Investors need to recognize cost of green house gas liabilities, finds new CIBC World Markets report
Forty Per Cent of TSX Impacted by Projected Legislation TORONTO, Feb. 13 /CNW/ - CIBC (CM: TSX; NYSE) - Projected legislation to curb green house gas (GHG) emissions will have a direct impact on firms that make up 40 per cent of the TSX's market value, finds a new report by CIBC World Markets. The report also finds that the vast majority of these firms will be adversely affected by the implementation of an emissions cap and trading system. "Investors will soon have to recognize carbon liabilities as part of a firm's balance sheet," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Carbon exposure is broader than many investors yet suspect. "The full extent to which corporate valuations will be impacted by carbon risk will depend on the distribution of permits, the initial severity of the emissions caps and the rate at which they are lowered over time. At the end of the day, legislators will determine those parameters. But investors beware; carbon emissions are very soon going to carry a price in the Canadian economy." The report notes that the state of California has taken the lead in reducing GHG causing carbon emissions by establishing a statewide cap and trade system. The state, which is a huge energy consumer, seeks to cut its carbon emission levels back to its 1990 level by 2020. The report also cites efforts by the states of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont to cap emissions from major electric generating units beginning in 2009, with a 10 per cent cut planned longer term. In addition, a bipartisan bill is before the U.S. Congress seeking to establish a nationwide cap and trade system for GHG emissions. "Canada has generally followed U.S. environmental initiatives at both the provincial and federal level," adds Mr. Rubin. "It seems reasonable to assume that a system similar to those about to be implemented in California will soon be adopted by Canadian provinces as well." The report finds that a number of variables will determine an industry's vulnerability to GHG emission caps, such as the ability to pass along the cost of emission credits to customers as opposed to absorbing that cost in profit margins. Another determinant of carbon vulnerability is the industry's energy intensity. To the extent that carbon emission allowances raise the price of energy, those firms that are in more energy-intensive industries will be penalized, even if they themselves are not major purchasers of emission credits. The ability of firms to abate their emissions through better carbon practices will become increasingly important as the cost of emission allowances rises over time. The report notes that abatement can reduce required allowances that might otherwise have to be bought in the open market or create surplus credits that can be sold in the open market. In order to gain an overall assessment of carbon risk, CIBC World Markets has devised a Carbon Cap Composite Vulnerability Index based on a weighted average of the four measures of carbon vulnerability: emission intensity; energy intensity; ability to pass along costs; and abatement scope. Emission intensity is measured as kilotonnes of emissions of carbon dioxide equivalent per dollar of output. Energy intensity is measured as terajoules of energy per dollar of output. The ability to pass along carbon costs as well as scope for carbon abatement is based on data obtained from independent consulting sources. CIBC World Markets assigned a 30 per cent weighting to emission intensity and the ability to pass costs, while assigning a 25 per cent weighting to scope for abatement and 15 per cent index weighting for energy intensity. The index finds that the coal-fired utilities sector is potentially the most exposed sector of the economy to carbon risk, reflecting extremely high emission intensity per megawatt of power produced. Next to coal-fired utilities, oil sands producers rank the highest on the index. While the oil sands accounted for only 3.5 per cent of Canada's GHG emissions in 2004, some estimates suggest that a virtual doubling in production to 2 million barrels per day will account for over 40 per cent of the growth in national GHG emissions over the balance of the decade. The full CIBC World Markets Monthly Indicators report is available at http://research.cibcwm.com/economic_public/download/mifeb07.pdf. 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 and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.