by PATRICK LEJTENYI

Montreal may be considered a backwater by some among the dizzying heights of high finance, but it may also become a trailblazer in a new field of public exchanges. Earlier this month, the Montreal Exchange, in a joint venture with the Chicago Climate Exchange, announced the creation of the Montreal Climate Exchange, a market for large polluters to buy and sell emission credits.

This is roughly how emission trading works: exchange members set greenhouse gas emission reduction targets within a certain timeframe. If the member—usually a large corporation—meets and exceeds its target, it can sell an emission allowance based on its extra cuts to the highest bidder. A member that doesn’t meet its targets has to buy the credits or face stiff penalties. Thus, companies that cut their pollutant emissions are financially rewarded, and those that don’t are financially punished.

Currently, Chicago has the only emissions exchange in North America, and its membership has been voluntary since it was created in 2003. Europe, however, has a mandatory climate exchange, thanks to the European Union’s adherence to the Kyoto Protocol’s emissions-reduction targets, and sees much more vigorous trading. Its 12,000 members are responsible for an estimated 40 per cent of Europe’s emission output. In Chicago, with its 200-member exchange, the right to pump one tonne of carbon dioxide into the air trades for about $5, says Léon Bitton, the vice-president of research and development at the Montreal Exchange; in Europe, with its 12,000 members, it costs about 20 euros (around $29).

As with any commodity, the market regulates the price, says Bitton. The more traders, the more the price can fluctuate.

No Made-in-Canada guidelines

But the Montreal Climate Exchange isn’t having the easiest of births. One problem is the federal government. Like the Bush administration in the U.S., the Harper government is no fan of the Kyoto Protocol. With a “made in Canada” approach to climate change expected to be unveiled in the fall, the Montreal Climate Exchange’s guidelines are as yet unknown. Will membership be mandatory, like in Europe, or will it be voluntary, like in the U.S.? That central question can affect the Exchange’s entire make-up and effectiveness.

“In the absence of strict government regulations requiring carbon emissions limits, this will never become anything more than a pilot project,” says Matthew Bramley of the Ottawa-based Pembina Institute, an environmental think-tank. “If you look at the EU, it’s a thriving market: in 2005 the volume of trading there was over $8-billion (U.S.). But the Chicago Climate Exchange, which isn’t government-enforced, the volume was only $2.8-million (U.S.). Exchanges only become commercial propositions when there’s a large enough volume.”

Bramley likes the idea of an exchange in principle—it’s a key component to the Kyoto Protocol—but worries that without any government support, it will languish.

“Under the previous federal government, there were plans to put into place targets for greenhouse gas emission reductions” by heavy industry, he says. “Environment Canada was drafting regulations, but that all ground to a halt with the last election.”

One way some U.S. states are getting around federal lethargy is by setting up their own mandatory emission limits. But that system may not be coming to Canada, Bramley says, because many provincial governments, including Quebec’s, aren’t interested.

Chinese lessons

If Europe is anything to go by, there is a large potential for success in greenhouse gas emission trading. In May, the World Bank reported that the trade in carbon dioxide emissions grew in 2005 to $10-billion (U.S.), a 10-fold increase over 2004, with the EU accounting for 75 per cent of the market, although almost half of the total amount of emissions reductions came from the developing world. The biggest buyers of the 453.5 million tonnes of carbon dioxide credits sold in 2005 were Japan, Britain and Italy. The biggest seller by far was China. “To be fair, the Chinese government has been implementing a number of policies to reduce fossil fuel use,” says Bramley. “China gets a lot of bashing from the Bush administration because China doesn’t have emission reduction targets” (the U.S. complains about Kyoto because only developed countries are required to reduce greenhouse gas emissions).

Other big sellers are Brazil, the rest of Latin America and India.

But whatever the federal government decides to do, says the Montreal Exchange’s Bitton, they should be ready to roll six months after the feds outline the “made in Canada” approach.

“We already have companies knocking at our door, we already have companies trying to generate credit,” he says.