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By Martin Hutchinson
Contributing Editor
Money Morning
The Waxman-Markey Bill, the much-ballyhooed clean energy legislation passed recently by the U.S. House of Representatives, is an economic and political mess.
It introduces huge new distortions in markets, imposes onerous new regulations on a number of industries, requires a large addition to bureaucracy and risks a trade war.
And it does very little to fight global warming.
At this point, however, investors really only need to know two key things about this legislation in order to set themselves up for profit, while avoiding any losses from the bill's fallout:
- From a political standpoint, Waxman-Markey is likely to become law in something close to its current form, meaning investors can craft a plan of attack with a fairly high degree of confidence.
- And, from an economic standpoint, it seems to define a pretty clear set of winners and losers, enabling us to flesh out that plan.
A "Good" Tax?
I'm not sure whether I believe in global warming. We clearly seem to be producing more carbon dioxide than we used to, but it's not clear how much of an effect that's having on global climate. Equally, the effects of extra carbon dioxide are long-term and largely irreversible, so even if the warming effect is limited in our lifetime, we probably owe it to our grandchildren not to leave them living in a steam bath.
To the economically minded who share my skeptical-but-cautious view, the optimal policy is pretty obvious: We should enact a carbon tax. Government operations have to be funded somehow, and there's no obvious reason why a carbon tax should be any more economically damaging than any other kind of tax.
A carbon tax has two advantages over other alternatives:
- First, it can be varied easily, as we get new information and become more worried or less worried about global warming.
- Second, it allows investment and purchase decisions to be made by the market, just tweaking the price mechanism a bit to reflect our concerns about carbon emissions.
We're not going to get a carbon tax, because it has the politically deadly word "tax" as part of its name. Still, during the presidential campaign, then-candidate Barack Obama showed off a pretty sensible "cap-and-trade" program. All the carbon emissions permits were sold, so the market was able to work properly, with no freebie giveaways to politically favored recipients. Further, there were no "offsets" by which companies could satisfy domestic permits by persuading the Chinese not to build a dirty coal-fired station, for example (these have given rise to innumerable scams in the European Union cap-and-trade system).
Such a system would have raised lots of revenue, helping to close the budget deficit and pay for healthcare reform, which ought to be one of its major objectives, given the United States' now-dire fiscal position.
The Lowdown on Waxman-Markey
That's not what we're getting with Waxman-Markey, under which 85% of the emissions permits will be given away for free. That depresses the amount of carbon emissions saved, because with so many free permits available, the price of permits will be low.
Also, Waxman-Markey forces new buildings to use 30% less energy by 2012, intruding the U.S. federal government into yet another business previously regulated at the state level. It allows "offsets" for 2 billion tons of carbon emissions a year – 50% domestic and 50% international.
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Finally, it doesn't even raise any net revenue, because the giveaways and administration costs match the fairly paltry revenue raised through selling permits; according to the Congressional Budget Office (CBO) it's just barely "revenue neutral" in the 2010-2019 time frame. That's a major problem for President Barack Obama's budget, which had assumed $624 billion in revenue from cap-and-trade in that same period.
The Winners and Losers
Needless to say, with the government rearranging deckchairs and giving out goodies in such a big way, there will be winners and losers. Clearly that's what investors most need to understand.
One winning category will be distribution-oriented public utilities – the guys who actually send out electricity bills, including Consolidated Edison Inc. (NYSE: ED), Pepco Holdings Inc. (NYSE: POM) and Northeast Utilities System (NYSE: NU).
These companies will be given permits for 35% of the total "cap" amount in the early years, with instructions to provide rebates on electricity prices. Some of the value of those free permits is bound to flow through to shareholders. In fact, the bill was passed on a Friday, and it was notable that on the following Monday that the distribution-oriented utilities showed a nice bounce. If you can get a 7% dividend yield from the company that sends you electricity bills, it's probably a buy!
