Having boxed Canada’s opposition parties into a choice between supporting his coming throne speech and forcing an election that will almost surely end with another minority Conservative government, Prime Minister Stephen Harper seems to have turned his skills as a political operator to the world stage and the debate over climate change.

Harper jumped into the coal mine for his US counterpart last week, singing of a new consensus on “flexible” targets as the best means to address global warming.

He did so at a meeting called by United Nations Secretary General Ban Ki-moon for the purpose of building momentum toward an agreement to extend the Kyoto Protocol. The next major forum to discuss international climate action is in Bali in December at the annual meeting of the UN Framework Convention on Climate Change (UNFCCC) and Kyoto Protocol members.

The Canadian prime minister said the global community needs to balance environmental protection with economic growth. Harper said there’s an “emerging consensus” on the need for a rethink on how to respond. He referred to recent meetings of the leading industrialized and Asia-Pacific countries, where talk on climate control steered clear of setting binding targets.

“We are building on the dynamic created by the G-8 and APEC summits to promote international cooperation in the fight against global warming,” he told the UN summit.

Harper will attend the next meeting of the Asia-Pacific Partnership, an agreement among Australia, China, India, Japan, South Korea and US that allows each country to set its own goals and has no enforcement mechanism.

Harper followed his inside-the-Kyoto-tent act during a question-and-answer session after a speech to the Council on Foreign Relations: “If you go for hard caps as the only kinds of target (to limit global emissions), by definition the only countries that will sign on are countries that have no population growth and fairly limited economic growth. That’s what happened with Kyoto.”

President Bush acknowledged last week that climate change is real and that human activity is a factor. He said the US supports the UN process for an international climate agreement but argued that a long-term, nonbinding global goal should be set by the end of 2008 and finalized at a summit he would host.

Bush has rejected Kyoto because he said it would harm the US economy and didn’t require emissions cuts by China and India. The bottom line of the Bush approach is that each nation establishes for itself what methods it will use to rein in the pollution problem without stunting economic growth. That precludes mandatory obligations. New technologies and voluntary measures are the essential elements.

The US hasn’t enacted legislation to enforce Kyoto because the agreement establishes emissions reduction requirements for developed nations only; and developing emitters–led by China and India–don’t want climate sensitive restrictions to impede their economic growth.

Canada’s House of Commons and Senate passed the Kyoto Protocol Implementation Act in June. It gave the government 60 days to come up with a plan for Canada to meets its target, a 6 percent cut in emissions below 1990 levels by 2012.

But the minority government’s plan, rolled out Aug. 21, wouldn’t hit the Kyoto target until 2025. Trying to achieve the cuts by 2012 would be disastrous for Canada’s economy, Environment Minister John Baird said. Because of Canada’s resource-based economy, growing population and “vast northern geography,” attempting to follow the Kyoto timetable would cut Canada’s gross domestic product by more than 6.5 percent, reduce personal incomes, lead to higher unemployment and energy prices, and kick the economy into a deep recession, the August plan states.

Britain, Germany, France and most of the rest of Europe favor mandatory targets. And Ewen MacAskill of The Guardian reported that even China and India acknowledged that the voluntary approach wouldn’t work and favored binding measures. The Asian tigers still disagree with the Europeans, however, on how mandatory rules would be implemented.

Bush hopes to establish a new framework for cutting greenhouse gas emissions and will use the Asia-Pacific Partnership to pursue his vision.

How Policy Works

Sebasian Mallaby, who directs the Center for Geoeconomic Studies at the Council on Foreign Relations and is a columnist for The Washington Post, wrote of the interplay of technology and policy in the climate change context in a July 10, 2006, piece:

Mexico City has reduced its output of carbon dioxide by almost 55,000 tons a year by opening one efficient bus route; the key innovation here was the creation of two bus lanes. The new buses run on diesel–not exactly a technological breakthrough. But because they are rapid and frequent, the buses have brought car use down and reduced emissions.

So what matters is not just the technologies we have but the incentives to deploy them. The average Western European uses half as much energy as the average American, and that’s not because there’s more technology in Europe. Rather, Europeans have embraced anti-carbon policies ranging from gas taxes to emissions caps, from an absence of extravagant mortgage subsidies that encourage super-size homes to congestion charges for drivers in London and Stockholm.

Because of Norway’s carbon taxes, companies drilling for natural gas in the North Sea are starting to capture the carbon dioxide they release and inject it back under the sea floor. Because the United States lacks a carbon tax, natural gas drillers in this country have less incentive to do that. Meanwhile the Energy Department reports that there are plans to build 150 new coal-fired power plants in the United States, enough to generate power for 93 million homes. But because government hasn’t created intelligent incentives, most of these new generators won’t be fitted with technology to capture and store the carbon.

So incentives count. Technology frequently turns out to matter less than policy.

The Roundup

Oil & Gas

Penn West Energy Trust (PWT.UN, NYSE: PWE) has made an offer to acquire Vault Energy Trust (VNG.UN, VNGFF) for 0.14 Penn West units for each Vault unit, which adds up to approximately CD380 million including Vault’s debt. Penn West will issue about 5.5 million units to close the deal. The transaction exchange ratio represents a premium to Vault unitholders of 6 percent.

