Bill C-30 (39th Parliament, 1st Session) Committee on Feb. 27th, 2007

[Andrei Marcu]

I will take that if you'll allow me, Mr. Bigras.

It is a market for carbon, and it's a market of ideas, and it's a market of products. There are a number of exchanges in Europe--I think six or seven, we lost track--and most of them are our members who offer this service, and various companies are members. The European Climate Exchange, which is related to the Montreal Climate Exchange, is the predominant exchange at this point, but there are others.

At some point in this market, there is going to be a rationalization, and there will be a limited number of players. There will continue to be over-the-counter trading and slowly they will be moving to a model with some over-the-counter trading and some exchange trading. That is a typical model that happens in any commodity.

It is normal that at this stage you see a lot of people getting into the market, and over time you will see a rationalization and probably one or two of these exchanges surviving. I wouldn't want to even speculate as to which ones out of them. Indeed, it is a large number, but it's a normal phenomenon at this stage of the market.

[Luc Bertrand]

Mr. Chairman, my view is that there will be consolidation.

There will be a consolidation of platforms in Europe, but you nevertheless have to understand that Canada is a small jurisdiction in economic terms. You have to be realistic.

In addition, over-the-counter activity is already significant and will continue to be so. Our challenge is to ensure that we can build a standardized and transparent market that is also accessible to all players and all persons concerned. The worst thing we could do right now would be to make a decision that would ultimately favour a single elite group of major emitters.

We propose a platform with the Chicago Climate Exchange. We're going to try as far as possible to meet the standards of the CCX, which I sense will be the dominant platform in the United States, once the U.S. Congress has decided this question. That will likely happen because draft legislation to that effect has already been tabled.

The Montreal Exchange has tried as far as possible to harmonize its practices with those found in Europe and the United States. That's why we decided to associate with the CCX. There will be over-the-counter activity, and that's understandable. It may be another market, such as the Toronto Stock Exchange, that will do it, but as regards specifically derivative activity, it's not just a matter of knowing which exchange does it. That exchange also has to be able to offer counter-party risk management, that clearing corporation I told you about earlier. There's only one in Canada, and it's the property of the Montreal Stock Exchange. Without that clearing corporation, there won't be any liquidity. That has to be clearly understood.

To answer your question more specifically, I'd say there will continue to be a large over-the-counter market, and you can't do anything about that, but we at least have to try to adopt another, more transparent vehicle, a standardized market such as that of the Montreal Stock Exchange.

[The Chair, Conservative, Laurie Hawn]

Thank you very much.

We'll move on to Mr. Manning.

[Fabian Manning, Conservative, Avalon, NL]

Thank you, Mr. Chair.

I'd like to follow up on the previous questions to Mr. Delbeke. Since you're undergoing a review now of your experiences with the carbon markets in the EU, maybe you could elaborate on what Canada can learn from those experiences, both positively and negatively.

[Jos Delbeke]

First, simplicity and certainty for the market operators matter a lot. We have seen that a long-term signal and stable market conditions are critical; hence, a mandatory and absolute cap system is the most efficient way to go.

The other part of the question is whether or not we have a fragmented market in Europe. I think we have not been concentrating very much on the traders and the trading institutions. In fact, we have left that to the private sector. But we see in Europe that a tonne of carbon dioxide is being traded, a tonne of greenhouse gases is being traded all along the EU. There is one price and there is one basic exchange system, even if the trading institutions are different. We see that as a highly integrated market in which tonnes of carbon dioxide are being traded between Lithuania, Spain, Poland, Germany, and the UK. In that sense, simplicity again matters a lot.

Thank you.

[Fabian Manning, Conservative, Avalon, NL]

Thank you, Mr. Delbeke.

I have a question for Ms. Donnelly. Air quality in Canada has worsened over the past decade. We've seen many reports, and many witnesses have come forward and advised us of that. According to the OECD, in a recent study Canada ranked near the bottom. I'm just wondering if you could put forward some ideas on how we should address that in the short, medium, and long terms.

[Aldyen Donnelly]

Again, obviously in terms of emissions trading, I support market measures, and we should get started right away. The one thing I would throw out there is that if we're running a refinery or an electricity generation unit, and we have to comply with NOx and SOx and fine particulate standards, 80% of our immediate least-cost solutions to those challenges are solutions that drive up our greenhouse gases.

