No Kyoto, No Problem?

Heavily criticized for not supporting the Kyoto Protocol, the Bush Administration has cited that adopting mandatory measures to fight climate change interferes with the economic growth of this country. While there is virtually conclusive evidence stating that the economic cost of not fighting climate change greatly outweighs the cost of doing so, events have taken place showing that some people don't feel like waiting around until they are forced to cut emissions.

Indeed, while the US has not signed the Kyoto Protocol and does not (yet) have a federally mandated cap-and-trade system for greenhouse gases (GHG), voluntary markets have been rapidly advancing in lieu of such regulations.

The global cap-and-trade GHG emissions market came about after the Kyoto Protocol was originated in 1997. The goal is to reduce aggregate emissions of member countries to 5.2% below 1990 levels by 2012. Until then, there is a ceiling, or "cap", placed on total GHG emissions allowed for each country, to be lowered each year. Any country that exceeds its cap can purchase carbon credits that are produced, and "traded", from another member country's carbon offset project.

While the U.S. does not have a national carbon offset program, there are some voluntary regional initiatives in place, such as the nine-member Regional Greenhouse Gas Initiative, the Chicago Climate Exchange and the California Global Warming Act. Everyone involved with these initiatives has proposed to tackle climate change – with or without coersion. In other words, the members of these initiatives are the most forward-looking groups in the U.S. When the time (eventually) comes when everyone is required to participate in the battle against global warming, this group will be best positioned.

With a 30% contribution to U.S. GHG emissions, the utility sector has long been vilified for its conservative stance against global warming. Dallas-based TXU Corp. (TXU) was planning on building eleven new coal-powered power plants before the private equity buyout cut it down to three. But we needn't always look to the TXUs of the world to gauge corporate social responsibility within the utilities sector. Especially not nowadays. FPL Group (FPL), the parent company of Florida Power & Light is among the leaders in the U.S. wind industry. And recently, American Electric Power (AEP) announced it will invest large sums of money to retrofit all its old coal-fired power plants with carbon sequestration technologies. AEP is also seeing that sustainability practices are becoming more important in investor's eyes, and so it is preparing itself for the future.

So what does this mean? Will the rest of the utilities follow suit in the near future? It's hard to tell at this point, but is difficult to change decades of tradition in a matter of a few years. While it is good to see the paradigm starting to shift, albeit slight, we have come to realize that the voluntary markets will be able to produce only so much momentum toward our zero-emission world. It is a pipe dream to think that a federally-mandated program will not be necessary to achieve this.

In the meantime, what can FPL and AEP continue to do with their goodwill? Simple – turn it into a competitive advantage. Stay tuned for more on how that can be done.

Disclaimer: I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security.

Disclosure: I do not own any of the stocks above, but may consider buying FPL and and AEP in the future.