that unlike the blunt instrument of carbon taxes, cap
and trade systems are anchored with a direct carbon reduction target while
rewarding economic efficiency. "Government doesn't have to guess how high to
set a tax to achieve a given reduction in emissions. Instead, government
starts with its emission reduction target and the market sets the price for
emission credits.
    "Through trading, carbon is burnt in the most economically efficient
manner. At any point in time, firms can either choose to buy emission credits
in the open market or undertake the costs of carbon abatement themselves,
depending on which is more economic. Rising emission credit prices over time
make abatement measures increasingly affordable as well as incenting carbon-
reducing technological change. The pioneering efforts in NOX and SO2 trading
systems that arose out of the campaign against acid rain in the late 1980s are
directly linked to inducing technological change that has brought down the
cost of scrubbers in power generating stations."
    He believes that the price of emission credits will ultimately depend
upon the stringency of the reduction target. But, in order to gain real
economic traction, most research suggests that reduction targets will need to
be somewhere in the $30 to $40 per ton range, While he notes that the U.S.
will be a relatively late comer in setting up a national trading system for
carbon emission, he believes the Americans are likely to get it right. "The
U.S. experience in cap and trade systems for SO2 and NOX is a shining example
of how if properly incented the market can get the environmental job done.
    "Over the last 25 years, there has been a 40 per cent reduction in
emissions of these gases into the atmosphere. As such, these programs are a
template for future carbon management, unlike the almost farcical launch of
the European carbon exchange, which saw emission credits plunge in value from
over 30 Euro a ton to virtually nothing in the space of months. That's what
happens when you hand out ten times as many emission credits as there are
emissions."
    Mr. Rubin also advised the audience that the transportation sector -
which accounts for 25 per cent of carbon emissions - will remain out of the
reach of a cap and trade system. But again he sees the market as providing the
answer without a need for any taxes or subsidies. "$100 a barrel oil will soon
see American motorists paying over $3.50 per gallon for gasoline and Canadian
motorists paying around $1.30 a litre at the pumps within the next 12 months.
No great moral suasion from government will be needed to wean the populace off
driving gas guzzling SUV's and pick-up trucks. Pump prices will do all the
talking."
    "In the end we must all come to understand that the decarburization of
our economy is not simply about the substitution of different forms of energy
for oil, gas and coal. The answer can't all be in the supply curve.
Ultimately, the task of decarburizing the economy must be about reducing the
demand for energy itself, and that requires a radical change in the structure
of our economies as well as in our economic behaviour."

    CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
investment banking, and merchant banking to clients in key financial markets
in North America and around the world. We provide innovative capital solutions
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For further information:

For further information: Jeff Rubin, Chief Strategist and Chief
Economist, CIBC World Markets at (416) 594-7357, jeff.rubin@cibc.ca or
Kevin Dove, Communications and Public Affairs at (416) 980-8835,
kevin.dove@cibc.ca


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