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The Wall Street Journal: Handicapping the Environmental Gold Rush

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In the race to profit off the scramble to go green, there will be winners and losers. Here’s how the players currently stack up.

October 29, 2007; Page R1

The green stampede is on.

As a global economy powered by cheap fossil fuel comes under intense pressure to change, corporate executives are racing to stay ahead of the tectonic shift in their world.

From Capitol Hill to California and Brussels to Beijing, multinational companies are stepping up their lobbying and tweaking their product lines in response to demands that they get more environmentally attuned. New companies — even new industries — are challenging the established giants to exploit a growing market for everything from green cars to green fuels.

And a host of middlemen have sprung up to make markets in new financial instruments created by the proliferation of green-oriented subsidies and mandates. All these players are jostling to shape the new government rules to give them the bulk of the benefit — and hit someone else with the bulk of the burden. Ultimately, the cost will be passed on to consumers.

Big energy burners are experimenting with ways to use fossil fuel more efficiently — and to roll out supplemental fuels. General Motors Corp., for instance, is developing more hybrid gasoline-and-electric cars, a technology it dismissed a few years ago.

ConocoPhillips plans to start brewing small quantities of diesel fuel from animal fat. Utilities are experimenting with a technique to turn coal into electricity that would shoot the resulting greenhouse-gas emissions underground instead of up into the air.

Alternative-energy producers are having a field day as new regulations and subsidies, and improving technology, make their power more attractive to investors. Hosts of new projects are springing up as Wall Street sinks money into everything from wind turbines to solar panels to ethanol. Credit Suisse Group just introduced a new “global-warming index” of stocks its analysts believe will benefit from the push toward lower emissions — one of several new green-investment instruments from major banks.

Still, skepticism is warranted. A great green future has been heralded before — and then it fizzled. In the wake of the 1970s energy crisis, Washington adopted generous subsidies for synthetic fuel and solar panels, the oil patch diversified into nuclear energy, and Detroit retooled to crank out fuel-efficient cars. Then oil prices fell back down, and those experiments fell by the wayside.
Two factors suggest today’s energy crunch — and resulting green interest — may prove more enduring. Unlike the 1970s oil-price spike, which was due to the temporary supply disruption of the Arab oil embargo, today’s oil-price rise is due largely to rising demand from the developing world, a trend many analysts predict will intensify. By 2030, annual global energy demand is projected to grow 53% above the 2004 level, according to the International Energy Agency. Even if governments adopt more aggressive policies to encourage energy efficiency, global energy demand would still rise 37% by 2030.

What’s more, there’s rising pressure to confront an environmental issue virtually unmentioned a generation ago: global warming. In 2005, European governments slapped utilities and some other big industrial sectors with caps on their emissions of greenhouse gases, notably carbon dioxide, which is produced when fossil fuel is burned. Now Europe is toughening those constraints. The U.S., the world’s top greenhouse-gas emitter, is considering imposing a carbon cap, too. That would amount to a new tax on fossil-fuel consumption — over time, a spur for corporations to make serious changes.

The financial flows in this green push remain relatively small for now. And they’re competing against a huge, and cheap, installed energy base. But investment is growing fast. What follows is a snapshot of potential winners and losers as business tries to shift its green portfolio from the red side of the ledger into the black.


The prospect of carbon caps threatens every company whose business depends on burning energy — that is, virtually every multinational corporation on the planet. Auto makers, oil producers, utilities, chemical producers — all the stalwarts of the fossil-fueled age are in for a potential hit. So are those that feed off them: banks, insurance companies and individual investors.

The clearest sign of the threat big industry feels is a surge of infighting. Long-friendly sectors are bickering over who will get stuck with the bulk of the cleanup bill for global warming. One of the biggest spats is between the auto and oil industries. The fight centers on the best way to cut cars’ gas consumption — boost their mileage or find alternative fuels.

Auto makers say they’re working to improve fuel economy. But they argue toughening U.S. standards too much too quickly would be disastrous at a time when many manufacturers already are suffering. A better solution, they argue, would be to get more alternative-fuel vehicles on the road. Detroit’s Big Three auto companies particularly like ethanol. Their existing vehicles can burn the corn-based fuel with only minor modifications — tweaks far cheaper than retooling vehicles to go farther on a gallon of gasoline.

