The Carbon Age

After working for months (or was it stalling) the Canadian federal government finally rolled out the details of their air pollution/climate change plan. The main focus was on big businesses which generate about half of the pollution in Canada (for a quick summary see here).

There was lots of interesting points in the plan and everyone is already lining up to say 'it's great' or 'it's horrible.' Some like the 55% reduction target of air pollutants like sulfur dioxide (acid rain), nitrogen oxidizes (smog) and particulate. While others dislike how vague the plan is on reducing carbon dioxide being released into the atmosphere and how Canada will not meet its Kyoto targets.

Perhaps not realizing what they have done, the most important thing the government gave industry was the number: $15/tonne of CO2 tax starting in 2010. You see industry has seen this coming. Despite all the rhetoric to the contrary they have not had their heads in the sand. They have bought studies, funded R&D and attended conferences getting to know their options for CO2 reduction. The biggest problem with all their efforts was the economics. How much was avoiding producing a tonne of CO2 going to be worth? Now they know and now the real work begins.

In the next several months we are going to see two things happen. One a lot of current projects will be canceled since they are no longer economically feasible. The second thing will be a series of announcements on new projects starting up. Why? Well to actually engineer, fabricate and construct most of what the facilities required to clean up the emissions to the new standards will take at least four to five years. The deadline of the first phase is 2012 meaning most of these projects will have to start not six months or year down the road, but NOW.

So in the end, Canada has turned the corner and entered a new age: the carbon age. The old rules are now gone for power generation and oil & gas. The entire economics of any major construction project have just changed overnight. So what is an investor to do?

Well let's follow the money. First you will need lots of engineering for these new projects, so check out any publicly traded engineering firms such as SNC-Lavalin. Then materials to build everything such as steel (from Ispco for example) and concrete. Also there are typically a fair amount of chemicals involved in these processes so you might want to look at Dow Chemical. Then there will be the other big winners of all this: alternative energy production like wind turbines, solar panels, ethanol and biodiesel (there is so many different companies involved in these I'll leave you do your own research). Perhaps the most interesting change of all for potential investments will be the construction of a Canadian carbon credit exchange. Will the public be allowed to trade? Is so will the credits be in high demand or will the market be flooded and have the price crash like it did on the European exchange?

The other issue swirling around all of this is the fact Canada is currently run by a minority government. So if the opposition really dislikes this plan it might trigger an election and drop Canada back into limbo with its climate change plan. Hold on to your seats, this could be an interesting few weeks.