The montreal exchange is not letting up in its campaign to persuade the federal government to enforce mandatory emission reductions on industry so the ME can introduce a carbon-trading system in Canada.

The ME has partnered with the Chicago Climate Exchange to set up the Montreal Climate Exchange. Even though the carbon market is ready to go, however, the exchange won’t launch until Ottawa takes steps to crack down on large producers of greenhouse gas (GHG) emissions. And the Conservative government didn’t introduce mandatory emission reductions when it announced its proposed Clean Air Act this past fall.

The lack of action is disappointing, but ME CEO Luc Bertrand intends to be persistent.

“Admittedly, the Clean Air Act didn’t provide the framework to establish the market,” Bertrand says. “But we’re of the opinion that slowly but surely we’re going to evolve toward the framework we need from the federal government so that we can launch the market.”

On Dec. 7, 2005, the ME signed a letter of intent with the CCX to set up the Canadian climate exchange, to be known as the MCeX. The first product of the joint venture was to be a futures contract that would allow polluters and other market participants to buy and sell carbon emissions on the MCeX.

At the time, the then-Liberal government in Ottawa had plans to force reductions in carbon emissions through a system of credits, part of its drive to meet its commitments under the Kyoto protocol on GHG emissions.

In carbon-trading systems, governments set limits on companies’ carbon emissions and then permit trading in credits. Emitters that exceed their quota are able to offset their production by buying carbon credits. On the other hand, companies that come in below their quota are able to sell excess credits.

The Tory government has said Canada can’t meet its commitments under Kyoto. Nevertheless, it has indicated that it’s looking at introducing a trading system in GHG credits.

The Clean Air Act, announced in October, targets a reduction in greenhouse gases of 45%- 65% below 2003 levels by 2050. Undefined short-term targets would come into force after 2010.

At a recent United Nations meeting on climate change in Kenya, Canadian federal Environment Minister Rona Ambrose invited experts from Europe and the U.S. to a meeting in Montreal in December to discuss the establishment of an international carbon-trading system.

Bertrand says the key to a viable carbon market is penalties for companies that don’t live up to their emissions targets.

“We’re encouraged that the minister has said we are driving toward establishing quotas,” says Bertrand. “That’s definitely Phase 1. Now, Phase 2 is: what do you do to enforce it? That’s important. It’s nice to have quotas. But they have to be mandatory, with a very strict compliance regime. Otherwise, you don’t have a market.”

Canada is the highest per-capita emitter of GHGs in the world. Yet, Bertrand says, it is in danger of missing out on building a major carbon market: “There is going to be a market. Let’s make sure that we don’t lose it to a foreign market.”

Elsewhere, there has been progress on carbon trading. The European Union’s Emission Trading Scheme traded 360 million tonnes of carbon in 2005, worth an estimated US$9 billion. In the U.S., there is a voluntary carbon trading among emitters at the CCX. As well, California is looking at setting up a cap-and-trade system with eight eastern states.

CCX chairman Richard Sandor is a pioneer of financial derivatives who is credited with designing the first interest rate futures contract in the 1970s. Besides its agreement with the ME, the CCX is also a partner in the Amsterdam-based European Climate Exchange.

“The CCX has been working on this for a long time,” Bertrand says. “It brings the intellectual capital, and we bring in the technical expertise. That’s the easy part. The part that we have to make sure is the regulatory framework.”

The MCeX has the support of several large pension-fund managers, including the Caisse de dépôt et placement du Québec, and major corporations that are calling on Ottawa to bring in mandatory GHG reduction targets.

“The large pension plans are worried that the companies in which they have investments are one day going to have this massive liability in front of them,” Bertrand says.

@page_break@He notes that class-action lawsuits have been launched in the U.S. against large emitters, and France recently threatened to tax companies that are based in other countries that aren’t reducing emissions.

Companies also want clarity from Ottawa, he maintains. If they are to reduce carbon emissions, they have to make long-term capital-spending decisions. If they have made progress reducing emissions — Shell Canada Ltd., Alcan Inc. and TransAlta Corp., for example — they want to “monetize this through a market mechanism,” Bertrand says, “and sell those credits to others who are falling behind.”

The carbon market is just one iron the ME has in the fire these days. It’s also marketing its high-performance trading system to other exchanges. Bertrand was recently in the China to drum up interest in the latter platform.

The ME’s main business of trading futures and options has been so strong in the past few years that some shareholders are getting itchy for a public share offering, to cash in on sky-high values for exchanges.

ME stock is owned by investment dealers, banks and individuals, with ME employees holding about 15%. The shares currently trade only in private transactions. The shares are said to trade in the $50-a-share range, up from about $17 in the summer of 2005. The shares would almost certainly be worth much more if the ME went public.

Bertrand insists he’s feeling no pressure to take the exchange public, adding that the ME is being managed for the long term and not on the basis of hot markets.

In early November, the ME reported another big quarter. In the third quarter ended Sept. 30, net income climbed 30% from a year earlier to $5.9 million. Revenue soared 20% to $19.9 million. Total trading volume increased by 24%.

TSX Group Inc. has made no secret of its interest in a merger with the ME. TSX CEO Richard Nesbitt has repeatedly said the TSX will get back into the futures and options game when a non-compete agreement with the ME ends in 2009. And he has made a number of appearances in Montreal to tout a merger. But Bertrand is giving the idea the cold shoulder. IE