CCV versus MCX

In speaking to clients we have noted a lack of understanding in some circles with respect to the role and function of the Montreal Climate Exchange ("MCX") and the differences between it and the Chicago Climate Exchange® ("CCX"). The MCX is a joint venture between the Montreal Exchange (now part of the TMX Group Inc.) and the CCX. One of the common misconceptions about the MCX is that it and the CCX are the same type of exchange. In order to clarify the distinctions between these two exchanges, we will describe briefly below how each of them functions, with respect to carbon credits. It should be noted that other types of financial instruments are trade on the CCX but will not be discussed here.

With respect to emission reductions, the CCX is a self-contained voluntary regulatory scheme and trading system. Credits can be created on the CCX, in much the same way as in a government regulated system. On the one hand, a company may become a member of the exchange and accept to reduce its carbon emissions, thereby becoming a sort of voluntary regulated entity. On the other hand, a company may create a reduction project, the reductions from which, once they have been verified by a verifier that is approved by the CCX, may be registered on the exchange and traded. In short, the CCX acts as its own regulatory framework and determines the reduction requirements for its members as well as the validation criterion for reduction projects that are entitled to register credits on the exchange. The market for which the CCX is a platform is a voluntary market, in that the participants are not bound by law to reduce their emissions.

The MCX for its part is not a platform for a voluntary market but rather a market for forward contracts for delivery of "Canadian compliance units" that will be created in the future regulated market to be put in place by the Canadian federal government and as such is currently reliant on the coming into force of an eventual federal GHG emissions trading scheme in Canada. The MCX does not determine reduction requirements for any of its members, develop criteria for the validation of emission reductions or do anything other than function as a trading platform and clearing house for the contracts described above. The trading unit is a contract for future delivery of 100 "Canada Carbon Dioxide Equivalent Units". Each such unit will be an entitlement to emit one ton of CO2 equivalent in the system to be defined by the government of Canada. The contracts will expire quarterly and the first expiration date is June 2011. Currently the rules of the MCX provide for the physical settlement of the contracts with an alternative delivery procedure being available to the parties on an ad hoc basis.

MCX Activity

While the exchange opened on May 2, 2008, the level of activity has been negligible. Exchange representatives attribute this to the federal government's failure to deliver on its obligation to provide key elements to its offset system since the summer of 2008. This failure, along with the federal government's non-committal attitude toward the execution of its proposed GHG regulatory scheme has depressed activity on this market due to the uncertainty that the underlying element of the forward contracts will be available for delivery on the contract expiration dates.

The table shows the trading volume for the First Quarter of 2009 for the four (4) contracts that are currently traded. Until such time as the federal government begins to create more certainty with respect to the timing of the coming into force of GHG regulation in Canada, there is little reason to expect any significant pick-up in the transaction volumes handled by the MCX.

The MCX itself is now thinking about what it will do in the event that nobody comes to the party in June 2011. In February 2009, the MCX sent out a survey to market participants asking them to give their view on different courses of action that could be adopted by the MCX in the event that the federal framework for GHG emissions trading is not in place by June 2011.

OTC Market

Currently, the over the counter voluntary market offers pre-compliance purchasers the ability to hedge a future compliance obligation by using protocols and verification standards that have been tapped by the federal government in its draft framework as being those that will likely apply. The over the counter market allows the parties to paper the purchase or sale of voluntary credits with tailored provisions, in the knowledge that such contracts may, at some later date, be converted to an exchange position on the MSX if the parties so wish.

Activity in the voluntary markets across North America has generally been depressed in early 2009, with VCS credits down 40% in January/February as compared to November/December 2008 and CCAR credits down 17% during the same period.2 Volume in the Canadian OTC market has softened from our perspective but it is interesting to note that CCX reports increased volumes during the same period.3