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If the U.S. regulates carbon emissions, would your portfolio take a hit?

A discussion with Dan Bakal, director of electric-power programs for Ceres.

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Those free allowances amount to a big chunk of change. Your report says that under one scenario, about $6.2 billion a year for the 10 largest investor-owned utilities.

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Yes, although it's actually quite complicated because it depends on what markets they operate in. So for companies that operate in regulated markets, those allowance values may not translate into profits for them.

That's what stands out from the report: The impact on investors depends hugely on the details of what's enacted.

There are many ways to slice this up. What we do show is that if you allocate some of the allowances to the local utility companies and enable them to use those allowances ... to help their customers reduce their bills and even invest in energy efficiency, that's an effective way to address some of the rate impacts they might be seeing.

Because consumers will be affected, too?

Absolutely. And what we try to do is give a really concrete example. So we look in Indiana. The majority of the electricity comes from coal. And under the Lieberman-Warner bill what it does show is that if it's implemented properly, whatever rate increases might impact customers due to the added costs of CO2 [regulation], they can be offset by a combination of rebates and energy efficiency programs. So that the average Indiana customer, who spends approximately $82 a month on electricity, may see a slight increase in rates but that can be offset by a combination of rebates and incentives.

Is carbon regulation inevitable?

I would argue it's inevitable because the science of climate change is so compelling right now. There's so much consensus around it. And the amount of action that we really need to take – or the amount of greenhouse-gas reductions we really need out to 2050 – are so significant that they're not going to happen following any business-as-usual approach.

What other industries may be affected?

The legislation in Congress is really economywide. It is not just the power sector. So any other high-emitting industry – from oil and gas to heavy manufacturing to the coal industry, mining, and so on – face impacts because of their emissions or their contribution to the problem. Then there are industries that face impacts because of the climatic changes we're already experiencing and likely to experience. So agriculture is facing climatic impacts. Of course, the insurance industry is dealing with implications of severe weather events of all kinds. And real estate [faces] sea-level rise and other issues.

Are there any winners in this?

Every place where we see risk, we also see opportunity. So for a lot of industries, they have to get their heads around the risk and then see how it becomes a competitive advantage for them.... On top of that, there are clean-tech or clean-energy companies. It's a burgeoning growth area where companies of all different kinds – whether it's the wind-power generators or the solar technology companies or even the emerging ones like tidal power and enhanced geothermal, but also all the energy-efficiency technologies that get us to use energy more wisely. That whole space is growing rapidly to the point where $150 billion was invested in global clean-energy companies last year.

So what should an ethical investor do?

You look carefully at the most carbon-intensive industries and try to avoid some of the real risk areas. And then you look on the upside.

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