I am still on alert for a larger pullback in the market. The larger picture suggests the SPX will li...
Money to Be Made on Climate Change
12/22/2009 10:05 am EST
The outcome of the Copenhagen conference shows where investors are likely to see profits—and costs—from global warming over the next decade.
The vague, blatantly inadequate "agreement" that President Barack Obama wrangled out of the Copenhagen climate conference—or, to give the meeting its official name, the U.N. Climate Change Conference—is nonetheless a game changer.
Oh, not because any of the countries that have signed on have committed to actually do much of anything. But because the very inadequacy of this agreement forces all meaningful action back onto national governments.
If you want to know where the profits—and costs—of global climate change will be for the next decade, you need to study not the technologies of climate change but the nature of the governments and economies that will stumble toward addressing this problem.
The nature of the US system, for example, tells an investor a great deal about how to make money on global climate change in the next few years.
Designed to Confound
Sometimes, looking at the challenges of global climate change, I think this problem was designed by some mad economist: It plays to just about every weakness in capitalist market economies.
Shall I count the ways?
First, you can't prove that climate change is caused by human activity or that the consequences will be a disaster—or that climate change is even happening. And that leaves plenty of room for honest dissent. And for pandering dishonest dissent, too.
I think the best explanation for the data is that climate change is man made. And I think that extrapolating from current trends such as the drying of California, sub-Saharan Africa, and Australia makes a good case that global damage, if we don't do anything, is going to be greater than the $9 trillion estimated in the 2006 Stern Review on climate change.
But is any of that absolutely certain? No way. The climate is a complex system that we don't understand very well. All we can say, if we're honest about it, is that the theory that man-made carbon dioxide and other greenhouse gases are warming the planet and creating a massive change in our climate fits the facts better than other theories.
That leaves the United States well short of a consensus. And if you need a refresher to what happens to our political process when you don't have a consensus, just look at the nearly terminal dysfunctionality of the US Senate on health care in the past few weeks.
Second, because global climate change is a really, really complex theory where the outcomes are incredibly sensitive to small changes in initial conditions and the relationship between variables, it's really hard to put a number on either the cost or the benefit. The 2006 Stern Review estimated the cost of a three- to four-degree Celsius rise in the average global temperature at $9 trillion. I don't know whether the hundreds of millions of people displaced or who starve to death under that scenario would agree with the report's total.
Of course, those who don't believe that global climate change theory is correct would put the benefit of "fixing" it at $0. On the cost end, I've seen everything from $20 billion (based on fixing the problem with a solar umbrella) to $10 trillion. Put those numbers in your cost-benefit analysis and you can justify every conclusion from spending nothing to spending whatever it takes.
Third, this is one of those situations where you're asked to pay now in real hard cash for hard-to-quantify benefits later that market economies are so terrible at pricing. How much would you pay today to avoid a broken leg tomorrow? That's easy. You've got some idea of how inconvenienced you'd be, what services you might have to pay for, your tolerance for pain and what's on your schedule that you'd have to postpone or cancel if you broke a leg.
But now let's make the problem harder: How much would you pay today for a 60% chance of a broken leg? Or a 50-50 chance that the broken leg would happen to either you or your neighbor Fred? Or that it's an 80% chance of a broken leg, a 15% chance of two broken legs and a 5% chance of death?
On Sale Now: Ice Age Avoidance?
I live in New York City. One potential climate-change scenario is that the melting of Greenland's ice cap could send so much fresh water into the North Atlantic that it stalled the Gulf Stream.|pagebreak|
One possible result (it has happened before; look up the Younger Dryas) would be to cover parts of North America, including New York, and Europe with glaciers. What would I pay to avoid that tomorrow? Well, tell me how likely it is, for a start. And then I'll fork over some tax money for a fix.
We're actually not talking about how much I'd pay now to avoid a disaster to myself. We're talking about cash for kids here. If the computer projections are right, we need to take decisive action within the next 20 years or we'll pass a tipping point that makes it extremely difficult (and even more horrendously expensive) to fix the problem, if it's still fixable at all.
In other words, if I don't put up the cash now, my kids or their kids are going to either learn a lot about how to dig a snow cave, or they're going to inherit a beachfront apartment on what is now the third floor in north Manhattan.
I could go on, but I think even those three problems suggest the shape of any potential climate change solution in the US and globally.
Politics Enter Into it
Because in the US, we don't have anything like a political consensus on the nature of the problem or what to do about it, any solution will be the result of intense political horse-trading. Know how the Democrats got Louisiana Senator Mary Landrieu to vote for cloture on health care? They put $100 million into the bill earmarked for Louisiana.
Anything that emerges from the US Congress will be a grab bag of goodies for this industry and that, with the biggest share of goodies going to the most powerful industries: Utilities, agribusiness, and oil and chemical companies. Alternative energy will get thrown a bone so it won't look quite so much like the giveaway to industry that it is. But you can estimate the size of the bone from the $5 billion that the Obama administration has just proposed in a new jobs initiative as its big commitment to creating green jobs.