In greenhouse gases, it's the opposite. If I have to drive down my greenhouse gases, 80% of the first measures that I'm going to do to drive down my greenhouse gases will also drive down the other measures. I strongly believe in a multi-pollutant approach, but if you're going to get something right, get the greenhouse gas side right, because you're getting a side benefit in the reduction in pollutants to the extent that you're keeping your money at home, whereas when you're working really hard on short-term objectives for NOx and SOx and PM10, you could be driving greenhouse gas emissions up.

The other thing I would say is this. While I have concerns about the CDM market, I'm a strong advocate of international trading. We should absolutely have the right to employ in Canada reductions that originate in plants that would have been legal to build and operate and to make products that are legal to sell in Canada. It's an easy criterion to build into a domestic rule for international credits. When you do that, I think you'll find that at least most provinces will overlay a discriminatory provincial regulation over any rule the federal government writes, because a dollar we send offshore is minus a dollar out of our GDP, and a dollar we spend at home gets us a local air quality improvement and it has a $2.50 multiple.

So any government acting prudently will have favour keeping the money at home. That's not opposing international trading entirely. It's just having a rule that discriminates to some extent.

[The Chair, Conservative, Laurie Hawn]

We're going to move on to Mr. Scarpaleggia, for five minutes, please.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

Thank you, Chair.

Ms. Donnelly, you mentioned a couple of things at the outset. You said that having a domestic trading system would somehow--I can't remember the exact phraseology--penalize consumers of hydro-electricity and subsidize producers and I guess consumers of oil and gas. I didn't quite get that. Could you...?

[Aldyen Donnelly]

I'm glad you raised that. First of all, I want to say that what I'm about to say isn't a criticism of Europe. If you look at the national action plans that have been proposed for 2008 through 2012 in Europe--and I excerpted key information from the U.K. plan as an example in my submission to you--for the most part, they are, and I'm distinguishing between the EU allowance market and the Kyoto quota market when I say this—

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

What's the difference between an allowance market...? I don't understand the terminology.

[Aldyen Donnelly]

The European Union has created an allowance market that is separate from the Kyoto market, but slightly linked. Between 2008 and 2012, overall, it's fair to suggest that when they come into compliance with their domestic EU cap-and-trade rule, most European countries will cut emissions a further 5% to 7% from what they were in about 2004. It's also true that what I call the European trading zone's Kyoto quota supply exceeds Europe's existing emissions by about 11%. So domestically, Europe is creating a market that is driving emissions down, but how you deal with that is completely different from your question of what the Kyoto market means to you. Those are two different stories, two different discussions.

Going back to the domestic European market, which is valid--I'm not saying this is wrong--most of the countries have shorted the allowance allocation to electricity generators in the order of 30% and then issued business-as-usual allowances to everybody else that's a major emitter. If Canada were to then jump into that market, there would be implications for our doing a domestic allocation that's not the same as theirs. However valid that allocation is for Europe, and I agree it's valid, it's not a valid allocation for Canada; so there's a dilemma here. I'm saying that's one of about ten reasons for us to think more along the lines of the California model than the European model. It's not a criticism of the European model. Circumstances are different.

[Francis Scarpaleggia, Liberal, Lac-Saint-Louis, QC]

It seems to me that when you create a trading system, those sectors that have reduced their emissions, such as the hydro-electric sector or the aluminum sector, stand to benefit tremendously by selling their credits to other sectors that have not reduced their emissions. So sectors like the hydro-electric sector make windfalls.

[Aldyen Donnelly]

Again, let's do them separately. In Europe the only companies that have to reduce to comply are electricity companies. Nobody else has to reduce. If we laid off the whole national target on electricity companies in Canada and did not oblige oil and gas producers to reduce, we'd essentially be taxing Canadians for their right to consume made-in-Canada energy. I don't need to walk you through the politics of that.

The dilemma is that Europe has given European oil and gas producers all the allowances they need to operate on a business-as-usual basis, because they've elected to lay off the whole reduction obligation on electricity companies. If we then do an allocation in Canada that causes Canadian oil and gas producers to have to buy offsets, by definition the day after we do that.... If I have two oil wells up north and one is owned by a large European oil and gas producer and one is owned by an independent Canadian oil and gas producer, five minutes after I'm completely linked to the European market but have a reduction obligation on the Canadian oil and gas producer, that means the European can buy the Canadian well at 40¢ on the dollar.

Europe hasn't done anything wrong. It has just created a situation that's very difficult for us.

[The Chair, Conservative, Laurie Hawn]

Okay. We're going to have to end that there.

Mr. Watson, for five minutes, please.