Auto makers complain that oil producers are dragging their feet in getting the ethanol-gasoline blend known as E-85 to their gas stations. They’re beginning to suggest the federal government push gas-station operators to install more pumps for E-85, a blend of 85% ethanol and 15% gasoline.

To oil producers, those are fighting words. They say the expense of installing E-85 pumps at their gas stations isn’t justified by the small number of ethanol-capable cars on the road. Instead, the oil companies want the government to lean on auto makers to improve their cars’ mileage.

Earlier this month, ConocoPhillips Chief Executive James Mulva called in a speech for the U.S. to consider imposing “feebates” to prod consumers to buy thriftier vehicles. That system would impose surcharges on buyers of less-efficient vehicles and give rebates to buyers of more-efficient ones. Mr. Mulva talked in his speech about the “shared energy future” between the auto and oil industries. But his call for fuel-efficiency improvements was clear.

For now, the tough talk is just that. Neither side in the squabble is likely to get exactly what it wants. Meanwhile, even as some big companies fight to escape new environmental mandates, most of them are also trying to exploit new environmental opportunities. For Waste Management Inc., the Houston-based garbage handler, that means harnessing what used to be a throwaway gas.

Trash rotting in landfills produces methane, a potent greenhouse gas. For years, Waste Management has captured methane from some of its landfills and used it to generate electricity. This summer, the company announced that over the next five years it will install methane-capture equipment on 60 more landfills, bringing the total to 164. The move would increase the total generating capacity from the company’s landfills to 700 megawatts, nearly as much as that of a modern coal-fired power plant. The likely customers are industrial users and utilities.


Renewable energy isn’t about to replace fossil fuel. According to the IEA, fossil fuels will continue to provide the vast majority of global energy. Their share, 80% in 2004, will drop only to 77% in 2030 under the environmentally rosiest scenario. That projection assumes that governments will implement aggressive policies to promote energy efficiency and renewable energy. By contrast, the energy most commonly considered renewable — wind, solar, geothermal, wave and tidal power — will account for only 2.4% of total energy consumption in 2030, the IEA says.
But even a global energy system that continues to be dominated by fossil fuel will provide big opportunities for companies that come up with ways to consume that fuel more efficiently. Similarly, even renewable energy’s tiny slice of the global energy pie is likely to provide alluring profits for savvy energy providers and investors: A 2.4% share of global energy is nearly five times those renewables’ 0.5% share in 2004.

Many companies rooted firmly in the fossil-fuel world are venturing into renewable energy. Consider wind. General Electric Co., which has a big business building equipment for coal-fired power plants, has become a leading wind-turbine maker. Oil giants BP PLC and Royal Dutch Shell PLC are developing wind farms. And Spanish utility Iberdrola has become one of the world’s biggest renewable-energy producers.

The promise of wind is evident even in fossil-fuel strongholds like Texas. For decades, the Texas General Land Office has coordinated offshore oil-and-gas leases in the state. Earlier this month, it awarded what it called the nation’s first competitively bid leases for offshore wind exploration. It gave a Louisiana company four years to decide whether it wants to build wind turbines in the Gulf of Mexico, a body of water long marked by oil and gas rigs.

Wind power in Texas shows how renewable energy is maturing and how risky it remains. The state has eclipsed California as the nation’s top wind-energy producer. It has about 3,352 megawatts of wind-power capacity, about 3% of the state’s total electricity capacity, according to the American Wind Energy Association, a trade group.

Texas has what amounts to a wind-power trifecta: an abundance of remote, windy places; a robust requirement that utilities produce a chunk of their electricity from renewable sources; and relatively high prices for conventionally produced electricity, which, on top of subsidies, help renewable energy compete. A decade ago, the Texas wind market consisted of small developers. Now many of them are being bought up by bigger players. These big companies see real money to be made as governments expand renewable-energy subsidies and mandates, and as technological improvements bring down the cost of producing wind energy.

Take Horizon Wind Energy LLC, a Houston-based wind-project developer whose roots go back to 1998. In 2005, Goldman Sachs Group Inc. bought what it later named Horizon for about $200 million and proceeded to build up Horizon’s portfolio of projects, ultimately spending a total of about $1 billion. This spring, Goldman sold Horizon to a Portuguese utility. The price: $2.15 billion for Horizon’s equity. Goldman reported third-quarter profit from that sale of $900 million. That was nearly one-third of Goldman’s total net income for the quarter.

