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.

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