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 (OTC:CXCHF) 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.