TORONTO - Investors beware: carbon emissions are very soon going to carry a price in the Canadian economy.
This warning comes from CIBC World Markets economists who reported Tuesday that companies representing 40 per cent of the Canadian stock market's value could be affected -- mostly negatively.
The study by Jeff Rubin and Benjamin Tal took note of the increasing likelihood of a North American market-based cap-and-trade system to reduce greenhouse gas emissions.
Such a system, already being developed in California and other states and proposed by prominent American federal politicians -- would limit total emissions of carbon dioxide and force polluters to bid competitively for quotas entitling them to produce emissions.
Rubin and Tal observe that the oil and gas sector and utilities contribute almost 40 per cent of Canadian emissions that contribute to global warming. These industries, along with emission-heavy industrial processes such as metal refining, "would be prime targets of any Canadian cap-and-trade system.''
However, utilities may be better positioned to pass along carbon costs than other sectors with less pricing power such as metal smelting or oilsands production, they say.
Overall, "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.''
Rubin and Tal see coal-fired utilities as the most vulnerable sector, "reflecting extremely high emission intensity per megawatt of power produced,'' while nuclear and hydroelectric power is generated carbon-free.
Next to coal-fired utilities, oilsands producers are highest on the investment bank's vulnerability index. "Producing a barrel of synthetic oil from the oilsands releases up to 120 kilograms of CO2 into the atmosphere, three times the equivalent emissions associated with producing a barrel of conventional oil,'' Rubin and Tal write.
"By 2017, planned production increases would push carbon emissions from roughly 30 million tons per year to over 100 million tons per year.''
Metal smelting and refining sector is also highly energy intensive and emission-heavy, and its abatement prospects are limited while "most smelters and refiners have little ability to pass along carbon costs to their customers in the form of higher metal prices.''
On the positive side, oil and gas pipelines operators are seen as likely winners.
"While pipelines transport massive amounts of energy, the sector itself is not a significant source of carbon emissions,'' they write.
Gold companies could also be net sellers of emission credits "due to low emission intensity in mining activities as well as above-average room to abate.''
In all, Rubin and Tal estimate that 90 enterprises account for almost half of Canada's greenhouse gas emissions, though some such as Ontario Power Generation are in the public sector.
"Nevertheless, most of the major sources of industrial GHG emissions come from the private sector. The majority of these are publicly traded,'' they write.
"We estimate that some 40 per cent of the TSX market capitalization will be directly affected by emissions trading, of which the vast majority will be adversely affected.''
Added Rubin: "Investors who have been rightly cynical of Canada's Kyoto commitments will soon have to recognize carbon liabilities as part of a firm's balance sheet,'' and "carbon exposure is broader than many investors yet suspect.''
