Are you carbon beta rated? Here's a look at the likely winners and losers in the carbon rationing age

Chief Executive, The, July-August, 2008 by Ronald Bailey

A new study, Climate Changes Your Business, by the international business consultancy KPMG, identifies various business sectors that are at greatest risk as a result of climate change. They include aviation, transport, financial companies, tourism, and oil and gas. Transport, which emits about 13 percent of greenhouse gases, is at high regulatory risk. Policymakers want to discourage high-emitting transportation, such as road and air transport, in favor of lower emitting forms such as rail and public transport. The main danger is higher fuel prices.

In the Line of Fire

Aviation as a subset of transport is particularly at risk. The KPMG study cites estimates that "the risk from climate change to aviation accounts for 50 percent of the sector's market value." Again the danger here is higher fuel prices and less business travel. The tourist industry is at risk not only because higher energy prices will reduce leisure travel but also because of ecological shifts. Scenic mountain glaciers will melt, coral reefs may bleach, forests decline and so forth. Carbon rationing whacks coal, oil and gas companies directly. As noted above, under a 23 percent carbon emissions cut, coal shares would take a 54 percent hit, oil and gas 20 percent, and utilities 4 percent.

On the flip side, there would certainly be some corporate winners under carbon rationing. As energy prices rise, producers of solar, wind and perhaps biomass energy generation equipment and generators would cash in. In addition, electricity generators whose portfolios are heavily weighted toward coal generation will have to raise their prices to pay for any excess emissions allowances. Meanwhile, companies that produce electricity using nuclear power will benefit, since they will be able to raise their prices yet not pay for any emissions allowances.

Two-thirds of the electricity generated in the U.S. is used by commercial and residential buildings. As residential and commercial energy prices rise, consumers and facilities managers will seek to conserve energy. Companies that sell building products that conserve energy, such as insulation, energy efficient windows, more efficient heating and cooling systems, and more efficient lighting will benefit. The U.S. Green Building Council has created the Leadership in Energy and Environmental Design (LEED) certification program, which sets a benchmark for the design, construction and operation of high-performance green buildings. LEED homes use 15 to 20 percent less energy than does a house built to code.

Many in the financial sector are eagerly anticipating rich new carbon markets in which to trade. But the advent of carbon rationing means that institutional investors also face substantial risks to the value of their portfolios. The nonprofit Carbon Disclosure Project (CDP) represents some 385 institutional investors including Merrill Lynch, Goldman Sachs, Morgan Stanley, AIG Investments, Barclays and HSBC that manage $57 trillion in assets.

The CDP issues reports annually aggregating information from a climate change questionnaire that it sends out to the world's 3,000 largest publicly listed companies. Its annual reports evaluate each company's exposure to carbon taxation and regulation, changes in the climate system, technological innovations and shifts in consumer attitude and demand. The idea is that investors should take how companies plan to deal with these issues into account when making investment decisions.