vaughnwoods

“It’s difficult to get a man to understand something when his salary depends upon his not understanding it.” - Upton Sinclair (as quoted by Al Gore in An Inconvenient Truth)

Riddle: What do interest rate cuts and global warming have in common? Answer: They represent hot investment themes for 2008. Several new exchanges have begun trading carbon emissions by the ton, causing every owner of a manufacturing plant in the world to reassess the value of their business, based upon opportunities to generate cash by going green. Credit Suisse analysts are recommending that investors go green in 2008 by focusing their portfolios on the supply-and-demand sides of the forces shaping global warming. Here’s how it works.

Businesses can easily enter the cash-for-carbon-emissions market, earning as much as $45 for every ton of carbon sold, by becoming a member of a climate exchange. One such climate exchange is the Chicago Climate Exchange (CCX). Launched in 2003, CCX is the world’s first, and North America’s only, voluntary and legally binding emissions reduction trading system. The Financial Industry Regulatory Authority (FINRA, formerly NASD) provides independent third-party verification. CCX handles contracts dealing with several types of greenhouse gases, all of which are tradable worldwide. CCX members are leaders in greenhouse gas (GHG) management and represent all sectors of the global economy.

Our own UC San Diego recently became the first university on the west coast, and one of only eight universities in the nation, to join CCX. CCX founder, Dr. Richard L. Sandor, was named a Hero of the Planet by Time Magazine in 2002 for founding the CCX, and hailed as the "father of carbon trading" in 2007 (www.chicagoclimatex.com, 2008). Member firms of a climate exchange are allocated annual emissions credits based upon an assessment of their standard level of emissions. Once this emissions standard has been set, member firms can profit by reducing carbon emissions below their target and selling the excess carbon credits to other firms.

The coal industry is one group poised to profit from climate exchanges. More than half of the United State’s energy consumption is supplied by coal. According to the U.S. Department of Energy, the energy content of the nation’s coal resources exceeds that of the entire world’s known recoverable oil. Coal producers are learning that clean coal technology can have the dual effect of reducing carbon emissions by 30% to 50% and creating opportunities for profit.

Over 75% of carbon emission reductions at present come from demand-side efficiencies. Moreover, since lighting accounts for approximately 20% of the world’s global energy, analysts at Credit Suisse are highlighting companies that produce light-emitting diode (LED) equipment. LED technology is showing promise of energy-saving features on a global scale. LEDs produce more light per watt than do incandescent bulbs and can emit light of an intended color without the use of color filters. Additionally, LED light sources do not contain mercury, while compact fluorescent lamps do.

On the supply side, nuclear energy is considered the cheapest energy source. Currently, 16% of global electricity output comes from nuclear energy. In California, 14.7% of our electricity generation comes from our two nuclear power plants in Diablo Canyon and San Onofre. In addition to California, thirty other states also have nuclear power plants. Globally, France is the leader in nuclear energy use, deriving 78.1% of its electricity from nuclear power plants. The percentage of energy from nuclear power should rise even higher in upcoming years as thirty-four new nuclear reactors are now under construction world wide (www.nei.org). Ninety-four more reactors are either planned or on order and two-hundred twenty more are proposed (Credit Suisse, 2007).

California Attorney General, Jerry Brown, is currently suing the US federal government in an effort to lower automobile vehicle emissions to levels below established federal guidelines. According to the BBC news service, fifteen other states or state agencies are planning support of California's action. At approximately $45 per ton, it would seem that corporations finally have an incentive to reduce air pollution. At the federal level, President Bush asked, “Is it more effective to let each state make a decision as to how to proceed in curbing greenhouse gases? Or is it more effective to have a national strategy?” Such a comment has overtly leftist implications, especially for a Republican president. Yet, this emissions tug-of-war is not about states’ rights. It is about business, and for many businesses the cap-and-trade-carbon exchange is nothing short of the opportunity of the century. While there is currently no federal law that requires large companies to participate in the carbon emissions exchange, many legislators expect such a law to be implemented in the next three to five years. Like many corporations, California isn’t waiting around for federal legislation to explore the carbon emissions exchange system. As California Gov. Arnold Schwarzenegger told Newsweek, “What we’re basically saying to the federal government is, ‘Look, we don’t need Washington.’”

Contact us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

**Credit Suisse, Marketedge.com
Global equity strategy, (Credit Suisse, 12/19/2007)
Carbon tax should replace carbon trading to curb climate change (Associated Press,
International Herald Tribune, 12/13/2007)
Coal, (www.energy.gov/energysources/coal.htm, 2008)
Comparing LEDs to Traditional Light Sources (www.netl.doe.gov/ssl/usingsLeds
/generalilluminationsefficiencycomparison.htm). Nuclear Energy Institute (www.nei.org),
www.dailyreportonline.com, Thursday, September 20, 2007