News Analysis: What Bali means for you; the impact of the UN Climate Change Conference on investors

December 28, 2007

When we think of visiting Bali, we usually think of pursuing hedonistic rejuvenation in spa palaces littered with Hindu sculpture, sun-drenched beaches, and beautiful people right out of the pages of People magazine.

During two weeks in December, 10,000 delegates from 190 nations have gathered in Bali not to bask in the sun but to come up with better ways to harness its energy.

The prize? A successor to the Kyoto Treaty on greenhouse gas emissions. The delegates concluded two weeks of tense negotiations with a Bali Roadmap outlining the timing and agenda of that new treaty.

UN Secretary-General Ban Ki-moon said that the new treaty must be finalized by the Copenhagen conference in 2009 to give nations enough time to ratify before the Kyoto Treaty expires in 2012.

Lord Nicholas Stern, chairman of IDEACarbon, said Bali is setting in motion a process that would create a “global carbon market worth EUR 240 - 450 billion by 2020.”

450 billion? And in Euros, too, not increasingly tattered US dollars. Sounds good to me.

How can you play in the new game Lord Stern is talking about? What the winners and losers in the new post-Bali economy.

1. Winners among biofuels stocks. In a post-Bali world, biofuels are going to be in more demand, because nations will have to find ways to cut 30-40 percent of their emissions â€” despite population growthâ€” and biofuels are one of the best available technologies around. With limitations on the acreage available for corn, soy or canola, look to companies like second-generation biofuels companies like Verenium (VRNM) or Brazilian sugar ethanol giant Cosan (CZZ). Even first generation biofuels companies like VeraSun (VSE) look better under Bali’s sunshine.

2. Winners among Biofuels feedstocks. If you are nervous about investing in biofuels producers, why not invest in their feedstocks. Commodity investments in crude palm oil, sugar, corn, soy, canola and cottonseed oil will have food and fuel makers bidding up their price for some time to come.

3. Winners among greenhouse gas-emitting companies. In a post-Bali world, companies that can adapt to 40-50 percent emission cuts will find that carbon credits will likely be a new revenue source for them. Conversely, companies such as major international airlines like American (AMR) and United (UAUA) that are stuck with fossil fuels will find those fuels require the purchase of a lot of carbon credits, and the resulting cost hikes will force airlines either to innovate or downsize. Among airlines, Virgin and Air New Zealand have taken the most positive steps to date to develop biofuel options.

4. Winners among Carbon market intermediaries. Up to 13 billion tons of CO2 could be traded each year, and traders and companies like AgCert (AGC.L) that set up and manage emission reduction programs will have their hands full of business. Companies that have established carbon trading desks like JP MorganChase (JPM) will be taking their percentage in the new economy too.

5. Winners among nations. The biggest winners appear to be China and Indonesia, which have become the world’s biggest and 3rd biggest greenhouse gas polluters but looked to have escaped a requirement to join a common emission reduction standard. The developing nations will either have no requirements â€” as happened in Kyoto â€” or a lower standard. Plus, developed nations will be setting up a subsidy scheme to pay developing nations not to cause further deforestation.

China has performed especially well, successfully positioning the US as the “bad guy” and instead securing a 10-15 years to further develop the world’s second largest economy without facing emissions restrictions that would hamper low-cost industrial development. Long-term, this will only help the yuan stay stronger, longer.

Smart investors make money in bear markets as well as bull markets, because “it’s an ill wind that blow no one any good” goes John Heywood’s old proverb. In the post-Bali world where nations must scramble to rapidly reduce emissions, there will be tempting targets a-plenty both in biofuels as well as the intermediaries who will make markets in carbon.

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Written by Jim Lane · Filed Under News & Financial Analysis