Investing in Renewable Energy: Making Money on Green Chip Stocks

Chapter 12. PROFITING FROM POLLUTION

Renewable energy companies not only generate revenue by providing clean, green power for consumers, they can also generate additional revenue by simply offering an "offset" to companies that emit greenhouse gas emissions (GHG).

Through a system known as carbon trading, a market-based mechanism that helps mitigate the increase of carbon dioxide in the atmosphere, renewable energy companies (as well as other entities that provide offsets, such as forestry management companies, for instance) can sell carbon credits to companies that emit carbon dioxide into the atmosphere and want to balance out their emissions. The growing interest in carbon trading stems from emerging new legal requirements that investors expect to be established under the next administration in the United States.

According to analysts at New Carbon Finance, the U.S. carbon market could be valued at $1 trillion by 2020. Analysts at Point Carbon, a provider of analysis and news for carbon markets, have stated that the United States could be trading $600 billion in pollution credits annually by 2015. But what does that mean for Green Chip investors?

Well, for the companies in which we invest, it means a potentially huge valuation increase for those stocks. We'll get into the particulars of that in a moment. First, let's get into the meat and potatoes of how and why carbon markets exist.

BUILDING MOMENTUM

The most recent data—though varying widely depending on the source—estimates that ...