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That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

Wednesday, March 14, 2007

Trading Carbon Credits for Fun and Profit

Today's comment is by Mike Burnick,
The Sovereign Society's Senior Editor and Global Markets Analyst.

Today, a decade after the Kyoto Protocol first kicked off global efforts to limit greenhouse gas emissions, the American free enterprise system is finally making global warming a top priority.

And why not ... after all there's a lot of money to be made from saving the environment.

We have seen a seismic shift in the U.S. lately, with government and industry more interested in cutting carbon dioxide gas emissions, and other man-made pollutants, that are suspected of causing global climate change.

In fact, three major energy industry trade groups have recently done a complete about-face. They've gone from fighting mandatory federal limits on greenhouse gas emissions - to now supporting legislation that could regulate greenhouse emissions sooner than most thought possible.

The Wall Street Journal reported this week that the Edison Electric Institute , a powerful lobby for the electric utility industry in the U.S., has joined the American Gas Association , and the Electric Power Supply Association (EPSA), to support federal government regulation on its industry members.

This is a significant shift on the part of American industry. For years, industry heads have pooh-poohed the very idea that carbon dioxide even caused global warming. It reminds me of the good 'ole days, when the American tobacco industry vigorously denied scientific evidence that smoking caused lung cancer.

But of course, there's a profit motive behind this sudden change of opinion.

Utility Industry Gets a Wake-Up Call
Utility firms that belong to the Edison Electric Institute generate 60% of electricity in the U.S., according to the Wall Street Journal. And the good folks at the EPSA represent the interests of 22 firms that sell electricity on wholesale markets across the country.

Together, these two organizations represent a very big block of the biggest carbon dioxide emitters in the United States. In fact, about 50% of America's electricity needs are provided by coal-fired power plants - the fossil fuel with the highest carbon content.

But why the sudden change of heart? For one thing, the change in control of Congress last fall was no doubt a wake-up call for the utility industry. Former Vice President Al Gore's well-received documentary "An Inconvenient Truth" has helped fire up public opinion in favor of environmental protection.

There's now a growing probability that Congress acts to pass some sort of emission controls before next year's election. And Paul Wilkinson, vice president of the American Gas Association, perhaps said it best: "We want to be at the table during the debate." In other words, key players want to help steer the debate as much as possible in the industry's favor. It's the American way.

U.S. States Hop Aboard the Carbon Credit Bus
This driving trend toward legislation to limit greenhouse gas emissions was already underway in state legislatures across the country. Last year, the State of California - the world's 12th largest carbon dioxide emitter -- passed the Global Warming Solutions Act that aims to cut greenhouse gasses 25% by 2020.

Oregon, New Mexico, Arizona and Washington State have joined forces with California to propose a "cap-and-trade" program that would allocate carbon emission credits among companies operating in these western states.

The idea is modeled after an emission-credit trading program in place among eight states in the northeast, including all the New England states, New York, New Jersey, and Delaware. So now the time seems ripe for a federal carbon credit-trading program -- to spell out nationwide rules for limiting greenhouse gasses.

There are a number of different schemes being considered by Congress, so it's too early to say what the final version will look like. But the basic idea is a carrot and stick approach - with a free market twist.

This free market twist is known as carbon credit trading...

Both the U.S. government and key industry players in the U.S. are suddenly becoming very environmentally-conscious. And why not, since the government is set to introduce a profit motive for American industry to clean up its act.

U.S. federal and state governments - now joined by the same utility companies that used to lobby vigorously against green legislation -- are now working together to reduce carbon dioxide and other greenhouse gas emissions. (Carbon dioxide is one of the key culprits for global climate change.) Just last year, California introduced and passed the Global Warming Solutions Act - aiming to cut greenhouse gasses 25% by 2020.

Following suit, Oregon, New Mexico, Arizona and Washington State have joined forces with California to propose a "cap-and-trade" program that would allocate carbon emission credits among companies operating in these western states. A similar program is now under way in northeastern U.S. states.So now the time is ripe for federal legislation - to spell out nationwide rules for limiting greenhouse gasses - and provide incentives for businesses to follow the rules. It looks like this government initiative will spark the era of carbon-credit trading.

Just What Are Carbon Credits Anyway?
Companies like electric utilities and manufacturers that produce carbon-based fuels or emissions, would require government permits for each ton of carbon they release into the environment. Firms should also be able to freely trade these carbon-credits amongst each other, so that a company that upgrades its operations to reduce emissions might wind up with surplus credits.

These extra credits may then be sold to less "environmentally friendly" firms in need of more carbon credits to cover their excess emissions of greenhouse gases - or else pay steep penalties to the federal government. This creates a potentially powerful profit incentive for American industry to clean up its act.

Obviously, it also creates a vast new medium of exchange - with carbon credits as the currency. And wherever there's a new medium of exchange, you can rest assured that someone will figure out a way to trade them on the open market to earn an extra buck or two.

The Wall Street Guys Are Drooling!
Of course, Wall Street Investment Bankers will have a field day. They are no doubt salivating as we speak, at the chance to figure out new ways to securitize carbon credits so they can be traded on financial exchanges around the world.

Think of all the millions ... even billions of dollars at stake. Global investors will have lots of new products in which to stash their hard earned cash, in search of incrementally higher investment returns.

In fact, the Chicago Climate Exchange (CCX), which began operations in late 2003, bills itself as North America's only, and the world's first, greenhouse gas emission registry, reduction and trading system. CCX recently announced plans for a new exchange traded fund based on carbon credits, potentially allowing individual investors to profit from this new market for the first time.

And we're going to need new profit opportunities, because one sure thing that's coming out of all this is higher utility costs to consumers .

In fact, the Wall Street Journal reports that one environmental group is forecasting an increase of anywhere from 3.5% to as much as 35% in the nation's electricity prices, depending on the shape and scope of the government plan that's finally adopted.

But what's a few bucks more in monthly utility costs when we're helping save the environment from poisonous greenhouse gases.

Besides, you can always offset your higher electric bill with a few well-timed carbon credit day-trades in your IRA!

MIKE BURNICK, Senior Editor

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