Friday, May 29, 2009

Legislative Resolve

The U.S. House Energy and Commerce Committee approved the American Clean Energy and Security Act on last week, signaling the resolve of legislators to move forward with the most comprehensive and far-reaching energy and climate actions in decades. Surprisingly it is making strange bedfellows of the likes of Dow Chemical (DOW: NYSE), BP (BP: NYSE), The Nature Conservancy and the Wilderness Society. Even the U.S. military has weighed in, suggesting that climate change is a matter of national security.

Among a number of other provisions, the proposed legislation provides for a market-based program aimed at reducing carbon emissions from electric utilities, oil companies, and industry in general. Polluters must have tradable federal permits called “allowances” for each ton of carbon produced. Up to two billion tons of emissions can be reduced through offsets in lieu of emissions reductions. The Federal Energy Regulatory Commission will be responsible for regulating the cash market in emission allowances and offsets.

The bill reported out of the House Committee also directs the EPA to set emission standards on sources that are not covered by the allowance system. Special programs to reduce emissions of two pollutants that contribute to global warming: hydrofluorocarbons and black carbon.

The legislation still has a long way to go through the legislative process before it becomes law. However, with widespread support across industry and environmental groups, it appears more likely than not that Congress will take action during the 2009 session.

In our view, for better or worse, the legislation is likely to benefit the industrial complex in general. This includes companies in the Crystal Equity Research coverage universe such as Dynamic Materials (BOOM: Nasdaq) and American Ecology (ECOL: Nasdaq). Not because the cap and trade approach is necessarily the right choice, but because passage of some legislation provides industry with greater certainty. It removes the global warming and carbon emission topic from the realm of political rhetoric where no one knows the future to a situation where the costs of emission can be calculated even if not with precision. Such calculations are necessary to enable capital investment and operational decisions.

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