Thank you. The Montreal Exchange is honoured to have been invited to appear before this committee.
In our opinion, at this stage of the development of the Canadian climate exchange, we need a clear and precise understanding of government regulation. Ideally, this would be a system that included mandatory reduction objectives combined with compliance mechanisms. This is the central theme of our presentation.
In our opinion, this would foster the implementation of a price setting mechanism for emissions trading. It has to be said: Canada has enormous potential. As you know, CO2 emissions are approximately 750 million tonnes a year. It has to be said and repeated often: this is the highest quantity per capita in the world.
The solution advocated by the Montreal Exchange is simply based on the creation of an exchange. It is very important to state over and over again that this solution does not require any financial contribution from the government. What is the Montreal Climate Exchange? Essentially, it is a partnership between the Montreal Exchange and the Chicago Climate Exchange, as was announced on July 12.
The Montreal Exchange is Canada's financial derivatives market. It is the oldest exchange in Canada. Its roots go back to the 1830s. It's important to note that in 1975 the Montreal Exchange became the first market in Canada, and the second in the world, to launch equity options. It launched financial derivatives on futures in 1980. In 1999 we convinced the Toronto Stock Exchange to buy our stock business so that we could specialize in the derivatives market. In 2000 we were the first North American derivatives market to commence the full automatization of our exchange. In 2004 we created the Boston Options Exchange, which is a unique market in U.S. equity options business. Our partners are UBS, JP Morgan, Morgan Stanley, Citigroup, CS First Boston, and the Boston Stock Exchange.
The role of the Montreal Exchange in this market is that we are the technical operators of the exchange. We are the largest shareholder of the Boston Options Exchange. I think it's important for this committee to know that this is the first time the Securities and Exchange Commission has allowed a non-U.S. exchange to be the operator in the U.S. marketplace.
Furthermore, the Montreal Exchange is recognized as a market operator in the United Kingdom by the Financial Services Authority. We are recognized by l'Autorité des marchés financiers in France, and we are recognized as a futures market by the Commodity Futures Trading Commission in the U.S.
The strategy of the exchange the last four or five years has been to focus on the liquidity pools, which are in London, New York, and Chicago. As a result of the strategy, we have experienced a growth of 25% compound annual for the last five years. So far this year our growth is north of 40%.
On a daily basis, we trade some $70 billion worth of notional value on the Montreal Exchange. Our clearing corporation is central to our operations. It is a double-A-rated Standard & Poor's agency and runs a book of notional risk of some $600 billion to $700 billion. This is ongoing.
For its part, the Chicago Climate Exchange is probably better described through its founder, Dr. Richard Sandor. Dr. Sandor is the creator and architect of the financial derivatives business. He designed the first specifications of the T-bill futures contract for the Chicago Board of Trade in the early 1970s.
Dr. Sandor and I have had a long and great relationship over the years. For many individuals, like me, who have made derivatives their career, he is unquestionably a gentleman with extraordinary knowledge and foresight. He launched the Chicago Climate Exchange about six years ago. His first big launch, though, was in 2004 after the United Kingdom and the European Community finalized the terms for an emissions trading scheme. He launched the European Climate Exchange, which is today the largest climate exchange in the world.
The Chicago Climate Exchange runs a voluntary program in the U.S. Many Canadian companies, because they lack a system here in Canada, have already joined this exchange. There is slippage going to the U.S. already. The point is that the Chicago Climate Exchange is an organization with depth of knowledge, intellectual capital, and lots of know-how on how to build and launch exchanges, primarily in the climate area.
With the technical expertise of the Montreal Exchange, our infrastructure, our self-regulatory framework, our experience and knowledge in managing markets, along with the intellectual capital in climate of the Chicago Climate Change, the partnership that we have created is uniquely positioned to build here in Canada a very efficient, professional market, with great transparency in the world of emissions trading. A key factor here is our clearing corporation, the Canadian Derivatives Clearing Corporation, which is 100% owned by the Montreal Exchange. It's the only one in the country. Trading is one thing, but clearing and risk management is truly the underlying value-added service of such an organization.
You may ask, why a climate exchange? There are concrete examples over the last 20 years where trading mechanisms, trading schemes, have proven effective in helping to reduce emissions. The most concrete example is the acid rain reductions that we have seen in the U.S. with the sulphur dioxide program that was put in place by the EPA back in the 1980s. Of course, the carbon dioxide program in Europe is functioning very well. We can see some reductions that are in line with the targets that have been developed. Our view is that there now is sufficient precedent or sufficient substance in the marketplace for Canada to move decisively and use a climate exchange as a policy tool and as a tool also for enterprise to reduce carbon dioxide emissions.
Naturally, a climate exchange will ensure that costs are minimized and stakeholder flexibility is maximized, without any injection of public funds. It will also allow firms that invest in technological emission reduction solutions to be in a better position to manage their investments and get the most from the capital expenditures they devote to this activity.
It is clear that a market promotes the creation of incentives. In the case of GHGs, it would help reduce emissions in a cost-effective and permanent manner. However, to reduce GHGs permanently, a major reorganization of investments must take place. We would, of course, have to opt for better performing systems as technology evolves.
Thus, firms must therefore invest in innovation and adopt new technologies. For corporate decision-makers, the issue is not whether or not they should invest; rather, they must decide which technologies they should invest in, to what extent, in what way and how much risk should they take. This is precisely where the market comes into play: it allows decision-makers to obtain the best answers possible to these key questions.
The solution lies in price determination. However, the stock market is the ideal mechanism for price discovery. It is common knowledge that price signals are a very effective mechanism in making key decisions.
Therefore, what are the main characteristics and elements of a market-based solution? First—and this is fundamental—the government must set emission reduction targets. Without these targets and a mandatory framework, the market will simply not exist. Then, we need flexibility. The system must enable emitters the necessary latitude with respect to the manner in which objectives are reached. The emitters are responsible for answering critical investment questions.
Some firms will be able to reduce their emissions quickly since it is less costly for them to do so and they have access to technology, while others will adopt a different approach, buying credits from corporations that have a surplus of them. It is important to mention that the emissions market–