How to Profit From Greenhouse Gas Emission Restrictions and Incentives

Includes: AEP, AOMFF
by: David Fessler

It’s one of the fiercest debates in the world – both politically and economically.

That’s because it concerns the world itself – namely, how to protect it from harmful environmental emissions and global warming.

Many environmentalists say global warming not only exists, but is also the leading cause of damage to the Earth. They cite obvious factors like the Antarctic ice shelves breaking off, glaciers melting at unprecedented rates and the holes in the Earth’s ozone layer.

But a few scientists believe global warming is exaggerated, with warmer temperatures and melting ice the result of normal up-and-down cycles that occur every 10,000 years or so.

For the record, I believe global warming is real. But the big debate centers on the question of why it’s happening. Let’s examine the biggest offenders, the incentives being offered to reduce emissions and who stands to capitalize from new energy legislation…

Global Warming… Greenhouse Gas Emissions Are The Real Problem

No matter where you stand, you’ll likely know that the consensus is that greenhouse gas emissions are the cause of the problem.

The most prevalent of these gases is carbon dioxide (CO2). It’s the result of burning fossil fuels like coal, natural gas and petroleum, as well as from vehicle emissions. The chart below – courtesy of the Environmental Protection Agency – shows the breakdown of greenhouse gas emissions – and just how much of a factor CO2 is…

Global Warming & Global Greenhouse Gas Emissions

The greenhouse gas problem stems from this cycle…

  • Gases rise up into the atmosphere, where they accumulate and create an “insulating” layer.
  • This layer traps more of the sun’s heat within the Earth’s atmosphere instead of it radiating out into space.
  • As a result, global temperatures rise. If left unchecked, within 100 years – or much sooner by some estimates – oceans will be 20 feet higher than today.

Obviously, rising ocean levels would have a devastating effect. Many low-lying coastal areas would be completely submerged, with millions having to move to higher ground. And some low-lying islands would disappear entirely.

Hurricanes and typhoons would be 10 times as damaging as they are now, and places previously thought to be immune from storm surges would find themselves in the middle of a New Orleans-like nightmare.

So it’s obvious that the easiest way to attack the greenhouse gas problem is to go after CO2, as it’s responsible for 55% of all greenhouse gas emissions. But that means targeting the sources…

Who’s the Biggest Global Warming Offender? Look in the Mirror…

While global warming – and, by extension, greenhouse gas emissions – are a worldwide problem, you can see from the chart below that the United States is by far the world’s biggest offender.

Since the beginning of the Industrial Revolution, we’ve pumped more than 6,000 million metric tons of carbon dioxide into the atmosphere. To put that in perspective, our emissions are equal to that of Europe and China combined. Russia is about half that of China.

Global Warming & Global CO2 Emissions

While the United States is the largest greenhouse gas emitter, it’s the rate of growth that worries scientists and policymakers – particularly with other nations quickly establishing themselves as major players on the global stage.

For example, by 2015, emissions from developing countries like China, Russia, Brazil and others are expected to exceed those of developed countries.

So how are we tackling the problem?

Got Emissions? Bury Them…

While electric vehicles, like PHEVs, will eventually address CO2 emissions in that area, mass production and adoption is still a long way off.

At the moment, it’s more viable to tackle the millions of tons of CO2 that billow out of smokestacks at power plants. And that’s what scientists have explored over the past 10 years.

So far, the most promising and technically feasible idea is to capture the CO2, liquefy it, and pump it deep underground, beneath an impermeable layer of rock from which it can’t escape.

The technique is already being used in Canada on a few older oil and gas wells as a means of extending their productive life, with CO2 piped there from the United States. There’s no reason to believe it won’t work here, but there’s just one problem: cost.

Incentivizing the Offenders Through “Cap-and-Trade”

Of course, no plant owner is going to rush to spend the millions required to capture CO2… unless legislators make it illegal and painful for them not to.

The key is to make it worth their while via incentives.

And that’s happening in the form of a tax on carbon emissions – a so-called “cap-and-trade” system.

Simply put, the government sets the “cap” on the total amount of carbon emissions allowed. Emitters can then “trade” (buy and sell) permits, which allow them to emit CO2. The aim is that the overall limits gradually decline, thus forcing the price of the permits up, making it more economically attractive to actually stop emitting.

Unfortunately, though, the United States is noticeably behind the rest of the world in its implementation of such a system. And realizing that a change of this magnitude will take time, a cap-and-trade system is working its way through Congress in the form of the Waxman-Marley bill.

Naturally, with Washington involved, it won’t pass easily. However, it has become a political hot potato and Congress will eventually pass some form of the bill. And the good news for investors is that it will generate another new revenue stream in the energy sector.

The Company Leading the Way… So Far

A few coal-burning utilities aren’t waiting for the legislation to kick in. Alstom, SA (OTCPK:AOMFF), a French energy infrastructure manufacturer, has a CO2 injection pilot project with American Electric Power Company, Inc. (NYSE:AEP) – the largest coal-burning power utility in the United States – at one of AEP’s plants in West Virginia.

Using Alstom’s technology, AEP is capturing and liquefying about 1.5% of the annual CO2 output from the plant and injecting it deep underground. If successful, Alstom hopes it will be able to leverage its “early-in” success in West Virginia, other parts of the United States and elsewhere around the world.