The acquisition is estimated to add current production of nearly 6,500 barrels of oil equivalent (boe) per day, weighted 65 percent to natural gas and 35 percent to light oil and natural gas liquids. Penn West hopes to increase its tax pool position by about CD500 million and increase its ceiling under the federal government’s “undue expansion” rules related to the 2011 tax on trusts to approximately CD10.4 billion.

Vault’s Alberta properties are located at or near some of Penn West’s core light oil properties. And Vault’s natural gas properties in northeast British Columbia and northwest Alberta complement existing Penn West properties.

Penn West will also add approximately 120,000 net undeveloped acres to its land base of approximately 3.5 million net undeveloped acres.

The deal has been approved by both boards of directors. A special meeting of Vault’s unitholders to approve the transaction is expected to be held in November. Buy Penn West Energy Trust up to USD38. Hold Vault Energy Trust.

Vermilion Energy Trust (VET.UN, VETMF), Verenex Energy and Bordeaux Energy have abandoned the Orca 1 well in the Bay of Biscay, offshore of France. The partners announced last week the oil and gas exploration well had been shut down after drilling hit a “thick sealing element” and no significant hydrocarbons were found.

Further drilling at the well in the Aquitaine Maritime Exploration Permit about 30 kilometers offshore of Bordeaux confirmed the finding.

Vermilion said its net effective capital exposure is estimated to be about CD9 million, based on an expected gross well cost of CD55 million. Verenex is 41.8 percent owned by Vermilion. Vermilion Energy Trust is a buy up to USD38.

Business Trusts

Big Rock Brewery Income Trust (BR.UN, BRBMF) announced that Timothy A. Duffin has advised the board of directors that he will be resigning his position as CFO effective Dec. 31, 2007, to pursue other interests. He’ll consult the trust through 2008 in order to provide for a smooth transition of the role to his successor and to complete the previously announced internal reorganization and year-end financial statements. Big Rock Brewery Income Trust is a hold.

CI Financial Income Fund (CIX.UN, CIXUF) changed two conditions on its CD2.58 billion offer for rival DundeeWealth in an attempt to win support for the hostile bid. DundeeWealth won’t have to cancel the proposed sale of an 18 percent stake to Bank of Nova Scotia, and CI Financial also said DundeeWealth’s board would have to back the CI offer for it to proceed. Buy CI Financial Income Fund up to USD26.

Cinram International Income Fund (CRW.UN, CRWFF) has acquired inventory management firm Vision Worldwide Management LLC for CD10 million. Vision develops inventory management systems for home entertainment vendors, enabling them to track products from the point-of-sale to determine which items need to be replenished and also to determine the performance of specific stores and products. Hold Cinram International Income Fund.

CML Healthcare Income Fund (CLC.UN, CMHIF) launched a hostile CD9-a-unit bid for Medisys Health Group Income Fund after talks between the two companies on a confidentiality and standstill agreement failed. The deal would be worth about CD69.3 million.

The offer trumps a CD7-a-unit, going-private bid launched earlier this year by the Elman family, a major Medisys shareholder. The CD9-a-unit bid is a 28.6 percent premium over the Elman bid.

CML provides laboratory testing services in Ontario as well as medical imaging services across Canada. Medisys is a medical imaging and corporate health services provider. CML Healthcare Income Fund is a hold.

Sun Gro Horticulture Income Fund (GRO.UN, SGHRF) is paying USD22.4 million in cash and trust units for Grow Best Holdings LLC of Orlando, Fla., which owns Florida Potting Soils and Sunshine Peat. Sun Gro will issue USD2 million worth of units, with the rest of the acquisition funded from a line of credit.

Florida Potting Soils sells bulk bark growing mixes to nurseries in Florida and neighboring states and also produces sand and peat-based blends for golf courses. Sunshine Peat harvests a central Florida bog.

It’s Sun Gro’s fourth acquisition this year. Earlier this year, Sun Gro acquired Sun-Up Horticulture and Kellogg-Rich Grow in California and Quebec peat moss producer Tourbiere Omer Belanger. Sun Gro Horticulture Income Fund is a hold.

Real Estate Trusts

Canadian Apartment Properties REIT (CAR.UN, CDPYF) has acquired eight apartment buildings with 748 suites in British Columbia and Alberta from TransGlobe Property Management Services for approximately CD94.6 million, including new insured mortgages of CD61.2 million for a five-year term at a weighted average interest rate of 4.73 percent. Occupancy in the acquired portfolio is currently 100 percent.

Canadian Apartment Properties REIT also announced that TransGlobe will purchase from it 11 noncore Ontario and Quebec properties totaling 1,478 suites. This transaction is scheduled to close in mid-January 2008. Canadian Apartment Properties REIT is a buy up to USD20.

Natural Resources Trusts

Brookfield Asset Management last week bought 2.6 million Acadian Timber Income Fund (ADN.UN, ATBUF) units from Fraser Papers through a wholly owned associate. Brookfield now owns 7.51 million Acadian units, approximately 45.3 percent of the total outstanding.

Fraser Papers has sold its entire position of 3.6 million units; units not sold to Brookfield were sold to two investment dealers. Acadian Timber Income Fund is a buy up to USD12.