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 March 13, 2009
We Are Playing With Live Bullets

 

There is a major decision looming that could either have catastrophic or meteoric consequences for your portfolio, depending on how you react.

Actually, looming is the wrong word. The decision has been made, it's just not been made official yet.

So one of two things can happen.

You can ignore my warning, tell me I'm wrong, gripe about it and do nothing.

Or you can — like so many others have already chosen to do — face the facts, and prepare your portfolio in a profitable way.

Carbon Credit Outlook

Yes, the decision I'm talking about is the coming regulation of carbon emissions that will make burning fossil fuels much more expensive and alternative sources more competitive.

I'm not here to argue semantics or global warming opinions. It doesn't matter if you think cap-and-trade is a new tax or a conspiracy led by patchouli-doused Democrats; the fact is, if you invest in energy, this decision is going to affect you. So you better prepare.

And when I say the decision has already been made, I mean the decision has already been made.

Here's U.N. Secretary-General Ban Ki-moon's response, after a two-day trip to the White House:

President Obama and I share a fundamental commitment — 2009 must be the year of climate change. That means reaching a comprehensive agreement in Copenhagen by year's end.

And the President — who said he would cap emissions during the campaign — has included $646 billion in revenue in his budget from carbon sales between 2012 and 2019.

According to the Environmental Defense Fund's Mark Brownstein, "We are now playing with live bullets."

As BusinessWeek put it, "The bullets are already flying—but mainly over the details of the plan, not the general idea."

In response, global carbon credit prices on multiple exchanges have been on the upswing. Certified emissions reductions, which are credits derived from Kyoto programs, have risen 47% in the past month, from €7.50 to €11.00. Prices for European credits, called EU Allowances, have gone from €8.00 to €13.00, a 63% rise in the same amount of time.

Take a look:


carbon credit outlook

Rising carbon credit prices are a firm indication that the U.S. is on track to cap carbon emissions.

But the best proof comes from listening to the head of some of the U.S.'s largest utilities, which would bear the brunt of cap-and-trade costs.

Utilities Want a Price on Carbon

If you want to identify the real reason that emissions will be capped and carbon credits traded, you have to look no further than the utilities that would be getting the short end of the stick.

John W. Rowe, CEO of Exelon (NYSE: EXC), has said that the Obama Administration is "very close to right on the climate plan."

And James Rogers, CEO of Duke Energy (NYSE: DUK) — one of the most carbon-intensive utilities — has said he has "great hope for the 'green' stimulus, but it won't fulfill its potential unless there is a price on carbon."

Even the utilities that aren't fully in favor are positioning themselves for what they know is coming. American Electric Power (NYSE: AEP) CEO Michael Morris, who thinks the plan is "a clear transfer of the middle part of the country's wealth to the two coasts," is actively engaging senators in coal states to ensure his business isn't slammed too hard. He knows cap-and-trade is on the way, he just wants to soften the blow for his company and constituents.

You should be doing the same.

Yes, Cap-and-Trade Increases Costs

That's sort of the point. . . to make burning fossil fuels more expensive.

To that end, Obama has proposed that companies buy carbon credits worth one ton each at a price between $13 and $20 if they go over their established carbon cap level.

But here's what's important for you, and the reason I've been harping on this topic for so long.

Some of the cost of those carbon credits will be passed on to consumers. Even at the low range of the carbon credit outlook price, BusinessWeek claims "the price of gasoline would go up by 12 cents a gallon and the average electricity bill by about 7% nationally."

Don't get all bent out of shape yet.

Of the $646 billion in government carbon credit revenue predicted over the next few years, $60 billion per year is allocated to offsetting higher energy costs for low- and middle-income families — a plan that has much Republican support.

That will put most of the onus on energy producers, not energy consumers.

In fact, I don't see any onus on consumers at all. I see opportunity.

A portion of that $646 billion —$15 billion per year, to be exact — would be dedicated to "investments in clean energy." And that's how you can put cap-and-trade to work for you.

Mandating the trade of carbon credits is as much about increasing the use of renewables as it is about reducing emissions. Switching your energy investment strategy now is the best thing you can do to prepare for an energy market that's about to see drastic fundamental changes.

In fact, the Environmental Defense Fund has already created a map of 1,200 alternative energy companies that stand to benefit from the plan. That's where you need to be looking for future energy profits.

As you can see, the decision has already been made.

Excoriate it or embrace it. It's up to you.

Call it like you see it,

By Nick Hodge
Energy & Capital