Cap and Trade Legislation

When California enacted AB32 in late 2006, I doubt they knew it would eventually become the national model cap and trade legislation.

Now, with Obama in office and Californian Henry Waxman as chair of the House Energy and Commerce Committee, that’s exactly what is happening.

Waxman has vowed to act “quickly and decisively” to regulate greenhouse gas (GHG) emissions via a cap and trade system.

The scheme has huge financial implications for those with carbon risk, and could offer windfall profits to companies that have turned carbon into an asset. Most of all, though, it means easy, legislated profits for you as a retail investor.

Here are the nuts and bolts of it all…

Implications of Cap and Trade Legislation

The capping of U.S. emissions will immediately split domestic companies into two groups: those for which carbon is an asset and those for which it is a liability.

We’re going to profit from the former while feeling sorry for, and sometimes laughing at, the latter.

Here’s how it works, using a hypothetical:

Under a cap and trade system Utility X is allowed to emit 50 tons of carbon dioxide. If they emit 55 tons, they must purchase 5 carbon credits from a carbon exchange or carbon market. If they only emit 45, they’ll be able to sell five credits to the exchange.

Within the cap and trade scheme, each carbon credit is equal to one ton of carbon not emitted.

It’s not hard to prognosticate the outcome. Companies that are carbon-intensive (think coal power plants) will be doing all they can to reduce emissions. For most, that means investing in new renewable energy projects.

You can profit by investing in the cleantech companies that will see a boost in business from utilities trying to stay under their caps.

That means getting into the big boys of the cleantech world today, before the legislation is signed into law. Because you can bet the Wall Street Wonks will flock to cleantech stocks the moment Obama’s pen touches the cap and trade page.

SunPower, First Solar, and any ETFs that hold major cleantech positions would be my first stop, but there are other ways to…

Profit from Cap and Trade

In addition to the buoyed balance sheets of cleantech companies as utilities scramble to curb emissions, other companies are poised to profit.

You see, it isn’t just clean energy generation companies that are invited to the cap and trade profit party. Companies that generally prevent carbon from entering the atmosphere are also possible investment targets. These are companies like Waste Management (NYSE: WMI) and Environmental Power (AMEX: EPG), which manage landfill gas.

Other avenues might be exchange traded funds and notes like the iPath global Carbon ETN (NYSE: GRN) and the AirShares EU Carbon Allowances ETF (NYSE: ASO), both of which track the price of carbon credits. Rest assured, as demand is guaranteed by cap and trade legislation, the price of carbon credits will rise.

Lastly, as we’ve seen in Europe, I suspect there will be an onslaught of funds and investment firms dedicated entirely to generating revenue via the sale of carbon credits.

As these develop, it will be possible to invest in these funds and reap dividends. Look out for that, and a slew of carbon-related IPOs to flood the market pending any significant legislation.

To clean energy and clean profits,

Chris Hunter
Clean Energy Sector