2009-08-27 Carbon Pricing and Your Investments

In the 1950s, government and industry officials said nuclear power would be so cheap, there would be no need to meter it. Free electricity for all! Imagine if that had actually happened and imagine that now, because of the economic downturn, government decided to start charging for electricity in 2009.

Suddenly, you would look at your company and investment portfolio with a new lens. Any electricity-hungry businesses would be worth much less than those that put a premium on

efficiency or used self-generated renewable energy like solar and wind power. Stock values would be revised over time as charges for electricity mounted up. Many previous darlings of Wall Street would be dogs and vice versa.

Of course we all know that electricity never was free. In a similar vein, however, our atmosphere WAS given away for nothing — a pricing plan that is about to change. Carbon emissions, responsible for climate change, have had a price in Europe for several years and the US is about to move in the same direction. Smart businesses and investors will now need to crack “The Carbon Code” to figure out the winners and losers — and just how much to adjust their business plans and portfolios.

Companies that are heavily dependent on energy from fossil fuels will find that a price on carbon, through the cap-and–trade system being developed in over 30 states (and envisioned in the Waxman-Markey bill that passed the House and is now being debated in the Senate) are worth much less than companies with a lower “carbon footprint”. Energy and resource efficiency will be king.

The Carbon Code has actually been with us awhile, but so far mostly invisible. Investing in Toyota a few years ago turns out to be smarter than buying GM stock, in no small measure because Toyota and its Prius were more efficient than GM and its Hummer. Makers of compact fluorescent light bulbs (CFLs) are literally turning the lights out on incandescent bulbs, as many states and countries (including the US in 2012) ban inefficient lights. Applying The Carbon Code, smart investors realize that even more efficient lights — LEDs — will soon replace both incandescents and CFLs.

Paper or Plastic?

In one of the most dramatic examples of The Carbon Code already at work is a company called iGPS, a maker of plastic shipping pallets. Wood pallets consume vast tracts of forest every year, something unsustainable in a literal sense as global demand outstrips supply, but also a product constrained by the worldwide effort to avoid deforestation to prevent more greenhouse gas pollution. The plastic pallet is 30% lighter than the wooden one, saving fuel and pollution immediately, and doesn’t require toxic fumigation or extra trips to the repair station.