A cap-and-trade plan to combat climate change gets a bit closer to reality today as the American Clean Energy and Security Act of 2009, a 1,200-page bill requiring the U.S. to cut reduce greenhouse gas emissions by 17% from 2005 levels by 2020 and about 80% by the next century looks set to pass the House. Ahead of a final vote, analysts are weighing in on what it could mean for companies and investors.
Mostly bad things, it turns out.
Paul McWilliams at Next Inning Technology Research says cap-and-trade simply opens the door for corruption:
There are many easy, painless and even economically positive ways we can encourage reduced CO2 emissions and the development of new technologies that will reduce our dependence on foreign oil, which is what is implied by the "security" part of the title. However, this bill will not accomplish these goals. What this bill will accomplish is a mechanism for massive corruption, the strengthening of the power of congressional incumbency, the establishment of a full employment act for lawyers and the debasement of the aggregate U.S. economy. Yes, those are bold words, but I can back them up.
If this bill passes, Congress will have the power to decide who gets to release CO2, how much they will get to release, how much they will have to pay if they want to release more than the congressional dictated allocation and who they must pay. Because nearly everything we do from raising cattle to growing crops to powering our electric grid to manufacturing everything we eat, wear and use emits CO2, the implication is Congress will have absolute control over not just our economy as a whole, but also in naming the winners and losers.
Make no mistake; what our Congress is trying to do is give itself the ultimate and nearly infinite power to selectively un-tax without the annoying encumbrances or inconveniences of due process. Congress knows that if it is successful in this ruse, it will have industry cowering at its feet to beg for just one more bowl of CO2 credits and, with that, all the campaign contributions and perks you would expect to change hands when favors are denominated in tens or, in some cases, hundreds of billions of dollars.
The tone is dire, but it's tough to disagree. By its nature, any carbon credit scheme mean doling out large-scale, arbitrary costs to companies that pollute. There's just no getting around it, and the temptation to play politics with how those credits are allocated will be great. (I'll admit I'm not informed enough on the bill to parse whether safeguards are adequate here).
So who will the winners and losers be if the bill becomes law? The IRRC Institute breaks it down for the S&P 500. Unsurprisingly, big polluters in the utilities, oil and gas, industrials and basic resources sectors fare worst.
Some companies to watch: Between them, Exxon Mobil, Chevron Corporation, ConocoPhillips, American Electric Power and The Southern Company account for 22 percent of the total S&P 500 emissions.
More broadly, earnings will take a hit in carbon-intense industries as well. The IRRC says company-level financial risk is highest for companies in the utilities, basic resources, food & beverage, chemicals and oil & gas sectors. They could see an overall EBITDA hit of 9 percent or more.
That's sizeable. With American companies enduring a long recessionary slog, the cost of cleaning up carbon emissions adds another bearish pressure on an already fragile market. Cap-and-trade might well be worth it in the long run if the rest of the world signs on and corruption can be kept in check (both big ifs). What's clearer, if the bill passes, is that the pain for industry is just getting started.