Trader Talk

Obama's Clean Energy Push


The President has spoken out in support of the clean energy legislation that is making its way through the Congress. There should be a vote this Friday in the House--there is a very good chance it will pass, although its fate in the Senate is less than clear since it needs 60 votes to pass.

Here's the story:

Key provisions:

a) a system to reduce greenhouse gas transmission by providing economic incentives, often called "cap and trade;"

b) a National Renewable Portfolio Standard provision requiring utilities to generate 20 percent of their electricity through renewable sources by 2020;

c) several provisions to advance smart-grid technology.

Carbon dioxide emissions nationwide are expected to drop 17 percent by 2020 from 2005 levels, and more by 2030 (42 percent) and 2050 (83 percent).

Passage of this bill by the Congress is likely to be beneficial to clean energy stocks like wind, solar, biomass, and geothermal. Still, big names in this space like SunPower and First Solar have not moved much because until now the Street did not believe passage was likely, and at any rate demand in the U.S. is down greatly because of the recession.

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Interestingly, Chinese solar stocks like Yingli Green have far outperformed U.S. solar stocks this year, largely because the Chinese stimulus package is perceived to be especially favorable for domestic solar installations.

Cap and trade, simply put, sets limits (caps) on the amount of pollutants that can be emitted. Companies are given certificates (allowances) that allow them to emit that level of pollutants. Companies that emit pollutants beyond the amount allowed can buy credits which represent the right to emit more pollutants. The idea is that the total amount of allowances and credits cannot go beyond the cap, which (in theory) becomes more restrictive as time goes on.

There have been several objections to cap and trade. Some object to them because it creates uncertainty as to cost, because the price of permits are not known in advance and will vary over time.

Because of this, some have advocated a straight emission tax, so corporations know exactly how much they have to pay, and indeed can pay less if they reduce emissions.

However, on Friday the Congressional Budget Office said that the cost of the cap and trade bill would only be about $22 billion, or $175 per household.

There are several large cap and trade programs that operate in different parts of the world. In Europe, there is a European Union Emission Trading Scheme, which requires companies that emit carbon dioxide to report their emissions and return allowances equivalent to their emissions.

The U.S. is the only industrialized country which has not ratified the Kyoto Protocol, a 1997 treaty that came into force in 2005, which requires signatories to adhere to a cap and trade system for the six major greenhouse gases. Many countries have not met their emissions targets, and there is currently discussion of a new, more comprehensive treaty, which is why Mr. Obama’s comments are very important.

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