What Does Global Warming Have to Do with Energy Stocks?

Over the last couple of years, consideration of the effect of climate change has become increasingly important in analyzing a company or market trend — particularly in the energy sector. For example, I have a very bearish view on the thermal coal producers in North America and it’s due exclusively to the high levels of carbon dioxide that coal-fired power plants generate, and the widely held belief that these emissions contribute to global warming.

As a researcher who likes to chase down facts, I know that credible scientists continue to debate whether and how much humans really do contribute to global warming. However, it’s the rare politician who acknowledges this controversy. Instead, they join the herd of scientists and pseudo-scientists who tend to cherry pick among the findings to fit their preconceived conclusions. An unfortunate state of affairs, but, alas, a consequential one, because these same politicians are awfully fond of regulation — and they’re becoming more so.

So it’s not surprising that we are on course for a real mess in terms of government regulations concerning carbon emissions, taxes, tariffs, and such. Detrimental results are likely for certain sectors of the economy, such as the oil and coal sectors and associated refiners, heavy industry, and the transportation sector.

As a scientist, I currently accept the near-unequivocal evidence that Earth is in a warming spell, but I also know that in past geological times, there have been many such periods of warming and cooling. I remain on the fence as to what impact anthropogenic (human-sponsored) emissions are having on the global trend. Perhaps more importantly, at some level I am haunted by the belief that even if we are responsible for global warming, we are too late, and there is nothing we can do about it.

Pragmatically, our job here is to point our subscribers toward prudent investments, and it is pretty clear that there is opportunity and danger in industry that is regulated, subsidized, and penalized by government. It’s also clear we are just now at the beginning of what will be pronounced government intervention — for example, the U.S. House of Representatives bill (H.R.2454) aimed at reducing U.S. greenhouse gas emissions 17% from 2005 levels by 2020 and 83% by 2050. The bill allows tariffs on carbon-intensive goods (such as steel, cement, paper, and glass) if they are produced in countries the United States judges to be shirking their responsibility in reducing greenhouse gas emissions.

Herein lies the problem, even if you believe cutting emissions will make a difference: the new big greenhouse gas emitters (i.e., China, whose growing use of coal recently pushed it to the #1 spot in greenhouse emissions, with India rushing to catch up) must curb their emissions… but in doing so, they will be denied the standard of living that in theory those of us who screwed up the atmosphere in the first place enjoy. This is hypocritical, and the hypocrisy is not lost on the developing nations. That’s why I think that global accords on emissions are not going to work.

Going forward, I see the impact of climate change regulations – tariffs, taxes on emissions, subsidies, carbon credits, and carbon trading – becoming a major factor in not only the energy sector but also the associated technology sector. And since governments tend to be rather fickle and make decisions that defy logic, our job has gotten that much more titillating.

Dr. Marc Bustin

December 17, 2009