How to Trade 'Cap & Trade' Policies - Barron's

Obama has given environmental initiatives a central role in his agenda, and one of the most important advances could be 'cap and trade,' a market-based system designed to cut emissions of greenhouse gases. Barron's highlights several ways to cash in on the effort to limit these gases.

There's plenty of positive movement in the direction of cap and trade: Obama's administration strongly supports the practice; new proposals could soon emerge from both the House and the Senate; the Chicago Climate Exchange has attracted around 400 participants, including Monsanto (MON), IBM (IBM) and Intel (INTC), as well as the city of Chicago, to sign on to a voluntary emissions cap program; and at least three different regional U.S. groups are developing cap and trade programs. A federal program isn't out of the question either.

Last month, the first ETF geared to this market was launched, called AirShares (ASO). It holds futures contracts on the EU Allowances and tries to copy their performance. There's also the ETN iShares Global Carbon (GRN). Several other indices, especially in Europe, will likely lead to more ETFs.

Jackson Robinson, president of Winslow Management, which oversees $325M in 'green' funds, believes cap and trade will help several companies that have been hurt by lower oil prices, and says their shares could double over the next 12-18 months. Among Robinson's picks:

1) EnerNOC (ENOC), a virtual utility. It has a market cap of $184M and Robinson sees losses of $1.07/share in 2009. Still, it plays a vital role in making deals between utilities and big power consumers.

2) American Superconductor (AMSC) moves electricity quickly and with little loss of energy over long distances. This means cities like New York could economically import clean energy (like windmill power) over long distances. The stock is expected to lose $0.34/share for 2008, and has a market cap of $721M.

3) Ormat Technologies (ORA) drills deep to produce geothermal power. The company is expected to earn $1.51/share this year, and has a market cap of $1.3B.

4) First Solar (FSLR) is well positioned to reach price parity with nuclear or coal within the next two years or so. Robinson estimates 2009 earnings of $7.13/share, and the firm has a market cap of $12B.

5) Energy Conversion Devices (ENER) makes flexible film for solar power. Robinson expects earnings of $1.59/share in 2009.

6) Itron (ITRI) sells meters that regulate power consumption and holds vast potential, according to Robinson. Its market cap is around $2B, and 2009 EPS are estimated at $3.78.

Comments

[Ferdinand E...:]

I've just written a paper saying that cap-and-trade is a scam. Unfortunately I don't believe it was accepted by SA, but since everything I write is published somewhere, it doesn't make any difference.

Here are two 'bottom line' observations from my article. The CEO of Exxon-Mobile prefers carbon taxes to cap-and-trade, and in the UK emissions from companies that participate in the cap-and-trade farce increased during the first two years of the scheme (and probably the third). What's the point in joining in the promotion of that nonsense?

Jan 18 09:40 AM

[longoil:]

The "Cap and Trade" versus "Carbon Tax" is a very interesting debate

The carbon tax proposed by Exxon's CEO is actually the better route to pursue, since it is easier to add an additional tax to gasoline, diesel, coal or other hydrocarbon. CEO Lee Raymond is extremely brilliant. On one hand he appears to be a responsible corporate citizen by taking responsibility for his company's pollution. On the other hand it, he knows damn well that any politican that even talks about endorsing a carbon TAX will be committing poltical suicide. Either way he wins.

Obama knows the carbon TAX is politically dangerous, which is why he opted for the Cap-and-Trade route. However, the Cap-and-Trade scheme is a nightmare to administer (compared to a carbon tax). You need an army of thousands of inspectors to police compliance. How do you detect when someone is cheating and emitting more pollution that they are allocated. ? Furthermore, the Cap-and-Trade has many loopholes for legacy polluters.

Jan 18 10:57 AM

[Erich J Knight:]

We have the lessons learned from the EU on Cap & Trade, and should avoid their pitfalls.

What I haven't seen is interest and attention to companies that through additionality, are carbon negative in their business practice, like;

www.3ragrocarbon.com

www.dynamotive.com/en/...

www.bestenergies.com/

An idea whose time has come | Carbon Char Group
www.carbonchar.com/

Jan 18 12:13 PM

[Bob the Bear:]

One of the better substitutes for trading in carbon is reducing the carbon usage. Orion Energy Systems(OESX) cuts electricity requirements by large amounts at no cost to the companies that they deal with. Bottomline large users of electricity save big dollars at no capital cost to themselves. Now that's an idea.

Jan 18 01:05 PM

[31October:]

Re: longoil ... "the Cap-and-Trade scheme is a nightmare to administer (compared to a carbon tax). You need an army of thousands of inspectors to police compliance. How do you detect when someone is cheating and emitting more pollution that they are allocated? Furthermore, the Cap-and-Trade has many loopholes for legacy polluters."

All completely correct! But this is not about doing the right thing. This is about politics.

Jan 20 11:48 AM