Five billion dollars? That's just five times the cost of the new Dallas Cowboys football stadium. The people of Arlington, Texas, voted to raise the sales tax, the hotel tax and the rental car tax to kick in $325 million in taxpayer dollars to the construction of a stadium that Cowboys owner Jerry Jones has compared to Rome's Colosseum. Surely, I'm not suggesting that U.S. taxpayers would be less willing to pay to stop global warming than to pay to build a football stadium?
Of course I am. Football stadiums provide an immediate and tangible benefit. You don't have to wait for your kids to enjoy them. You can buy tickets now. (So what if you have to mortgage your house to buy a season-ticket package? The kids will be better people if you don't leave them anything.)
So whatever funding the US government does provide toward fixing global warming is going to be the form of the least obviously painful tax or fee possible. Even if it is horrendously inefficient and perhaps ineffective.
So stop worrying about a carbon tax. Too obvious.
The Last Fix Available
It's cap and trade or nothing. That kind of program—which creates tradable credits earned by companies for reducing carbon emissions that can then be traded (for money) to companies that have exceeded their carbon limits—fits in well with the logrolling needed to get a bill passed. Need to diffuse industry opposition? Give out a bushel basket of cheap carbon credits that can be sold. Hey, if it works in the Senate, it should work with CEOs, too, right?|pagebreak|
Of course, cap and trade hasn't exactly built a sterling track record around the world. The U.N. program designed to encourage emissions reductions in the developing world that can then be sold in the developed world has run into problems since a sizable percentage of projects, the United Nations has suddenly discovered, would have been built anyway. According to the rules, projects like that aren't supposed to earn credits.
And in Europe, the program initially granted so many credits that market prices are too low to encourage much in the way of alternative-energy development. Right now, carbon credits trade for about $20 per metric ton on the European Union's system. According to estimates by the Carbon Trust, co-firing of biomass, a process that usually involves burning coal along with wood or agricultural waste, needs a carbon price of $105 a metric ton to be financially viable with current energy prices. Onshore wind power needs a carbon price of $190 a ton, offshore $360 a ton. Solar photovoltaic needs $835 a ton. Don't hold your breath waiting for these prices.
So where does this leave you as an investor?
- Expecting Congress to pass something that addresses global climate change. The move by Obama's Environmental Protection Agency to set rules for carbon dioxide and other greenhouse gases as pollutants under the Clean Air Act guarantees that Congress will act. Industry is almost positive it can get a better deal from Congress than it will from the EPA. Industry will start telling its lobbyists to work for climate change legislation.
- Running toward carbon-intensive companies in politically powerful industries. Especially if they are developing some real green technologies as well. American Electric Power (NYSE: AEP), which I recently added to my dividend-income portfolio, is one. DuPont (NYSE: DFT), also a dividend-income pick, is another. Dow Chemical (NYSE: DOW) is worth a look. (For more on picking utility stocks, see this recent blog post.)
- Looking for alternative energy companies that are nearly profitable or promise to get to that point quickly so they're not dependent on consistent, long-term government support. In the solar sector, First Solar (Nasdaq: FSLR) and SunPower (Nasdaq: SPWRA) are both operating cash flow positive.
- Not forgetting the solutions that don't need taxpayer money because they actually make money now. Intelligent-utility-metering companies such as Itron or building-energy-management companies such as Johnson Controls (NYSE: JCI), one of my Jubak's Picks, belong in this group.
- And cynically trying to identify companies that provide cheap quick fixes (or at least quick fixes that can be made to look cheap with accounting magic). I think natural gas falls into the category of real cheap fixes, since it's cheap to build a gas-burning power plant and because replacing a coal plant with a natural-gas plant does reduce emissions. I'd look at Ultra Petroleum (NYSE: UPL) and Devon Energy (NYSE: DVN) in that sector. Nuclear can be made to look cheap. Here you might look at a nuclear-focused utility such as Exelon (NYSE: EXC).
And, of course, you shouldn't forget to invest in Chinese companies tackling the problem. Chinese leaders aren't troubled with problems of 60-vote majorities in the Senate, and they want a piece of this market. The obvious choice here is Suntech Power (NYSE: STP), which has recently announced that it will build a production plant in the US.
So don't get distracted by arguments at the Copenhagen conference about whether the world's rich nations should give the world's developing nations $20 billion or $100 billion a year in aid to help them move their economies to a low-carbon-emission path.
Global climate change is indeed all about the money. But it's not the money you can see; it's the money you can't that sets the rules of the game.
At the time of publication, Jim Jubak owned shares of the following companies mentioned in this column: Devon Energy, Johnson Controls, SunPower and Ultra Petroleum, and one share of American Electric Power.
Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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