RBC pioneering CO2 trade in teething Canada market

TORONTO Fri Nov 7, 2008 10:46am EST

Smoke is emitted from a factory at Keihin industrial zone in Kawasaki, south of Tokyo October 22, 2008. REUTERS/Kim Kyung-Hoon

Smoke is emitted from a factory at Keihin industrial zone in Kawasaki, south of Tokyo October 22, 2008.

Credit: Reuters/Kim Kyung-Hoon

TORONTO (Reuters) - RBC Capital Markets, the investment banking arm of the Royal Bank of Canada, is forging ahead in Canada's still-nascent carbon market despite its massive policy risks, a director and trader at RBCCM said.

Canada's carbon emissions market, still fledging behind the absence of formal government legislation, forms part of a global trade in greenhouse gas emissions tipped to be worth over $100 billion this year.

"RBCCM is trading in pretty much every tradable carbon market in the world, including Canada," said Anthony D'Agostino, a director who runs origination and business development on the bank's five-man emissions sales and trading desk.

"We were by far the most active in Montreal in the beginning, in terms of volume," added Justin Woolsey, an emissions trader at RBCCM, referring to the Montreal Climate Exchange which launched on May 30.

Since launching an emissions desk last Spring, RBCCM has become active traders in the European Union Emissions Trading Scheme, the world's largest carbon market, and in the U.S. Regional Greenhouse Gas Initiative (RGGI), as well as on climate exchanges in Chicago and Montreal, D'Agostino said.

RBBCM are market makers on the Chicago Climate Futures Exchange.

While competitors Toronto Dominion Securities also have a carbon desk and make markets on Montreal, the rest of Canada's five big banks said they have yet to begin trading emissions.

LEGISLATIVE RISK

Although Canada is amongst the first developed countries outside of Europe to begin trading emissions allowances, interest as been limited since the government has yet to pass legislation that would make industry participation mandatory.

"Given that there isn't actually any program in Canada yet that requires the credits, volume is going to continue to be small while the legislative risk is still relatively large," Woolsey told Reuters.

"Until Canada gets their act together and actually gets a trading system in place, we see trading in Canadian credits floundering and lacking strong price direction."

Benchmark emissions allowances on the MCeX closed at C$11.00 ($9.40) a tonne on Thursday.

Last year, the Prime Minister Stephen Harper released 'Turning the Corner', a plan which sets intensity-based targets of a 20 percent reduction on 2006 carbon dioxide levels by 2020.

An intensity-based scheme differs from the traditional cap-and-trade approach in that emissions cuts are measured against units of economic output rather than in absolute terms.

Under the proposal, Canada would see a nationwide carbon trading scheme launched in 2010.

Although the plan is still far from becoming law, Democratic candidate Barack Obama's victory in Tuesday's U.S. presidential election may expedite cooperation between the two nations on a North American carbon market, which could effectively negate a Canadian federal scheme and U.S. regional markets like RGGI.

D'Agostino and Woolsey are both optimistic, and although they'd like to eventually see a North American market they don't expect a carbon market in the U.S. to begin trading until at least 2012.

"Carbon trading might get slowed down in North America because of the financial crisis, but Europe's also feeling some pain and the carbon market there is still kicking along," D'Agostino said.

"The carbon genie is out of the bottle and it isn't going to go away anytime soon."

(Editing by Jim Marshall)

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