U.S. and Canadian governments will introduce national cap and trade systems to curb greenhouse gas emissions: CIBC World Markets
Setting a price on emissions is the best way to sustainable reductions TORONTO, Oct. 10 /CNW/ - CIBC (CM: TSX; NYSE) - The next U.S. administration will implement a national carbon cap and trade system to cut greenhouse gas emissions and pressure Ottawa to do the same, forecasts Jeff Rubin, the chief economist and chief strategist at CIBC World Markets. Speaking at the launch of the Conference Board of Canada's latest Carbon Disclosure Project in Toronto today, Mr. Rubin stated that growing public pressure and the existence of trade and cap systems in most U.S. states will force the next administration in Washington, Democrat or Republican, to implement a hard national cap and trade system to deliver absolute reductions in carbon emissions. "When Washington adopts firm and hard emission reduction targets, you can rest assured that it will require that its major trading partner, Canada, do the same," says Mr. Rubin. "Just as most environmental legislation in this country finds its genesis in earlier U.S. state legislation, Ottawa's carbon polices for tomorrow is being drafted by U.S. state legislatures today." Mr. Rubin notes a cap and trade system is the best way to achieve a sustainable reduction in greenhouse gas emissions in our economy because it turns to the market for solutions. "For environmental progress to be sustainable it must first become economically viable. I for one believe that the market mechanism should be and will be the principle means for sustainable reductions. "But for that to happen the market must first be incented to act. The principles of profit maximization must be realigned with the task of decarbonizing the economy. That realignment is not possible as long as carbon emissions have no price and are effectively free to the emitter. What is still lacking today is a regulatory framework in which market forces can act." He told the audience of institutional investors, corporate executives and government policy makers that unlike the blunt instrument of carbon taxes, cap and trade systems are anchored with a direct carbon reduction target while rewarding economic efficiency. "Government doesn't have to guess how high to set a tax to achieve a given reduction in emissions. Instead, government starts with its emission reduction target and the market sets the price for emission credits. "Through trading, carbon is burnt in the most economically efficient manner. At any point in time, firms can either choose to buy emission credits in the open market or undertake the costs of carbon abatement themselves, depending on which is more economic. Rising emission credit prices over time make abatement measures increasingly affordable as well as incenting carbon- reducing technological change. The pioneering efforts in NOX and SO2 trading systems that arose out of the campaign against acid rain in the late 1980s are directly linked to inducing technological change that has brought down the cost of scrubbers in power generating stations." He believes that the price of emission credits will ultimately depend upon the stringency of the reduction target. But, in order to gain real economic traction, most research suggests that reduction targets will need to be somewhere in the $30 to $40 per ton range, While he notes that the U.S. will be a relatively late comer in setting up a national trading system for carbon emission, he believes the Americans are likely to get it right. "The U.S. experience in cap and trade systems for SO2 and NOX is a shining example of how if properly incented the market can get the environmental job done. "Over the last 25 years, there has been a 40 per cent reduction in emissions of these gases into the atmosphere. As such, these programs are a template for future carbon management, unlike the almost farcical launch of the European carbon exchange, which saw emission credits plunge in value from over 30 Euro a ton to virtually nothing in the space of months. That's what happens when you hand out ten times as many emission credits as there are emissions." Mr. Rubin also advised the audience that the transportation sector - which accounts for 25 per cent of carbon emissions - will remain out of the reach of a cap and trade system. But again he sees the market as providing the answer without a need for any taxes or subsidies. "$100 a barrel oil will soon see American motorists paying over $3.50 per gallon for gasoline and Canadian motorists paying around $1.30 a litre at the pumps within the next 12 months. No great moral suasion from government will be needed to wean the populace off driving gas guzzling SUV's and pick-up trucks. Pump prices will do all the talking." "In the end we must all come to understand that the decarburization of our economy is not simply about the substitution of different forms of energy for oil, gas and coal. The answer can't all be in the supply curve. Ultimately, the task of decarburizing the economy must be about reducing the demand for energy itself, and that requires a radical change in the structure of our economies as well as in our economic behaviour." 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.