How to Play Obama's Carbon Tax
What Investors Should Know about Obama's Carbon Tax
The U.S. government is going to be raising revenue and cutting spending.
This much is a foregone conclusion.
And while most of the talk has been about tax rates for various income groups, another major tax is most likely on the way...
It may not come in the agreement that must be rammed through Congress and the Senate next month, but it will be huge.
Rumors about a carbon tax on the national level have been floating around for years, but with Obama's second term secured and a dire need to fix the federal budget, odds are we're going to see a proposal very soon.
The president has even found himself an unexpected and extremely powerful ally.
Politics aside, let's take a look at the numbers...
Bank of London analyst Nick Robins cited Congressional Research Service estimates to determine that a tax starting at $20 per metric ton of carbon dioxide equivalent and rising at about 6% per year could raise $154 billion by 2021.
Applied to the Congressional Budget Office’s 2012 baseline, that tax would halve the fiscal deficit by 2022.
This is huge, both as a burden that will rest squarely on the shoulders of American businesses and as a massive correction in our downward debt spiral.
To put these numbers in perspective, U.S. corporate profits were around $1.5 trillion after taxes in 2011. The hypothetical $154 billion tax revenue would account for 10% of that figure.
Needless to say, even politicians with environmental concerns will have a heck of a time persuading their peers to sign on if they know the total cost. Framing it as “$20 per ton” tax with a seemingly low “6% rise” could obscure the real impact.
There's also the extremely attractive incentive of halving the country's deficit in under a decade.
Americans are more concerned about the economy than they are any other issue. The person or party that can ease this worry will have an ace in their hand when the next campaign rolls around.
Regardless of the actual tax rate, two things are certain:
1. Democrats will push for the tax to appease their supporters after a complete lack of progress on environmental legislation over the last several years; and
2. There will be big winners as well as big losers under any proposal or tax rate.
Obviously, coal miners and coal-dependent utilities already on the ropes will find themselves in greater trouble if this tax becomes law.
But what may come as a surprise is who will profit from an emissions tax...
ExxonMobil will thrive if this tax goes into effect.
In fact, the company is wholeheartedly supporting the proposal. I know this seems counterintuitive, but bear with me here. It's brilliant...
ExxonMobil expects demand for natural gas to rise by more than 60% through 2040, while global energy demand will increase about 30%.
XOM is putting a lot of money on the line, ponying up several billion in a buying spree of unconventional North American gas companies: Canadian firm Celtic Exploration (over C$2.5 billion) and XTO Energy (over US$30 billion).
Right now, natural gas and coal are about even when it comes to electricity generation in the United States... but by increasing the cost to produce coal, natural gas becomes more attractive for utilities.
Despite long-term demand in India and China, coal is already suffering in the global economy. Metallurgical coal prices are down due to lower demand in Europe and Asia, and thermal coal is down thanks to pricing pressure from natural gas and the success of shale gas.
A carbon tax would greatly boost demand for natural gas to avoid the penalties of burning coal in older power plants. It would be a knockout blow to the thermal coal industry in the United States — and guarantee the long-term use of natural gas for decades to come.
ExxonMobil sees this as a surefire way to ensure their bottom line is healthy — and that their expensive investments in North America pay off in the end.
Of course, ExxonMobil will have to sell the idea to politicians, but they shouldn't have too hard a time doing so...
Let's not be naive when it comes to the clout Exxon's lobbyists have on the Hill. The company also happens to be one of the largest holdings for U.S. Congress members.
An increase from a massive company like ExxonMobil will be helpful, but it will only be a small portion of its international holdings and profits.
The way to set yourself up to profit from a carbon tax is to target smaller, focused unconventional natural gas and shale companies...
My colleague Keith Kohl has been doing just that. Keith has found three solid Bakken shale field plays trading for less than $10/share. You can learn more about these here.
If and when the tax becomes official, these stocks will launch as natural gas takes the crown for the next several decades — if not the rest of this century.
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