Clean-coal technologies (primarily carbon capture and storage) are due to get 5% of the emission permits over a lengthy period. Most of the companies experimenting in this area are privately held, but Duke Energy Corp. (NYSE: DUK) is planning a carbon-sequestering power station in Indiana, so may be a beneficiary here – as well as through its operation as a major power distributor.
Another group of winners will the sharper (most-creative) operators in the financial-services arena. Since emissions permits will trade, somebody will have to trade them. What's more, there will quickly arise the whole paraphernalia of futures, options, swaptions, and default swaps. Bear Stearns and Lehman Brothers are, alas, no longer with us, but Goldman Sachs Group Inc. (NYSE: GS), as always, will be prominent at the front of the queue!
Losers? Well, all of us who will pay more for power, but also the Canadian oil sands companies, such as Suncor Energy Inc. (NYSE: SU), who seem fated to pay a hefty premium for their carbon-expensive operations. Probably, the major petrochemical companies such as The Dow Chemical Co. (NYSE: DOW) will be losers, too, as will other carbon-intensive industries. Housing companies will be losers – they use quite a lot of carbon-emitting materials, and will be forced to adopt expensive energy-saving technologies, making their products less affordable.
Of course, all this analysis depends on whatever changes the U.S. Senate may make to the legislation. And that chapter has yet to be written.
[Editor's Note: When it comes to global investing, longtime market guru Martin Hutchinson is one of the very best because he knows the markets firsthand. After years of advising government finance ministers, crafting deals with global investment banks, and analyzing the world's financial markets, Hutchinson has used his creative insights to create a trading service for savvy investors.
The Permanent Wealth Investor assembles high-yielding dividend stocks, profit plays on gold and specially designated "Alpha-Dog" stocks into high-income/high-return portfolios for subscribers. Hutchinson's strategy is tailor-made for periods of market uncertainty, during which investors all too often go completely to cash - only to miss some of the biggest market returns in history when market sentiment turns positive. But it can work in virtually every market environment.
To find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor - please just click here.]
News and Related Story Links:
-
Mondaq.com:
Australia: Legal Update: US Senate Considers Emissions Reduction Legislation: Waxman-Markey Bill. -
WSJ Blogs:
ACES High: Waxman-Markey Heads to a Vote -
Money Morning Outlook 2009 Economic Forecasting Series:
Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year. -
Wikipedia:
Emissions Trading. -
Wikipedia:
Carbon Tax.
Tags: Martin Hutchinson
Hi Bonnie
From a stock market view….
With all due respect sir, "you're not sure whether you believe in global warming" sounds an awful lot like the pack-a-day smoker who isn't sure smoking is bad for him because he hasn't dropped dead yet.
So higher CO2 levels are irreversible ? Haven't we had much higher levels previously ?
Talk to your plants, they love it.
You did a great job of CYA.
I will give you a hint about global warming. Check the sun spots not Al Gore.
If we have global warming why aren't the oceans getting warmer? Only Al thinks so. NASA with 4000 sensors in the oceans of the world detect NO warming.
My advice to you is to stick with things you know and quit listening to junk science. And don't be too sure about that bill passing in the Senate.
I'm really surprised any intelligent person could still believe in the Fairy Tale of Global Warming. Mr. Hutchinson usually researches things, but he has not done so here. If he had only scratched the surface of the available real literature, he would see that Rural Temperatures are Falling, not rising, there are 50% more polar bears than in 1950, the Arctic has stopped its Ice Decline, while Antartica is growing its ice pack.
Not to mention that the most important greenhouse gas is by far: water. Next is methane, then CO2.
Of all the CO2 sources percentage wise, human activity is in the single digits.
So, what does this all add up to? Mr. Hutchinson should be worried about the engine, or transmission in his car, meanwhile, he's losing sleep over the right rear 9 o'clock lug nut.
From an investment perspective, I find it disconcerting that Mr. Hutchinson does not realize GW, CC milarky is merely
1). A way for Al Gore to increase his personal wealth from 2 million to his current 100 millions due to his cap and trade companies.
