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Five Ways to Profit From Global Warming

Stock-Markets / Climate Change Jul 08, 2009 - 06:58 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: The Waxman-Markey Bill, the much-ballyhooed clean energy legislation passed recently by the U.S. House of Representatives, is an economic and political mess.


It introduces huge new distortions in markets, imposes onerous new regulations on a number of industries, requires a large addition to bureaucracy and risks a trade war.

And it does very little to fight global warming.

At this point, however, investors really only need to know two key things about this legislation in order to set themselves up for profit, while avoiding any losses from the bill’s fallout:

  • From a political standpoint, Waxman-Markey is likely to become law in something close to its current form, meaning investors can craft a plan of attack with a fairly high degree of confidence.
  • And, from an economic standpoint, it seems to define a pretty clear set of winners and losers, enabling us to flesh out that plan.

A “Good” Tax?

I’m not sure whether I believe in global warming. We clearly seem to be producing more carbon dioxide than we used to, but it’s not clear how much of an effect that’s having on global climate. Equally, the effects of extra carbon dioxide are long-term and largely irreversible, so even if the warming effect is limited in our lifetime, we probably owe it to our grandchildren not to leave them living in a steam bath.

To the economically minded who share my skeptical-but-cautious view, the optimal policy is pretty obvious: We should enact a carbon tax. Government operations have to be funded somehow, and there’s no obvious reason why a carbon tax should be any more economically damaging than any other kind of tax.

A carbon tax has two advantages over other alternatives:

  • First, it can be varied easily, as we get new information and become more worried or less worried about global warming.
  • Second, it allows investment and purchase decisions to be made by the market, just tweaking the price mechanism a bit to reflect our concerns about carbon emissions.

We’re not going to get a carbon tax, because it has the politically deadly word “tax” as part of its name. Still, during the presidential campaign, then-candidate Barack Obama showed off a pretty sensible “cap-and-trade” program. All the carbon emissions permits were sold, so the market was able to work properly, with no freebie giveaways to politically favored recipients. Further, there were no  “offsets” by which companies could satisfy domestic permits by persuading the Chinese not to build a dirty coal-fired station, for example (these have given rise to innumerable scams in the European Union cap-and-trade system).

Such a system would have raised lots of revenue, helping to close the budget deficit and pay for healthcare reform, which ought to be one of its major objectives, given the United States’ now-dire fiscal position.

The Lowdown on Waxman-Markey

That’s not what we’re getting with Waxman-Markey, under which 85% of the emissions permits will be given away for free. That depresses the amount of carbon emissions saved, because with so many free permits available, the price of permits will be low.

Also, Waxman-Markey forces new buildings to use 30% less energy by 2012, intruding the U.S. federal government into yet another business previously regulated at the state level. It allows “offsets” for 2 billion tons of carbon emissions a year - 50% domestic and 50% international.

Finally, it doesn’t even raise any net revenue, because the giveaways and administration costs match the fairly paltry revenue raised through selling permits; according to the Congressional Budget Office (CBO) it’s just barely “revenue neutral” in the 2010-2019 time frame. That’s a major problem for President Barack Obama’s budget, which had assumed $624 billion in revenue from cap-and-trade in that same period.

The Winners and Losers

Needless to say, with the government rearranging deckchairs and giving out goodies in such a big way, there will be winners and losers. Clearly that’s what investors most need to understand.

One winning category will be distribution-oriented public utilities - the guys who actually send out electricity bills, including Consolidated Edison Inc. (NYSE: ED), Pepco Holdings Inc. (NYSE: POM) and Northeast Utilities System (NYSE: NU).

These companies will be given permits for 35% of the total “cap” amount in the early years, with instructions to provide rebates on electricity prices. Some of the value of those free permits is bound to flow through to shareholders. In fact, the bill was passed on a Friday, and it was notable that on the following Monday that the distribution-oriented utilities showed a nice bounce. If you can get a 7% dividend yield from the company that sends you electricity bills, it’s probably a buy!

Clean-coal technologies (primarily carbon capture and storage) are due to get 5% of the emission permits over a lengthy period. Most of the companies experimenting in this area are privately held, but Duke Energy Corp. (NYSE: DUK) is planning a carbon-sequestering power station in Indiana, so may be a beneficiary here - as well as through its operation as a major power distributor.

Another group of winners will the sharper (most-creative) operators in the financial-services arena. Since emissions permits will trade, somebody will have to trade them. What’s more, there will quickly arise the whole paraphernalia of futures, options, swaptions, and default swaps. Bear Stearns and Lehman Brothers are, alas, no longer with us, but Goldman Sachs Group Inc. (NYSE: GS), as always, will be prominent at the front of the queue!

Losers? Well, all of us who will pay more for power, but also the Canadian oil sands companies, such as Suncor Energy Inc. (NYSE: SU), who seem fated to pay a hefty premium for their carbon-expensive operations. Probably, the major petrochemical companies such as The Dow Chemical Co. (NYSE: DOW) will be losers, too, as will other carbon-intensive industries. Housing companies will be losers - they use quite a lot of carbon-emitting materials, and will be forced to adopt expensive energy-saving technologies, making their products less affordable.

Of course, all this analysis depends on whatever changes the U.S. Senate may make to the legislation. And that chapter has yet to be written.

[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.

Longtime global investing expert Martin Hutchinson has made a specialty of evaluating banking profit plays, and in recent reports has warned investors away from "Zombie Banks" and devised his own "stress test" to highlight the best profit plays in the troubled U.S. financial-services sector. Hutchinson brings that same creative analysis to his The Permanent Wealth Investortrading service, which uses a combination of high-yielding dividend stocks, profit plays on gold and specially designated "Alpha Dog" stocks to create high-income portfolios for his subscribers. Hutchinson's strategy is tailor-made for uncertain periods such as this one, in which too many investors just sit on the sidelines and watch opportunity pass them by. Just click here to find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor.]

Money Morning/The Money Map Report

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Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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Comments

Mr. reality
10 Jul 09, 16:30
this is pathetic

this is pathetic

the whole charade disquised as "oh we are doing this for the enviornement ...now do your part"

you can fool all of the people some of the time..... and some of the people all of the time....but you can't fool all the people all the time

but since people believe they are helpless to stop the politics of everything they try to make money off of it and end of aiding it.


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