Good morning.
Thanks for the opportunity to make a presentation to the committee.
I have four points I would like to make. I will honour the ten-minute deadline.
Agcert is now an international business. Our market capitalization is approximately $500 million Canadian. We work all over the world.
Our business is to find capital to make technological improvements, primarily to farms, to agriculture, and commercialize and monetize the carbon assets that come from those technology improvements. The business model was created in Edmonton. The initial capital was found in the U.S. In 2002 and 2003 we signed up almost 2,000 farms in Canada and the U.S. to undertake these changes.
When the U.S. exited Kyoto and policy development stalled in Canada, we were faced with little opportunity other than to go outside of Canada and the U.S. We went to the capital markets, and we were effectively told to get out of Canada and the U.S. and go into Brazil. It was an amazing situation that we couldn't invest where we started the businesses. We were forced into countries with high risk, such as Brazil, Colombia, Venezuela, Indonesia, Malaysia, etc.
Today, I can tell you that we have just completed two projects in Canada. As far as I know, they're probably the first projects ever done in North America. They were done purely for the benefit of carbon emissions, with private money. I'll talk a bit more about that later. We changed the operating practices on two farms in Alberta.
The activity of trying to get capital to invest in Canada is not easy. That's my job. I am a competitor for capital. When we go to the board, I have to argue why you would invest in Canada instead of Brazil or Indonesia.
We have some 2,000 farms in all these countries that have been under contract outside of Canada for some time. We've invested in some 600 projects. Agcert has 88% of all agricultural approvals done in the United Nations today. We're a major player outside of North America.
What do we need to bring more capital into Canada? How do we create arguments so I don't have to stand before the board and try to defend a capital investment program where we don't know how much we'll make, we have some uncertainty in the cost, and there is absolutely no policy platform on which to base our investment decisions? What do we need to go into this next year of capital investment and try to pull more money into the country?
We think there are some 450 projects that can be undertaken in Canada, and about 2,000 in the U.S., if the right policy circumstances are in place. This means a liquid, free market and a policy environment that creates a safe haven for capital. It is not that the capital markets necessarily want to invest in countries where there is high risk; they just can't invest in countries like Canada and the U.S. in this current policy environment.
What do we need to invest? We need a registry, and we need a registry right away. There are registries that exist. The Emissions Marketing Association has a registry. The Chicago Climate Exchange has a registry. The CSA has a registry. The U.K. has a registry. France has a registry. California has a registry. There are lots of registries out there. There is absolutely no reason why we can't adopt, buy, or borrow one of these registries and deploy immediately.
This is an issue with respect to compliance with a treaty, as well. If I recall, the treaty has a compliance requirement that as at January 2007 you must have a registry in place. Canada is at risk of being in non-compliance with the treaty. It is a simple task. It is not complex.
A registry would give us the rules of the game for trading. We'd know what the requirements are for registration of our project types and our methodologies, and we'd know how to get the carbon credits moving through the registry.
We need methodologies. We spent in the order of $1 million to get our first methodology approved through the United Nations--an enormous amount of money, given that it was simply a paperwork activity. That was a critical investment. We suffer the fate of pioneers enduring the learning curve ourselves. That is a friction cost that can't be absorbed going forward. If there are lessons to be learned from what has happened in the CDM world, it's that the methodologies must be designed to maximize change.
Currently what has happened is that they've fallen into what's called the most conservative trap, and that is, they approve methodologies and then they modify methodologies to ensure that the recognition for the project development is minimized and that the identifier is minimized when calculating the offset benefits.
The most conservative trap is entirely a misinterpretation of what it was intended to be at the outset, but I've also seen trends inside of Canada with technical working groups, where they've fallen into the same trap. If the objective is maximizing change, the most conservative methodologies will undermine policy objectives.
A baseline was set for January 2001 to avoid stranding the pioneer projects. For many of the project types, for instance soils, the changes were undertaken some time ago, and to establish a baseline that's later than 2000 you'll end up with project types in pioneer investments that aren't recognized. Just imagine us. We spent on these two farms what would be the equivalent of about two-thirds of what the farmer would have spent--no capital improvements on their farms, strictly on environmental improvements. It was money that would never be found--into the environment. It's money that would go into new farm tractors or improvements in livestock. In absolute value, it's not a huge amount of money, but in relative value, it's well beyond the abilities of a farm to invest. This money is courtesy of the London Stock Exchange, incidentally.
We undertook these improvements in the fall of this year. If you set a baseline that said all projects going forward from 2007–we would end up with a stranded project, and effectively we've lost our money. We've sunk cost. In Canada it turned out to be a bad investment in the first place. The board proved me wrong.
These methodologies can also be provided with adaptive management. There's no intent, and it's almost impossible to say that what the science is today is stable. It is never stable. We've discovered along the way that the science is moving and the methodologies have to be adaptive as well. So periodically these methods can be opened on a five- or ten-year period to allow us to give some certainty to the capital investment as well.
Another way to move forward in domestic emissions is to recognize the existing, improved methodologies. There is committee work that has been ongoing in Canada with these. One, in particular, met in Victoria. They met in Halifax. They met in every city in between for the last 18 to 20 months, and we haven't got an improved methodology, we haven't got a recognized methodology. It's great for the technocrats to learn and understand, but there are existing, improved methodologies where there are huge amounts of investment that are recognized internationally, that can be deployed in short order.
Another urgent request that we make is that there's no price cap in the design and emissions trading. A price cap will limit capital investment. To argue that point, when I go to the board and say, “Why invest in Canada instead of Brazil?”, they say, “Well, your upward price opportunity or profit opportunity is limited in Canada if there's a price cap”, whereas if we were trading in the free market zone outside of Canada--current pricing in Europe is $20 Canadian--there is no limit on upward profitability and we make money as the market matures.
A price cap is also considered a peg in the market, and the arbitrageurs would take advantage of that peg. On a $15 price cap for somebody who's operating on an international basis, on an international portfolio, the play would become, let's buy in Canada, suck up all the Canadian domestic supply, because that price limitation is inherently less volatile than what we would find outside of Canada in international markets. So what you would see is a tendency for market players to buy up supply in Canada, hold Canadian supply, in order to hedge risk outside of Canada.
A price cap will reduce trade liquidity, and that's an example of how liquidity would be replaced or would be reduced.
There's also a redistribution of risk inherently in a price cap, in that what may not be a risk identified for large industry then becomes redistributed to other participants in Canada, other stakeholders in Canada. We're all going to pay for climate change and a price cap simply limits the risk to one group of stakeholders.
There are alternatives to pricing caps: generous and early stage allowances to minimize a short-term price impact to heavy industry, recognizing that heavy industry is dealing with 25- and 30-year capital turnovers, in some cases, and that's always been the argument for why they have to behave differently from anybody else. And it's absolutely true. My former client base was all heavy industry.
You can do it through allowances. Provide for allowances, and periodic reductions on allowances based on emissions intensities going forward over a capital cycle of say 25 years. That allows the capital asset managers, who are in many cases operating billions of dollars of capital investments, to say “I must reduce my intensities on this schedule going forward”, and then they can start managing their risk accordingly. Define their risk, and let them manage it.
And let market ingenuity determine the risk. If you provide the schedule, then you can start doing forecasting on what the cost impacts will be, and the market will adjust accordingly.
That's all I have to say. Thank you very much.