EPA Carbon Ruling Creates Dip-Buying Opportunity In Coal

Apr. 8.12 | About: VanEck Vectors (KOL)

The Environmental Protection Agency of the United States has proposed a new regulation that will limit emissions from power plants. For investors in the energy market, the biggest impact this will have is on coal-powered generators and the corresponding demand for coal. Here's a key excerpt from The Weekly Standard that summarizes things nicely:

By 2035, the bill requires that at least 84 percent of all electricity in the United States be produced from "clean energy" sources. Put another way, coal will be limited to no more than 16 percent of domestic electricity generation. That's a drastic reduction given that coal-fired generators now provide about 40 percent of our electricity.

You can read the entire mandate from the EPA -- all 257 pages of it -- here (pdf).

This bill is deeply flawed in many ways, although I will do my best to spare you a political rant and trust that government's ineptitude and corruption is either well-known to those of you open to the truth while it will not be accepted no matter what evidence is presented to those who do not wish to believe it. So, let's take a strictly economical approach.

The fact of the matter is that whatever restrictions are placed in the US on coal, it is still an important and vital energy source -- terrible and polluting as it undeniably is. Robert Bryce, an energy journalist I recommend to everyone investing in this space, sums it up nicely when he says:

Over the last decade, largely because of increased coal consumption, global carbon-dioxide emissions rose by 28.5 percent. Over that same decade, U.S. carbon-dioxide emissions fell by 1.7 percent. And here's a stubborn fact that the EPA and its allies on the Green Left simply refuse to acknowledge: Over the past decade, even if U.S. carbon-dioxide emissions had gone to zero, global carbon-dioxide emissions still would have increased.

Why? The answer is simple. The rest of the world wants what we take for granted: cheap, abundant, reliable electricity. Demand for electricity is a key reason that China's carbon-dioxide emissions jumped by 123 percent over the past decade. Over that same time period, Africa's emissions jumped by 30 percent, Asia's by 44 percent, and the Middle East's by 57 percent.

So that's the basic story here. Carbon emissions are going to go up no matter what the US does. Other countries will not follow the US' lead here simply because they want cheap and abundant electricity, as is common in the United States -- and coal is currently one of the best ways to achieve this goal.

Ultimately, the one energy source that can satisfy those who are both concerned about emissions as well as those who are concerned about having abundant energy is nuclear. It is worth noting that M. King Hubbert, the visionary geologist credited with observing Peak Oil back in the 1950s, entitled his seminal paper on the subject, "Nuclear Energy and the Fossil Fuels." Hubbert understood then both the problem and the solution to our current energy and environmental crisis: a shift away from oil and towards nuclear. Investing in the nuclear renaissance is one of my favorite opportunities currently in the market (see my initial coverage) and is one of the main reasons why I'm bullish on everything from uranium miners like Cameco (CCJ) and Uranium Energy Corp. (UEC) who can provide uranium as fuel for nuclear power to graphite miners like Northern Graphite (OTCQX:NGPHF) and Focus Metals (OTCQX:FCSMF) who can create batteries well-suited for transmitting nuclear power.

While I prefer to focus on nuclear, which I think will benefit from this flawed legislation, I do think coal will still rally as well. The coal ETF (NYSEARCA:KOL) is down nearly 6% since mid-March, and is over 80% off from its June 2008 high of 57.40. I believe coal will go back up to those highs, as there is still a supply/demand imbalance for coal -- and the possibility that we will reach "peak coal" in several decades (see my previous coverage of coal). So, even if the US bans coal power, that means coal producers will simply export their product as demand for it is strong.

There are two considerations that could spoil this analysis:

1. I'm underestimating the influence of the US and other nations will follow along. I doubt this, because coal is cheaper than nuclear, oil, and natural gas for many countries that cannot afford nuclear and do not have easily accessible fossil fuels. But it is something that investors may wish to keep an eye out for.

2. Everyone could get on board with nuclear. As a citizen of planet earth and an investor in nuclear power this is what I would much prefer, although nuclear still faces great political opposition and is difficult to finance in economies with lower GDPs. Modular nuclear reactors, like what Babcock Wilcox (BWC) is doing, could be a game changer that makes nuclear more affordable for smaller economies. I don't doubt that this will eventually occur, but I also don't consider it an investment opportunity for public market investors at this time (although these nuclear power startups are worth watching).

Disclosure: I am long CCJ, UEC.