Energy Investments Under Obama: Eye on Barclays Carbon ETN

This past Tuesday, Barack Obama was elected the 44^th President of the United States. And there’s no question that he’ll have his work cut out for him when he takes office next January 20^th.

As for the rest of us, now that the election is over, we’re all back to just being Americans. It’s time to collectively roll up our sleeves, and get ready to tackle the huge problems that lie ahead of us.

From an investment perspective, there are many sectors that stand to benefit once the Obama administration gets rolling in early 2009. It just so happens that two of them are the ones I’m keenly interested in: energy and infrastructure.

Over the next several installments, we’re going to take a look at how various energy investments might fare under the Obama administration.

The best place to start our investigation is with a review of Obama’s “New Energy for America” plan. It’s a comprehensive document detailing the President-elect’s roadmap for energy independence.

The plan is divided up into two sections, short-term solutions and medium to long-tern initiatives.

Short-Term: Relief from Pain at the Pump

Recognizing that Americans have been hammered at the pumps -- and for those who live in the Northeast, in their heating oil tanks -- Obama’s plan provides for a $500 energy rebate for individuals, and $1,000 for a married couple. The plan suggests the funding for this is to come from a windfall profits tax on oil company earnings. It’s unlikely that this could pass under any circumstances before late spring 2009, and as a result would have little effect on this winter’s energy bills.

Obama and Biden also wants to halt what they believe are speculative practices regarding energy trading as a result of loopholes that exist in the Commodities Futures Trading Commission regulations.

The last item on Obama’s short-term radar is a highly controversial plan to release oil from the United State’s Strategic Petroleum Reserve to help reduce oil prices. Given that oil prices are continuing to collapse, it’s highly unlikely this will still be up for consideration by the next Congress.

The mid to long-term section of the plan is focused on two inter-related energy issues that the country is faced with today and that will drive the new administration’s policies in the future: our dependence on foreign oil and the resulting effects on the global climate.

Carbon Credits: Coming to a Power Plant Near You

Obama wants to enact legislation that implements a wide-ranging cap-and-trade system to reduce carbon emissions by 80% by the year 2050.

One way to play the carbons emissions angle is via Barclays Bank PLC Global Carbon ETN (NYSE:GRN). These Exchange Traded Notes seek to replicate the Barclays Capital Global Carbon Index Total Return. This index is tied to the performance of the most liquid carbon-related credit plans, and as such is looked at as an industry benchmark for carbon investors.

Currently, the index has only two carbon-related credit plans in it: the European Union’s Emission Trading Scheme (EU ETS Phase II) and the Kyoto Protocol's Clean Development Mechanism.

It’s Barclay’s intention to add new carbon-related plans as they are developed, and certainly any plan the U.S. introduces would add to the attractiveness of this ETN as an investment. Shares are thinly traded, but are off 43% from their highs reached this past July.

As his new term unfolds, President-elect Obama’s greatest challenge will be to act as a catalyst to foster the creation of an energy coalition of both Democrats and Republicans.

Given the seriousness of our current situation, there’s a reasonably good chance he’ll have strong bi-partisan support in areas related to energy legislation.

We’ll continue to monitor Congressional energy actions, and report any meaningful and actionable ideas right here. In the meantime, turn down that thermostat and let up a little on the gas…

More on Obama’s plan next week.

Disclosure: none

Comments

[longoil:]

I don't think we'll see energy independence with Obama's presidency. His energy policy is very fragmented and full of pander to special interest groups (i.e. Coal, Corn Ethanol, UAW, etc.). A complete energy policy would include: finding new reserves (until the 40-50 yr transition to renewables is complete), conservation and alternative energy. So far Obama's policy barely addresses any of these categories and his energy plan is full of sub-optimal proposals:

1) Gap-and-trade of emissions solves nothing and how do you police
compliance? Enforcement will cost more than the benefits derived.

2) The SPR has enough oil to supply the US for 40 days. Do you think it is wise to drain it to lower gasoline prices a few cents briefly and then be exposed to oil shortages like 1973 and 1979?

3) Raise CAFE standards 4% per year. A good idea, but remember it was
Clinton and Gore (Mr. Climate change) that introduced the light truck exemption clause that made CAFE impotent in the first place to buy UAW votes. Obama owes UAW and I would be surprised if he makes good on this promise.
4) Windfall taxes for oil companies. Oil exploration and production is very capital intensive. Why would oil companies invest in new infrastructure to find new reserves if they will be penalized for making a profit on a risky ventures ? By introducing windfall taxes, oil companies will cut back on exploration and production and gasoline prices will rise significantly like they did in 1980.
5) His pandering to UAW includes opening up the NAFTA agreement with Canada. What he fails to see is that Canada has the upper hand this time around. If his negotiations include cutting Canadian jobs, Canada can turn around and kill the energy clause which guarantees that 60% of Canada's oil and gas production output is sold to the USA. Canada has plenty of other suitors like China and India that would gladly step in and buy from the 60% allotment. This would leave USA being even more susceptible and at the mercy of nations hostile to the USA (Venezuela, Saudi Arabia, Russia, etc.)

I hope I am wrong, but with oil prices hovering at the $60 mark complacency has returned and energy independence is on the back burner. It will only take center stage when it is too late and oil has surpassed the $200 mark.

2008 Nov 11 08:54 AM

[Steven Ward:]

Carbon credits (CC's) and the resulting schemes rank right up there with SUV's in their financial solidity.
CC's are being passed off as great financial instruments because it fits a political agenda.
Next boom and bust are CC's rolled up into debt obligations with the enviro's hollering it is sound policy.
I guess this is how they plan to bail out Wall Street.

Unless President Elect Obama changes his energy platform,he will have this country whistling past the energy graveyard.

2008 Nov 11 10:17 AM

[Marc Courtenay:]

Nice work David. You said it all when you wrote"The best place to start our investigation is with a review of Obama’s “New Energy for America” plan. It’s a comprehensive document detailing the President-elect’s roadmap for energy independence." Keep bringing these uniques investment themes our way and thank you.

2008 Nov 11 01:14 PM

[quick:]

I like the idea of an investment like GRN, but the thing that's scared me off so far is that it's an ETN, not an ETF, and is therefore dependent on the solvency of the underlying issuer, in this case Barclay's. So if Barclay's goes the way of Lehman Brothers, then all of your money tied up in GRN is wiped out, regardless of how the actual carbon credits are trading. Because ETNs don't hold underlying assets like a lot of ETFs do, I'm staying away from them during this credit crisis. Too risky for my blood! I wish there was another way to play this carbon market though, it's a good way to diversify.

2008 Nov 11 04:56 PM

[WayneS:]

"Oil companies" are already paying windfall taxes. ExxonMobil alone has paid $16 billion more in taxes in the US than they made. They make most of their money elsewhere and bring the money to the US. Isn't this what we need? There are other international oil companies in the US probably doing the same thing.
Gasoline today is $1.899 here. What does this mean?
1700 more people will die in their vehicles the next year than the last 12 months. People will return to their wasteful driving habits, if they actually quit. Green house gases will increase. Congress will forget about alternative energy sources, as they did in the 1980's. Oil stocks will go down because most people think they make money selling gasoline.

2008 Nov 12 01:35 PM