Carbon Cap and Trade's Possible Winners

by: Tad Gage

Make no mistake: in one form or another, carbon emissions legislation, taxation and trading is a growing global trend. Aside from the environmental issues, taxing companies’ carbon emissions is simply too alluring a prospect for most governments to pass up. The challenge comes in accurately measuring exactly what a corporation’s carbon footprint is, and then facilitating the trading of credits. So it stands to reason that companies that help monitor, measure, and trade emissions credits might be interesting long-term investment opportunities.

Experts say measuring a company’s carbon footprint is notoriously difficult. It’s hard enough to measure the primary and secondary impact of, for example, mining companies or utilities. But how effectively can you measure the carbon footprint of a U.S. company that manufactures shoes in China for sale in the U.S?

The impact of compiling the raw goods from around the globe, the impact of shipping materials to a factory, the carbon footprint of that factory, and the carbon usage required to ship the finished goods back to the United States? It’s a heroic challenge. But if you believe the more than 180 nations that have ratified the Kyoto Protocol, which took effect in 2005, there is a global move underway to cut emissions, greenhouse gases, and reduce or tax carbon footprints.

The topic is so complicated and convoluted it’s nearly impossible to understand without a PhD. But it will get figured out, one small step at a time. But back to the investment opportunity. First off, companies that develop systems and software to accurately measure corporate carbon emissions should benefit. SAP AG (NYSE:SAP) sent a “clear” signal a couple weeks ago when it announced plans to acquire Clear Standards, Inc., a privately held developer of enterprise carbon management solutions.

In a nutshell, SAP believes Clear Standards capabilities can be integrated into its organizational software, giving companies the ability to monitor and manage emissions data and environmental impact. Many smaller, privately held companies are out there developing niche capabilities in carbon footprint measurement. The companies with a halfway decent product and business model are going to be acquired, build alliances with bigger players, or go public.

Most of these companies aren’t publicly traded. One that is public is Evergreen Energy Inc. (NYSE Arca:EEE), which actually offers investors an interesting combination of coal cleaning technology in its K-Fuel product, enterprise carbon accounting measurement business with C-Lock Technology, and carbon credit origination with Carbon Credit Corp’s technology. Evergreen has frequently noted an extensive working relationship with IBM (NYSE:IBM) in developing integrated company-wide software solutions related to carbon impact measurement.

Such partnerships are no guarantee of a long-term winner, but it’s hard to imagine carbon emissions measurement is a passing fad – not with the pressure to address global environmental issues and the alluring revenue-generating opportunity presented by measuring and taxing carbon footprint.

Firms that stand to benefit from trading carbon credits strike me as a wild card at this point because it isn’t clear what exactly will be traded or how. I’d put more stock in the companies that develop the systems that do the heavy lifting of accurately measuring carbon usage. Without government-approved measurement systems, companies stand to get the short end of the stick in terms of taxation. Still, it’s tempting to look at the partnership between Goldman Sachs (NYSE:GS) and emission offset and carbon storage expert Blue Source, a privately held Utah-based firm, or pure carbon credit traders like Camco (OTC:CAMCF) or EcoloCap solutions [OTCBB:ECOS].

Finally, sustainability is yet another play in the emissions and carbon credit arena. Although the process requires a book to explain, corporations that are traditional net polluters can and are developing programs that earn them sustainability and carbon Brownie points. Canadian companies lead the world in this area. Viterra [TSX:VT], an Alberta-based agribusiness conglomerate, has programs in place to help its customers (farmers) manage their sustainability and carbon credits programs.

Viterra manages sustainability and environmental impact issues and measurement for its customers and also acts as a captive credit buyer and seller for farmers, who generally come out of the process either with extra cash or credit for purchases like fertilizer or services like grain processing. It looks like a win-win for both sides, since Viterra, a sustainability-oriented company, can share a bit of the carbon credit profits with farmers, who don’t have the resources to measure and manage these issues.

And although coal and electric utilities may look like the victims in emissions measurement and cap and trade, perhaps some will distinguish themselves. It appears there are ways energy companies can actually come out ahead in the carbon game, like Louisiana-based utility Cleco Corp. (NYSE:CNL), which participates in UtiliTree Carbon Company, a consortium of 40-plus U.S. utilities that manage wetlands, plant trees to offset deforestation in the southern U.S. and Malaysia and Belize, and so on. If energy companies can make these types of environment investments work for them to offset their carbon footprint and reduce taxes, you can bet they will.

It’ll be a long time before solar power and wind-generated energy have much impact. But the cut-and dried reality is that carbon emission measurement and taxation is here. I think there’s going to be a race to get the systems up and running that measure carbon emissions, reward conservation and sustainability, and either generate revenue from credit sales or minimize tax impacts. That’s where investment opportunity might reside.

Disclosure: The author has no positions in the companies mentioned.

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