Carbon Capping Debate - Will Results Favor Wall St.?

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 |  Includes: BCS, GS, MS, XOM
by: Bill Paul

Despite the frightening state of the U.S. economy, it still appears to be “politics as usual” in Washington, aided and abetted by journalism as usual.

Yes, the economic recovery act should be vigorously debated. But does anyone – anyone – think the debate has been conducted thoughtfully in the House and the Senate by elected officials who are more concerned about the fate of the nation than the fate of their political party?

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As decisive to America’s future as the current economic debate is, soon to come is another debate that won’t just be critically important to the fate of the economy but also the environment. Everything – not only our pocketbooks and portfolios but our very quality of life – rides on whether Congress can rise to the level of thoughtful debate.

The debate will be over how America should deal with rising atmospheric levels of carbon dioxide that most scientists believe is a key cause of global warming. The overarching question is: should America put a limit, “cap,” on CO2 emissions and, if so, how should it be enacted – through “cap-and-trade” or through a “carbon tax?”

The other week ExxonMobil Corp (Symbol: XOM) came out in favor of a carbon tax. If ExxonMobil, one of the world’s best political infighters, has decided it can’t keep fighting CO2-limiting legislation, then the “should there be” part of the debate has already been resolved.

So, profound change is coming. If, as the Obama administration wants, Congress embraces cap-and-trade, then an entirely new financial market with the potential to be as big as the stock and bond markets will be created over the next several years. This market will trade carbon “credits,” financial instruments generated by businesses (and, for all we know, maybe even homeowners). They will be sold by those that annually reduce their carbon emissions by more than an amount specified by the government. They will be bought by those who don’t.

The White House wants everyone covered under the cap. That would mean that the bottom line of literally every company in America would feel either a positive or a negative impact.

The alternative, a carbon tax, is seen by environmental and other advocates as the better approach on the grounds that it will force actual reductions in CO2 emissions by eliminating the option of paying for credits that, according to the advocates, constitute a permit a pollute.

If Congress goes the tax route, every business will again be affected to the extent that it is dependent on fossil fuels. Even with a maximum push for wind and solar development, the world will still likely be heavily dependent on fossil fuels in 20 years, and thus a carbon tax will likely make all energy usage far more costly.

What’s an investor to do? Bet on cap-and-trade, but not on Congress getting it right. After a not-very-thoughtful discussion, Congress will pass legislation that may well turn out to be a disaster for the economy and the environment in that it will be extremely expensive and won’t do anything to reduce emissions.

But cap-and-trade is what Obama wants. And it’s what Wall Street wants and needs to regain financial stability because it will generate a lucrative new source of income.

Who should investors bet on? They should think first about Goldman Sachs Group Inc. (Symbol: GS), Morgan Stanley (Symbol: MS) and Barclays PLC (Symbol: BCS), all of whom have long been preparing for a cap-and-trade world.

Disclosure: no positions