Carbon Emissions Trading

The climate of the fossil fuel energy business is changing drastically.

Right now, major investors and environmental groups are urging U.S. regulators to ensure oil companies are more transparent about the impacts climate change has on their industry.

In an open letter sent this week by investors holding more than $700 billion in assets, the SEC is pressed to make oil and gas companies include climate change liabilities when reporting their future reserve numbers.

Here’s a snippet of the letter: “We are concerned that climate change, and policies adopted to combat greenhouse gas emissions could render certain assets, particularly those with high carbon intensity, uneconomic.”

A bold statement, but a true one.

You see, oil and gas companies are having to look in more remote areas to find reserves (an effect of peak oil), including in areas that contain unconventional resources like oil shale and tar sands.

Those unconventional resources take more energy to bring to market, and if authorities impose a carbon tax or cap-and-trade scheme, those types of activities become significantly less profitable.

Oil reserve reporting requirements were originally drafted 25 year ago, and are egregiously stale for dealing with today’s market conditions, in an approaching-peak-oil-production world.

The letter continued: “As investors in oil and gas companies it is important for us to be able to assess the risk profile of reported reserves to factor in the costs of carbon emissions, particularly as global policy frameworks begin to change.”

Signatories of the letter included Ceres, a network of U.S. environmental groups and investors, and London-based F&C Asset Management.

BusinessGreen.com summarizes the intent of the letter nicely: “Investors claim that the SEC should address the fact that, for example, the energy needed to extract a barrel of oil from Canadian tar sands is very different to a drilling for a simple barrel of crude from the Gulf of Mexico.”

Once carbon control mechanisms evolve, oil and gas companies will not only face reduced profitability from increased energy inputs, they’ll also have to pay for the associated emissions.

When that happens, carbon control and mitigation companies are going to make a killing.

China Also Concerned About Carbon Emissions

The most common reason put forward for why the U.S. has failed to regulate its emissions is the lack of action from developing countries.

This argument has no merit. Indeed, China an India are both concerned with rising emissions, and each county is trying to do something about it. Each country has rigorous renewable energy programs, with China being the fasted growing wind market last year.

Now, China is toying with the idea of implementing a carbon emissions tax.

Chinese deputy minister for environmental protection, Pan Yue, has said that multiple government agencies have formed a team of experts to research the issue.

According to Reuters, “Pan gave no details of the proposed tax or when it might be introduced. But he said the team was also studying the issues of compensation for environmental damage, and the creation of a system for companies to trade rights to emit polluting gases.”

That means both a carbon tax and cap-and-trade are available options.

Last year, China cut tax rebates for energy-intensive industries, and this month it raised taxes on large passenger vehicles.

As China cracks down on heavy-polluting industries, look for China Energy Recovery (OTCBB: CGYV) to get increased business as companies seek to become more efficient.

That company recently announced it will have record revenue for 2008, while the 2009 outlook continues to trend upward.

A Developing Carbon Market

The global carbon market doubled in size last year to about $70 billion due to the Kyoto Protocol and its clean development mechanism (CDM). The CDM allows businesses in Kyoto signatory countries to purchase carbon credits harvested from projects in developing countries.

This is done by displacing emissions either through the use of renewable energy or through energy efficiency.

China accounts for 73% of CDM projects. And that’s not expected to significantly wane anytime soon.

As an example of how lucrative the carbon business can be, consider this:

A deal between Myland Group, a chemical plant based in Jiangsu province, and the World Bank is one example. Every year during production, the plant emits HFC23, a strong, heat-trapping gas, equivalent to 8 million tons of CO2s. Before the manufacturer signed a contract with the World Bank to sell carbon credits, the chemicals group did not realize it was sitting on a goldmine. But the seven-year deal is expected to bring the group a windfall of more than 330 million euros at a price of 6 euros per ton of CO2s.

If a similar scheme comes to the U.S., or the U.S. signs on to the next version of Kyoto (2012), similar opportunities will abound here.

Any company that has renewable energy or energy efficiency as its main business will have a new revenue stream, and stock prices will reflect that in valuations.

Waste-to-energy companies have the most potential for upside. You can gain exposure to that market through Waste Management (NYSE: WM, Covanta (NYSE: CVA), and Environmental Protection Group (NASDAQ: EPG).

More on this market and the profit opportunities it contains as development continues.

To green energy and green profits,

Chris Hunter