[Jeff Watson, Conservative, Essex, ON]

Thank you, Mr. Chair.

Thank you to the witnesses for their presentations.

Mr. Delbeke, I'd like to start with you. You made a comment earlier that investing in China was worthwhile, environmentally, in terms of investing in projects to clean up their air. I want to ask you a question of responsibility here. Should companies or nations outside of China bear the responsibility for cleaning China's environment?

[Jos Delbeke]

I would address the comment in the following way. What I think is not sufficiently present in the discussion we have had so far is that no one is forced to buy CDM credits, because the system is open. It's a free decision of every single company or market operator to go for CDM credits. They go for CDM credits because they think that is a cost-effective way of securing the compliance the system is imposing on them.

So it's a free choice, first, to go for it. Second, in that context, we have to take a very pragmatic view and reduce emissions where it is the cheapest. Since cost-effectiveness leads to a reduction of emissions wherever in the world, it has the greatest impact because we went for the low-cost solution.

I think that all systems, the European system as well as any other systems we have observed, have a de facto balance between what they do domestically and what they do externally. That balance creates an overall cost-effectiveness that is quite attractive for both sides--those who are delivering the credits and also those who are reducing their emissions.

Now that I have the floor, I cannot resist making one correction on what I heard from the previous speaker--

[Jeff Watson, Conservative, Essex, ON]

Actually, Mr. Delbeke, I have some other questions I'd like to get to, and I actually have a minimum amount of time in which to ask them.

In terms of investing in projects in China, for example, there are some interesting other possibilities. China has an expensive space program. They have an expensive nuclear weapons program. They are undergoing a multi-billion-dollar facelift for their Olympics.

In some respects, we're setting up a system in which companies that aren't able to make a target in the short term are going to have to look at investing in projects. Let's just take a Canadian company that chooses--as you say, it's a free choice--to invest in a CDM project in China, thereby helping to underwrite the cleanup of their environment over there. Interestingly, competitively, on the other side of it, China is in a position to launch $10,000 cars into our market, which could hurt other Canadian companies.

We end up in some interesting situations with this type of a trading system. Ms. Donnelly, you raised the issue of investing in projects that helped the largest hog competitor compete with or out-compete our own people here. Does this not concern anyone here, that in this rush to clean up the global environment we're also creating some difficult competitive positions for our own industries here at home?

Ms. Donnelly, do you want to comment on that?

[Aldyen Donnelly]

You know, a lot of what we're trying to address here are expectations. The average Canadian electric utility that's investor-owned and that has a triple-A credit rating wouldn't be buying credits from those hog producers, even if you made it legal, because we don't derive benefit in the long term by taking our own hog producer electricity customers out of business.

But you would think that government would be thinking about those things, yes.

[Jeff Watson, Conservative, Essex, ON]

Mr. Marcu, you said that there needs to be a significant realignment of capital spending. You go on in your presentation to say: “The world cannot make an overnight transition to a non-carbon energy economy.”

Clearly, there's a lot of capital investment that has to go on in Canada. There has been some discussion about whether the Kyoto target and timeline is something that would be put into an amendment to Bill C-30 to enshrine it as a short-term target. Can we achieve the kinds of capital investments we need to transform our economy if such a thing is undertaken right now, or would we see, in the short term, an exodus, or a potential exodus, of capital invested in other parts of the world, if you will?

[The Chair, Conservative, Laurie Hawn]

May we have a quick answer, please?

[Andrei Marcu]

Mr. Watson, you cannot decarbonize your economy overnight. You can start to inform the people who make the investment of the best way to make that investment. The only way, at least that I know, is to have a price mechanism. If you don't have a price mechanism, you make a cost-plan type of decision, because we are driven by a market economy, and that is driven by price. It may not be the ideal situation, but that's what we have right now.

[The Chair, Conservative, Laurie Hawn]

Okay, thank you.

We'll move on. We'll have Mr. Godfrey for five minutes, please.

[John Godfrey, Liberal, Don Valley West, ON]

Mr. Delbeke, I have a feeling that you were a little frustrated there.

Is it true, as Ms. Donnelly has asserted, that in Europe, only electrical companies have to reduce their greenhouse gas emissions?

[Jos Delbeke]

Thank you for the question. That's exactly what I wanted to address.

It is not true. In fact, all installations have received less allowance than what their expected emissions are. But it is true that the power sector has been asked to make deeper cuts compared to other sectors, because the power sector is somewhat less exposed to international competition compared to the oil sector, the gas sector, pulp and paper, and other energy-intensive activities.