Solar energy also is experiencing an investment surge — one equally dependent on the whims of government policy.

The world’s leading solar-panel makers are based in Japan and Germany, countries that jump-started domestic solar expansions with generous incentives. Analysts rank Japan’s Sharp Corp. and Germany’s Q-Cells AG as the world’s No. 1 and No. 2 solar-panel makers, respectively. But the business is getting cutthroat. A global shortage of silicon, the raw material used to make solar panels, is driving up production costs. Newer entrants like China’s Suntech Power, with lower labor costs than companies in the West, are growing fast. Meanwhile, innovators like First Solar Inc., of Phoenix, are rolling out “thin-film” solar equipment that uses very little silicon and can be applied to surfaces such as roofs and windows.

The largest solar-panel array in the U.S. is under construction in Nevada’s Mojave Desert. The project, at Nellis Air Force base, will consist of 70,000 solar panels spread across 140 acres. Together, they’ll produce about 15 megawatts of power. That’s about 2% of the output of a modern coal-fired power plant.

The project will be operated by Baltimore-based MMA Renewable Ventures, a unit of affordable-housing developer Municipal Mortgage & Equity. The money is coming from bigger players such as equity investors Citigroup Inc. and Allstate Corp., and debt provider John Hancock Financial Services, a unit of Manulife Financial Corp.

MMA has led the equity investors to expect annual returns of between 7% and 8%, says CEO Matt Cheney. That math relies on a patchwork of government incentives. One is a federal tax credit worth 30% of the project’s cost. But that federal break is due to expire next year. Unless it’s renewed, future projects won’t be able to take advantage of it. The on-again, off-again nature of such subsidies has long hobbled the growth of renewable energy.

Another boost is a Nevada mandate that utilities get 20% of their electricity from renewable sources. By buying credits known as renewable-energy certificates from the Nellis project, the utilities can satisfy their regulatory obligation. The Nellis project “wouldn’t be financible” without the revenue from the sale of renewable-energy certificates, MMA’s Mr. Cheney says.


Positioned between the old-energy companies trying to clean up their acts and the new-energy upstarts looking to peddle their goods are a new crop of middlemen taking their cut of the deals. They’re project developers, bankers, brokers and lawyers making markets in new financial instruments created by the push to curb global-warming emissions. Among the hottest commodities are government-backed certificates entitling the bearer to emit hot air.

According to the World Bank, the global carbon market had a value of $30 billion at the end of 2006 — nearly triple its value in 2005. The market is the result of a “cap and trade” system created by the Kyoto Protocol, the international global-warming treaty. Industrialized countries that have ratified it agree to curb their annual greenhouse-gas emissions by a set percentage. Then they impose an emissions cap on whatever swath of their economy they think is easiest to hit.

They print up a corresponding number of emission permits, distributing them among the companies they have slapped with the cap. In any year, companies that emit more than their quota have to buy extra permits. One option is to buy them from companies that got more than they needed from the government. Another is to bankroll emissions-reducing projects in developing countries — projects that, under the Kyoto rules, spin off their own variety of permits to pollute.

Facilitating the flow of money in this fragmented and fast-growing market are the middlemen. Some — including large investment banks — assemble funds that buy carbon credits on behalf of industrial investors. Some put together the developing-world projects that curb emissions particularly cheaply — like installing covers over pig-manure lagoons to capture methane and use it to produce electricity instead of sending it up into the air.

The early players in this business were based in London, which has emerged as the hub of the global carbon trade due to European Union regulations. Among the pioneers: boutiques like Climate Change Capital and bigger European-based lenders such as Belgian-Dutch bank Fortis NV, Barclays PLC of the U.K. and Germany’s Dresdner Kleinwort.

Now, with expectations of tougher European carbon caps and the eventual introduction of U.S. emission constraints, U.S. banks are digging deeper into carbon. Citigroup, Goldman Sachs, J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. all have bulked up their carbon businesses with new hires recently.

–Mr. Ball is The Wall Street Journal’s environmental news editor, based in Dallas.

Write to Jeffrey Ball at [email protected] and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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