Surprised?

With the continuing ups, downs and hairpin turns of the carbon legislation rollercoaster taking another gut-wrenching jolt today, I wanted to conduct a brief analysis of the impact addressing carbon emissions has had on publicly traded companies.

The Chicago Climate Exchange launched its voluntary cap and trade program in 2003 requiring its member companies to reduce their emissions by 6% over an eight-year period, 2003 – 2010. The baseline for measuring the reductions is an average of annual emissions from 1998 to 2001. While the program is voluntary, it is legally binding as the companies that join are contractually bound to meet their reduction commitments and the results are verified through reputable third party companies.

For the purposes of this analysis, I chose the ten largest publicly traded U.S. companies from the CCX’s 350 members. Ordered from largest to smallest in terms of market capitalization, the list consists of an interesting mix with many key industries represented: banking, technology, manufacturing, automotive and chemicals.

				4/26/10
Company		Ticker		Market Cap
				($Billions)
Bank of America		BAC		$181
IBM		IBM		$170
Intel		INTC		$132
Abbott Labs		ABT		$78
United Technologies		UTX		$72
Ford		F		$49
Honeywell		HON		$40
DuPont		DD		$37
Monsanto		MON		$36
Baxter International		BAX		$29

To measure the impacts of reducing carbon emissions by 6% from their respective baselines, I chose a simple and practical parameter, stock price performance. My thought is that investors will take into consideration the financial health of each of these companies by analyzing cash flows, earnings, the strength of balance sheets, market position, growth strategies, etc. and make their purchasing decisions with all these factors, and others, in mind. I measured the stock price performance for the period 1/2/03 to 3/31/10 for each of the companies using the adjusted closing price from Yahoo! Finance, which captures the effects of dividends. I also measured the growth of the Dow Jones Industrial Average over the same period. HIP Investor guru, R. Paul Herman, suggested that I also include industry-specific indexes in my comparison, but for the purposes of this analysis, I stuck with the Dow.

The results were not that surprising to me: eight of the ten companies outperformed the Dow Jones Industrial Average. To me this suggests that other companies with talented and visionary management teams would be able to lead their companies through the challenges that carbon legislation may present. The majority of these companies have flourished despite their proactive steps to improve energy efficiency and reduce their carbon emissions.

The Results

				% Change
Company		Ticker		1/2/03 - 3/31/10
Bank of America		BAC		-32.16%
IBM		IBM		74.78%
Intel		INTC		52.36%
Abbott Labs		ABT		69.67%
United Technologies		UTX		166.03%
Ford		F		45.15%
Honeywell		HON		117.23%
DuPont		DD		12.78%
Monsanto		MON		711.29%
Baxter International		BAX		128.68%
Dow Jones Industrial Average				26.13%

But they are worse than me...

The following article discussing opposition to cap and trade legislation in New Mexico highlights many challenges to addressing negative externalities, such as pollution or climate change.

Article: http://bit.ly/a19O71

In particular, the article touches on the theme of forgoing action on the grounds that a particular stakeholder, or in this case the State of New Mexico, does not pollute as much as other states and therefore its efforts to curb carbon emissions will not be that effective in the absence of broader participation. On a national level, opponents to cap and trade pose a similar argument: without the participation of China and India, a U.S. program will not have sufficient impact.

If we are to address the externalities created by pollution, all stakeholders should take the appropriate steps. New Mexico's participation in the Western Climate Initiative could apply pressure on the U.S. government to pass legislation. Moving forward with a regional cap and trade program, similar to the Regional Greenhouse Gas Initiative in the Northeast, could provide an additional example of a group of states making positive steps towards lowering carbon emissions without crippling their economies. On a larger scale, if the U.S. passes carbon legislation that puts us on par with Europe, the additional pressure may compel China, India and other developing economies to enact similar legislation.

Given the nature of state, national and global politics, we can't really wait for everyone to get on board before taking action.