Five ETFs for Climate Change Legislation

Through the first six months of the Obama administration, campaign promises were largely moved to the back burner while all available resources were devoted to an economy spiraling further and further into recession. Now that the country has lifted itself out of the recession and a recovery, albeit a fragile one, is underway, Washington has resumed battling over proposed social overhauls. While health care reform has been the primary focus (and the source of the most heated conflicts), climate change initiatives have been making steady progress as well.

That’s not to say that Congress is anywhere near a unanimous resolution on the matter. While most legislators are politically savvy enough to come out in favor of legislation protecting the environment, their ideas of the best way to do so vary wildly.

In June, the House passed HR 2454, better known as the Waxman-Markey bill, legislation including a “cap-and-trade” program whereby carbon emissions would be limited and corporations would need to purchase credits for any emissions exceeding predetermined levels.

In September, a bill championed by Senators John Kerry and Barbara Boxer was introduced with more aggressive targets for reducing 2020 emissions (see an excellent comparison of the two proposed pieces of legislation here). Kerry-Boxer also goes much further in promoting the development of nuclear power plants as a preferred clean energy option in the future.

ETF Plays On Climate Change Legislation

The end result from Washington still remains to be seen, with any number of scenarios currently in the running as viable options. And uncertainties over the impact on the economy and the environment will remain long after a resolution is approved and passed into law. But one thing is certain: the ultimate outcome from the climate change debate in Washington will have a major impact on the U.S. and global economies, touching a number of sectors. For investors with a hunch on how this saga may unfold, there are a number of ETF options that could see some big movements, both up and down, in coming months.

• iShares S&P Global Nuclear Energy Index Fund (NUCL): The Boxer-Kerry Bill now making its way through Congress comes out in favor of nuclear energy, which produces far fewer harmful emissions than fuels such as coal. Nuclear power seems to be one of the only issue both parties can reach an agreement on. “We need to build 100 nuclear power plants in the next 20 years,” said Republican Senator John McCain earlier this month. “We have to, otherwise we’re not going to reduce greenhouse gas emissions.”

• Market Vectors Coal ETF (KOL): As one of the least environmentally-friendly sources of energy, coal ETFs would figure to be under fire in the current environment. But despite the apparent bullseye on their back, coal ETFs have surged this year. KOL has gained more than 125% while the PowerShares Global Coal Portfolio (PKOL) is up more than 115% in 2009. This stellar performance may reflect skepticism over the ability of the government to gradually reduce dependence on coal as a major source of power in this country.

• PowerShares Global Clean Energy Portfolio (PBD): This ETF invests in companies focusing on green and renewable sources of energy around the globe, including wind and solar power. Although PBD has only about a quarter of its holdings in U.S. companies, climate change discussions have also taken place at a global level (such as at the G-20 summit), and it is likely that many developed nations will follow the lead of the U.S. on further regulations.

• iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO): In order to push through a climate change bill satisfactory to both parties, it is likely that the final legislation could include a provision for increased offshore exploration and drilling. If this is the case, firms engaged in exploration and production of energy sources in the U.S. could see a big boost.

• Claymore/MAC Golbal Solar Energy ETF (TAN): While it has had its share of setbacks, many believe that solar power is one of the most promising alternative energy sources for the future. TAN invests in companies that produce solar power equipment and products around the world, including solar cell and module producers.

Disclosure: No positions at time of writing.

Comments

[The Green I...:]

Thank you for the short introduction to U.S. climate change legislation.

Given the ETFs you list in the article, your article title is misleading. I would say that at least 2 of them, IEO and KOL, are very much going AGAINST climate change legislation and not “for”. It would also have been nice if you had mentioned all green ETFs, 11 of them at last count, not counting NUCL, but they are all listed in the recent Seeking Alpha article "A Guide to Investing with Green ETFs".

Oct 21 07:51 AM

[huangjin:]

ETFs for climate change legislation? Short U.S. Treasuries, short U.S. markets, long China and India. Short oil, short natural gas, short every commodity, except whatever will go into the "green" tech, such as lithium, because total demand will decline as the economy contracts. If there was a fund that went long the unemployment rate, I'd buy that.

Oct 21 11:02 AM

[tripleblack:]

LOL, I like your style, huangjin. You're right about lithium, or rare minerals in general, I just went long a minerals company (AMLM.OB) with that in mind.

Note the obvious discomfort with including NUCL in the "green" family. That relationship will always be awkward. Nuclear power might be a necessary evil, from the green viewpoint, at best, and then only in extremis. Listing it as a play may well be real, solid logic, but it does play AGAINST the human perceptions of those the topic purports to court.

The urgency put forth by most of the parties on the pro-global warming side of the equation will militate against the crash construction of a hundred new nuke plants - if for no other reason than the way we do this nowadays takes a decade or more to get such a project for even one nuclear facility off the ground, if then. If whatever legislation includes this odd alliance of agendas passes WITHOUT some sound formula to bypass the massive roadblocks currently in place, that portion of the bill will be pure fantasy.


On Oct 21 11:02 AM huangjin wrote:

> ETFs for climate change legislation? Short U.S. Treasuries, short
> U.S. markets, long China and India. Short oil, short natural gas,
> short every commodity, except whatever will go into the "green" tech,
> such as lithium, because total demand will decline as the economy
> contracts. If there was a fund that went long the unemployment rate,
> I'd buy that.

Oct 21 12:05 PM

[Old Rick:]

Do you have any ETF recommendations that might benefit from the revelation that AGW is a fraud?

Oct 21 03:34 PM

[NEOCON47:]

nuclear energy as a clean energy? not.

Do you have any idea how much pollution is produced making all of the materials and parts needed to store and operate a nuclear reactor?

Also, where does all the radioactive waste go to? in your back yard, and where is the security of the radioactive active?

If I was to bet on anything, it would be whoever mines Thorium as it cannot be used to build nuclear bombs and is not as potent as the other radioactive materials used in current plants.

BTW, it takes about 20 years to build a nuclear plant, do you know where you will be in 20 years?

Oct 21 08:08 PM

[Alpha-Hunter:]

I wouldn't be shorting gas anytime soon. Emissions wise in electrical generation it provides 50%+ reduction to CO2 versus coal. And the tech exists, combined cycle gas generation is horribly under-utilized. Try taking a look at the cost profile of new generation produced by the EIA at

www.eia.doe.gov/oiaf/a...

... and run the numbers on new scrubbed coal versus advanced combined cycle natural gas. Even at $5/mmbtu for gas, gas really isn't costing that much more than coal based generation. Slap any kind of carbon tax on, and it gets really tough for coal to compete.

Oct 22 01:06 AM

[Steve in Gr...:]

Here is the trade for climate change legislation using ETFs:

SH: Proshares Short S&P 500.
TBT: Proshares Ultrashort 20+ Treasury.
Physical gold.

Oct 22 11:34 AM