TORONTO, Jan. 10 /PRNewswire-FirstCall/ -- CIBC (CM: TSX; NYSE) - All jurisdictions in Canada and the U.S. will have carbon dioxide (CO(2)) regulations in place by the end of the decade to address global warming concerns, forecasts a new report from CIBC World Markets.
The report predicts that every province and state in North America will follow the lead of California and implement not only a CO(2) emissions cap but also an emissions trading system that will allow larger polluters to buy emissions credits from other firms whose emissions are less than what is allowed under the cap.
"While North America has ignored implementing the Kyoto Accord, public concern about global warming is growing," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "I expect this will force governments to declare war on carbon emissions on their own terms. As that campaign unfolds, the economy's largest emitters of CO(2) will become increasingly dependent on the economy's greenest firms for emissions credits."
The report states that the carbon abatement policies aimed at addressing climate change will have the greatest impact on the energy sector. This will have a significant impact in Canada where the sector accounts for 20 per cent of the country's CO(2) emissions. That percentage promises to rise steadily over the next decade as emissions-intensive oil sands production doubles and perhaps even triples, replacing depleting but less emission-intensive conventional oil production.
"What investors have to be wary of is not the future direction of oil prices, but what the eventual net backs to oil producers will be in a carbon-regulated environment," adds Mr. Rubin. "While we know that oil sands producers will have to be huge purchasers of emission credits, we don't know what the market-clearing price for those credits will be.
"The experience of the over decade-long functioning CO(2) and NOx-emission trading systems in the U.S. reveals that over time the market price for emissions credits rises sharply as emission caps are gradually lowered. Depending upon how stringent the cap, the real investment risk is that much of the economic rents from rising oil prices may be diverted from shareholders of oil producers to owners of much-sought-after emissions credits."
The report also notes that while the energy markets currently seem focused on the perceived demand impacts of global warming, it will be the supply impacts that will be far more important over time.
"Despite growing alarm of an oil price collapse, the demand impacts from temperature changes are surprisingly small," notes Mr. Rubin. "Home-heating has become a marginal component of U.S. crude demand and an even less important component of demand in Europe, which is also experiencing a dramatically warmer winter. Over the long term, the real impacts are likely to be much greater on the energy supply side"
The CIBC World Markets Canadian Portfolio Strategy Outlook report is available at http://research.cibcwm.com/economic_public/download/mijan07.pdf.
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