2). A Fascist power/money grab. Hopefully, It is not necessary to mention which bank(s) have turned GW hysteria into a profit-center. If Mr. Hutchinson does not see this, then all the rest of his investment advice is therefore suspect.
America needs clean, cheap energy — not clean, expensive energy. I'm a Democrat who thinks the House overplayed its hand. I read editorials, comments and letters-to-the-editor from all over the nation. Support for cap and trade is evaporating. Whereas a week ago it was maybe 2-to-1 against cap and trade, opinion now seems to be 8-to-1 against. The Senate will be wise to heed the overwhelming lack of public support and stop this disastrous legislation from passing into law.
Everything about the cap and trade bill is wrong. It will make energy more expensive — possibly big-time expensive. It will enrich a new class of financial speculator. Hundreds of lobbyists had a hand in it. Cap and trade could also drive-out manufacturing of every description. Plus, it's worse than a tax because only 15% of the proceeds from auctioned permits go into our national treasury. And the kicker? We'll never even know if cap and trade worked.
– Robert Moen, http://www.energyplanUSA.com
The potential that global warming is due to man-made carbon dioxide emissions is contrary to science. A consensus in science means that there is no conclusion nor enough evidence to support the causes of climate change as being aided by humans. Can someone tell me when the debate happened?
I point to facts concerning carbon dioxide and Henry's Law of Soluability as evidence:
1. Current carbon dioxide concentration in atmosphere ~ 380 ppm;
2. Carbon dioxide concentration in atmosphere in 1960 ~ 280 ppm;
2. Ideal carbon dioxide content to promote photosynthesis to improve health and growth rate of plants, trees and vegitation ~ 1,000 ppm;
3. Carbon dioxide concentration of exhale from humans and animals ~ 40,000 ppm;
4. Toxic concentration of carbon dioxide to humans ~ 150,000 ppm;
5. Carbon dioxide is essential to life on earth and it is wrong to label it as a "pollutant";
5. 90% greenhouse effect is due to water vapor and clouds and, without its effect, earth would be much too cold to sustain life; and
6. Henry's Law of Solubility – higher the temperature, the less likely a gas will remain soluable in water is evidence that the solar effects of the sun are responsible for higher content of carbon dioxide in water vapor in atmosphere.
Conclusion: Al Gore, Waxman, Markey and the liberal democratic government have devised yet another way to to gain tax control by penalizing corporations and consumers for using energy. To emphasize the Waxman-Markey Clean Energy Act as a job creater and earth saver is 100% false. For Waxman to compare this legislation to economic impact of curtailing sulfur emissions in the 1990s is bogus. Carbon dioxide is not combustible by itself so the plant required to recover it is huge, expensive and endangers humans because the carbon dioxide will now be concentrated and under pressure. To tax corporations will do nothing more than discourage them from doing business in the US and ultimately make the US more dependent upon imports.
Don't be fooled folks. Are we not carbon units. This is just the beginning of more carbon taxes to come. Now that they got the fox in the hen house, you think they are going to leave the door open? Gotta get the bailouts back somehow…..
What… you are supporting the "Al Gore" lies about global warminig???? There have been legal cases in Britian that proved most of the "junk" to have no turth in the substance of true science. This legislation is NOT about changing the current climate changes, but about about ruining what is left of a free people so that the "globalist's" can put ALL of us under a socialistic governmental system. I for one will actively resist any attepmts to remove my freedoms and my ability to make my own choices about how or where I choose to live.
BTY… the climate is changing…. it has COOLED about 1 degree in the past ten years…..
The United States has undergone atleast four glacial periods of warming and cooling. Long Island was formed by a glacier. The Fulton Chain Lakes in New York State were formed by a glacier. The Great Lakes have changed their drainage many times due to glaciers. Yet scientists do not know why changes in cooling and warming occured. Why do we know that the present warming will not change to cooling? Just unscientific facts and poor statistical forecasting has been used to forecast forever warming due to CO2. Is is the largest hoax ever perputrated on the world.
