How Will Obama's Administration Affect Emissions Trading Stocks?

All the recent talk about Barack Obama creating a "Climate Czar" position in his administration begs the following question: will Obama dare to implement a nation-wide cap-and-trade system for greenhouse gases [GHGs] in the midst of an economic collapse?

While the recent pullback in energy prices will certainly provide some cost relief to energy-intensive industries, which were getting squeezed by rising energy prices, this pullback pales in comparison to the challenges they face in other areas of their businesses right now, and slapping them with complex and potentially-costly new regulation could create significant political backlash. What's more, continued softness in industrial output should take care of at least some emissions in 2009, lessening the political imperative to act now. So the question is: what's in store for US emissions trading regulation and emissions trading stocks?

In May, I wondered whether the Climate Exchange plc story was overdone. Climate Exchange plc (CXCHF.PK) is the company that runs the Chicago and European climate exchanges. Another Massachusetts-based but Toronto-listed play on carbon emissions trading is World Energy Solutions [XWE.TO], the company that runs the auction platform for the RGGI's carbon dioxide emissions allowances. How have these two stocks done in the past six months? Not extraordinarily well, according to the chart below (the beige line is the S&P 500 - apologies for the unclear legend).

Click to enlarge

Does this fall from grace represent a great buying opportunity, especially for Climate Exchange plc (it would benefit most from federal-level regulation), or is the sector doomed for the foreseeable future because a new president would never dare to regulate GHGs in this context? Obama, as recently as Monday, was still hinting that he intended to move full swing ahead with his climate plan. But subsidizing clean technologies and imposing hard emissions caps are two very different things, and they have vastly different political implications.

To be continued...

DISCLOSURE: Charles Morand does not have a position in any of the securities listed here.

Comments

[War Room Ca...:]

The consensus in the market is that Obama will place caps on emissions. He has stated the other day that the US will "reengage" in the international climate talks. An international agreement's deadline is the end of 2009, but there is a meeting in the coming weeks taking place in Poland to further talks on an international agreement. However, US negotiators will not be making any major moves until Obama takes office. Obama has said he wants to cut emissions to 1990 levels by 2020 and then 80 percent below 1990 levels by 2050. Comparatively, the Kyoto has set a goal at six percent below 1990 levels by the end of 2012. So although Obama's goals are lower than Kyoto's, it is a start. There will be several sectors that will be affected by emissions caps as any new international agreement is expected to be economy wide and cover additional emissions than the current plan. There will be numerous opportunities within the emissions markets including arbitrage, derivatives valuation discrepancies, and simple volatility trading.

2008 Nov 19 10:04 AM