Tip Your Cap To The New Revolution

Jul 3rd, 2009 – Comment

  Keith  from Vaughan, Ontario writes about Cap and Trade: Lou I hear a lot about CAP and Trade. What is the best way I can invest to take advantage of this? Hi Keith, Great question given that the U.S. Clean Energy and Security Act just squeaked through the House of Representatives by a vote […]


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Keith  from Vaughan, Ontario writes about Cap and Trade:

Lou

I hear a lot about CAP and Trade. What is the best way I can invest to take advantage of this?

Hi Keith,

Great question given that the U.S. Clean Energy and Security Act just squeaked through the House of Representatives by a vote of 219 to 212 and still has to pass through the Senate. But regardless of the final form of the Bill and when it passes I think we have to be prepared for changes in how we use energy.

Cap and Trade was the system that helped remove sulfur emissions that caused acid rain and did so at considerably less cost than everyone expected after the passage of the Clean Air Act of 1990

How it works is that every emmitter, in this case of greenhouse gases, will be given a limit on the amount of gas they can produce as a result of their operations. They will be given a permit for a specified allocation.Over time the limits get stricter forcing companies to put in place an ongoing process of reducing their emissions through investment in mitigating technology.

There will be heavy emmitters and low emmitters. Companies that can reduce their emmissions more easily will have permits to sell to those that can’t move as quickly. Capital will flow to those most willing and able to get below their limit as quickly as possible.

The estimates of the value of a cap and trade system range from $50 billion to $300 billion per year in the U.S. which should get the ball rolling towards the goal of reducing CO2 emmission.

At this point there will be no direct way to participate in the trading of permits. It will likely be an over the counter market that serves market particiants directly. There could be the development of a trading vehicle for financial interest to trade in the permits but that system isn’t in play yet.

How can you profit from a cap and trade system on CO2? Start sorting the pile into big emitters who are slow adapters and big  emitters who are fast adapters. The fast adapters will get under the cap aggressively in a short span of time and have cap room to sell. The additional capital flowing to them will provide a strategic advantage for a period of time.

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I would start by looking at companies like Suncor. CEO Rick George has been a long time proponent of preparing for this eventuality and has built a culture within the company to adapt to the storm clouds  that they saw on the horizon 15 years ago.

But don’t stop there! Generate a list of prospects who are best able to adapt quickly and  don’t forget suppliers who have disruptive technology that will get them to the finish line faster and at lower cost. Then look at the charts for those companies and see where the trend is taking them.

Happy Capitalism!

Categories: Environmental
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