Canadian Carbon Market

Climate warming has been accelerating globally and is now one of the major environmental challenges facing humanity. To face up to this important issue, causing severe environmental and economic risks, the Government of Canada published in March 2008 the final version of the Regulatory Framework for Industrial Greenhouse Gas Emissions to reduce these emissions on its territory starting in 2010.

Energy development in Canada has been increasing for the last years. In such a context, the federal government has decided to adopt intensity-based greenhouse gas (GHG) emissions reduction targets. These targets are designed to promote a balance between Canada’s economic growth and the need to reduce GHG emissions. In addition to internal reduction through the development of new technologies, key regulated industrial emitters will be able to choose from several compliance measures in order to ensure compliance with their GHG emissions reductions obligations. One of these measures, the market solution is a private initiative and is called “the carbon market”.

Thus, in collaboration with the Chicago Climate Exchange® (CCX), the Montréal Climate Exchange (MCeX) has decided to launch trading of futures contracts on Canada carbon dioxide equivalent (CO₂e) units. These contracts will allow regulated industrial participants to manage their emissions risks at the lowest cost while also creating continuous incentives for technological innovation. The new MCeX contract, traded on the Montréal Exchange's (MX) electronic trading platform SOLA®, will give key regulated industrial emitters and other potential stakeholders the price signals needed to measure “the price of a ton of carbon”.

Proposed futures contract and advantages offered

The futures contract proposed by the MX is based on 100 Canada carbon dioxide equivalent (CO₂e) units. Each unit, as defined by the Government of Canada, allows for the emission of one metric ton of carbon dioxide equivalent (CO₂e)¹.

Now that the federal government has established mandatory reduction targets starting in 2010, MX and MCeX will offer through futures contracts:

• a price discovery process which can generate the price signal so highly coveted by industrial companies; and
• price risk management facilities.
  

The MX is bringing its values of transparency and security to this new market. The environment market will attract a large number of economic agents such as industries, investment banks and investors, thereby ensuring the liquidity of the futures contracts on Canada carbon dioxide equivalent (CO₂e) units.

Tradable Canada carbon dioxide equivalent (CO₂e) units eligible for physical delivery are:

1. regulated emitters’ credits; and/or
2. offset credits.

¹ GHG emissions are calculated based on the equivalent quantity of carbon dioxide required to produce a similar warming effect. The six GHGs are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, sulphur hexafluoride and perfluorocarbons.