These are the facts that I learned at Williams College during my minor in geology. I have seen side moraines, terminal moraines. lived in Cleveland, Ohio and seen the glacial deposits. On field trips I have seen glacial features all over New England. I obained a BA in chemistry and worked for 14 years in the chemical industry. CO2 is a necessity for plants and life on this earth. Thousands of years ago the CO2 was 2 and 9 times what it is today. Warmth lets plants grow better. The prehistoric cultures lived through CO2 two times the present concentration of todays CO2. This is just a TAX.
LIke the embryonic stem cell research hoax, "Global Warming" is a perfect example of a political power grab based on lies and "no-science". All American citizens should abhor such flagrant efforts to destroy our Federal Republic, and refuse to support or participate in any financial schemes designed to exploit these hoaxes.
I fully agree with the overwhelming majority of the comments above, and regret that people like Martin Hutchinson are allowed to be associated with legitimate, ethical and honest financial advisors and services.
Wow, "it’s not clear how much of an effect that’s having on global climate" i guess for you and those believe the media is not clear, even my 14 years old brother knows CO2 is not driving global climate.
While I believe wholeheartedly that we need to stem the tide of global climate change soon, I agree that Waxman-Markey is not the best way to reduce emissions. A revenue-neutral carbon tax is straightforward and transparent, incentivizes green R&D and returns the revenue to the people. It's a win for the environment and a win for the economy.
Yes, Waxman-Markey is a new, big TAX, in a typical government fashion. It does promote energy conservation in the long run. It does have an element of common sense, albeit greatly distorted to serve the purpose of government.
Global warming is a 10,000 year trend and ocean levels are rising to the point that hundreds of millions of coastal people will be displaced in less than a 100 years.
The earth has many big problems and a big TAX will not change much, but we should try. Accept it and move forward.
Technology will find a better way as it always has. Look at the last 100 years and know that change is the major factor.
We all need to find a way to profit from the next big thing Climate Change Refugees. And I totally agree Martin Hutchinson should be ashamed of himself. Let your GD grandkids take care of themselves!!!
While being environmentally responsible is crucial to our long term survival, we are placing resources in the wrong areas, Last I looked we are continuing to lose manufacturing jobs, my city is about to loss a big plant a loss of 2000 jobs. Our focus should be on creating the next generation of technologies and training. Our government has wasted trillions in bail outs, was negligent in allowing the financial markets to be governed, lets keep a clean playing field for all. And our govenrment is still rewarding the Goldman Sach's of the world while many of us have suffered great economic and emotional loss this past year.
Taxing an already taxed system is going in the wrong direction, increasing minimum wage is also a tax increase more social security tax and medicare as well as some income tax. Lets face it most employers are not going to be able to retain employees or get educated people for minimum wage even my teenage daughter makes more than minimum. Let the free market place work, more tax is idiotic right now.
Invest our resources in medical research, electronic and communication related technologies, make it easier for new products to get to market. investing in product development of the many patents that are sitting on the shelves because of the legal, engineering, prototypes and goverment agenices one has to deal with can cost millions and is a daunting task for the patent originator. We need these technologies to create new jobs and turn around the mess we are in right now. It seems we are trying to paint a wall after the house has burned down to fix the problem the current approach is benefiting few but not the rest of us who see our hard earned wealth slip away each year that took a few generations to build. I have personally lost a million dollars of personal wealth over the last 18 months and find myself starting over, but a bit wiser I will land on my feet and prosper.
You are not sure there is global warming, but you support a new carbon tax in the midst of a recession/depression? I'm not likely to invest with someone as brilliant as you!!
This article by Martin Hutchinson
is enough reason to delete Money Morning from my e-mails.
Money grubbers nerer change and neither does BS, which is what Martin's article is!!!
Carbon Credits "what a scam"!!!!