Jeffrey Rubin, chief strategist and chief economist at CIBC World Markets in Toronto, issued a report yesterday called “The Carbon Wars” that predicts California’s new cap-and-trade system for CO2 emissions will spread across all of Canada and the United States by the end of this decade.

While North America has ignored implementing the Kyoto Accord, it’s about to declare war on carbon emissions on its own terms,” writes Rubin. “As that campaign unfolds, the economy’s largest emitters of CO2 will become increasingly dependent on the economy’s greenest firms for emissions credits.

Rubin suggests that investors need to focus less on the future direction of oil prices and more on the “eventual net backs” to oil producers in a carbon-regulated environment.

While we know that oil sands producers will have to be huge purchasers of emissions credits, we don’t know what the market-clearing price for those credits will be. The experience of the decade-long functioning S02 and NOx emission trading systems in the U.S. reveals that over time the market price for emissions credits rises sharply as emissions 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.

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