How to Profit from the War on Greenhouse Gasses

The EPA recently ruled that too much carbon dioxide is threatening the planet. What this does is make it a lot easier to regulate and tax emitters of this gas.

So here we are in a shaky economy tottering on a ledge and along comes the EPA ready to shove it right off. As The Wall Street Journal reported: "The landmark decision lays the groundwork for federal efforts to cap carbon emissions ― at a potential cost of billions of dollars to businesses and government."

In other words, the war on the so-called greenhouse gases is officially under way ― and it is going to be expensive. Each passing month brings us closer to capping, taxing or cutting the gases thought to cause global warming.

I don't think investors appreciate how far-reaching such efforts could be. And there will be definite winners and losers as a result. Some of these are far from obvious and some are in plain sight.

The first obvious big loser is American coal, from which we get half about of our electricity needs. Already, you see companies reacting to this news. Consol Energy, a big coal company, said it halted two big mines in Appalachia because of uncertainty over the costs of pending new regulations. If you own a U.S. coal miner, I'd fold the hand, so to speak.

Coal-fired power plants look like big losers, too. And the utility AES, the biggest user of coal in North America, is looking to shutter some of its coal plants. It is also looking at how high rates would have to go to comply with possible rule changes. In some places, rates could rise as high as 50%. It is no sure thing that AES could get such rate increases.

Natural gas-fired plants, though, may be one winner relative to coal, because natural gas burns cleaner than coal. Already, in just the last few months, as the market ponders talk of new emissions caps, you could see gaps opening up between coal utilities and natural gas utilities.

Though the new rules could be a year or more away, those gaps may well widen over time as investors anticipate the likely bad ending for coal. So I would not own a U.S. coal utility right now, either. It is no fun wearing a target on your back ― especially since the guy throwing the darts makes all the rules.

Instead, I'd rather be the guy who gets to make and sell the new equipment that helps utilities "clean up." The demand for cleaner-burning fuels will boost the need for its high-quality pumps, valves and seals. These products work to improve efficiency and emissions. Two similar companies I'm keeping an eye on include Fluor Corp. and Foster Wheeler.

But there is much more top stocks for 2010…

Besides carbon dioxide, the EPA also named five other industrial gases to its hit list, including methane. This could have an impact on landfills, which emit methane and carbon dioxide. One of the companies I am following is Covanta, which turns waste into energy, essentially replacing landfills. For every one ton of trash burned in a waste-to-energy facility, one ton less of carbon dioxide is released into the air. It also captures the methane gas.

So again, big penalty for those who run landfills ― but potentially a boon to those with solutions, like Covanta.

There are many other ways the EPA's ruling could affect the lay of the land. The EPA could raise fuel-efficiency requirements on cars. It could require more hybrids and electric cars. This would be good for makers of car batteries. It would also be good for the things that go into making more efficient car batteries ― such as lithium or cobalt, which are ideas I prefer over the battery makers themselves.

The war on greenhouse gases could also dramatically affect our homes and offices. Worldwide, the energy we use to build, heat, cool and light buildings makes up about 40% of energy demand. This is even more energy than the world's transportation networks guzzle.

Better insulation, new windows and even more efficient water heaters can make a big difference on the carbon footprint of a building. Just heating water alone can make up 15% of the energy used in a home.

Another company I am following is A.O. Smith. This company has a dominant position in water heaters, as well as a rapidly growing business in China ― where the need is more acute. It also makes heating and air conditioning systems. A good chunk of A.O. Smith's sales come from replacement markets ― just fixing what is in place. Stricter building codes and a need to cut energy use could be good for businesses like Smith's.

However, this is not all driven by government's iron hand. In fact, in some cases, it is just good business sense. The Empire State Building, for instance, is undergoing a major makeover. But it is one you can't see from the outside. Instead, it's all about the insulation, smart meters, new boilers and more. According to the Financial Times: "The retrofit of the Empire State Building will cost about $20 million, but its annual energy savings will be $4.4 million when it is complete." That's not a bad payback.

In any event, the efforts to save energy and reduce greenhouse gases ― whatever their source ― is an important story and sets up a lot of things for us to look deeper into in future letters. We are still early in this game.