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October 14, 2008

Investors Focus on Presidential Candidates' Differences on Future of US Energy Consumption
    by Robert Kropp

While both candidates pay homage to energy independence and renewable resources, major differences emerge for responsible investors to consider. -- The final month of this year's Presidential race coincides with a dramatic meltdown of global financial industries. The need for decisive action to reduce the economic consequences of the crisis—along with the fact that both major candidates happen to be US Senators and have voted in favor of the recent bailout bill—raises new questions about the comparative impact on responsible investing of either a McCain or an Obama administration, come January 2009.

SRI Mutual Funds GuideIn August—before the severity of the meltdown was anticipated—David Darst, the Chief Investment Strategist at Morgan Stanley, published a document entitled Investment Strategy for a Post Election Environment. Darst observed in his analysis, "When the economy has been in or entering a recession during past presidential elections, the incumbent party has lost 3 of the 4 contests." Such a conclusion obviously bodes well for the Obama campaign.

Before the crisis erupted, the high price of oil—coupled with the growing acknowledgement that excessive reliance on fossil fuels constitutes not only a global environmental crisis but a national security threat as well—led both candidates to articulate positions on energy that placed a premium on an aggressive development of alternative energy sources. The candidates certainly espoused different priorities, but both appeared to recognize the seriousness of an impending energy crisis.

At the Carbon Disclosure Project’s Global Forum, held in September in New York City, representatives of both campaigns agreed that new energy policies at a federal level had to be developed. Yet significant disagreements regarding priorities exist between the two candidates. Despite a common call for "energy independence," the disagreements are pronounced enough to provide potential investors with relatively clear-cut alternatives.

According to Darst of Morgan Stanley, among the winners for investors in a McCain presidency are oil and gas. In keeping with his highly publicized call to "Drill, baby, drill!" McCain supports offshore oil drilling; furthermore, during the campaign he abandoned his opposition to drilling in the Alaskan Wildlife Refuge. Political expediency may have trumped long-term energy independence: not only are the results of drilling too far off in the future to be of immediate benefit, but such a position also
fails to consider the oil dependency of a nation that currently uses 25% of the world's oil resources.

As part of his goal to attain energy independence by 2025, McCain calls for the construction of 45 new nuclear power plants by 2030, as part of a plan to eventually construct 100 new plants. He also supports spending $2 billion a year to develop clean coal technologies.

Regarding nuclear power, the position of the Obama campaign is that the issues of security of nuclear fuel and waste, waste storage, and proliferation must be addressed before expansion of the technology can be considered. While nuclear power currently represents more than 70% of the nation's non-carbon generated electricity, the significant issue of nuclear waste is a reminder that nuclear power is not a renewable resource.

Obama will establish a 10 percent federal Renewable Portfolio Standard to require that by 2012, 10 percent of electricity consumed in the U.S. is derived from clean, sustainable energy sources, like solar, wind and geothermal. Obama anticipates that such a national requirement will spur significant private sector investment in renewable sources of energy and create thousands of new American jobs.

Because of this focus on renewable energy sources, Darst of Morgan Stanley believes that potential beneficiaries of an Obama presidency will include investors in geothermal, solar power, and wind power companies.

A fixture of European efforts to curb greenhouse gas emissions is a mandatory cap-and-trade program of emissions trading, in which companies that need to increase their emissions buy credits from those who pollute less. Both McCain and Obama support such a program, but with significant differences. McCain would give away most of the carbon permits - currently estimated to be worth $100 billion a year—to big energy producers, while Obama prefers to allocate permits through an auction. Under his system, every company would have to buy rights to pollute.

Because the carbon market is estimated to reach $3 trillion by 2020 if the US accepts the tenets of the Kyoto Protocol, investors in the carbon market stand to benefit more from either candidate than they did from the Bush administration, which refused to ratify the Kyoto Protocol. However, while both candidates support significant reductions in greenhouse gas emissions, only Obama's plan will help pay for the development of renewable energy resources by means of a carbon auction requiring businesses to bid competitively for the right to pollute.

Of course, the goal of reducing emissions cannot be attained by simply addressing issues pertaining to energy producers. On the issues of fuel-efficient cars and advanced vehicle technology, energy efficient buildings, recycling, and overall energy efficiency, the candidates seem to agree in principle, but differ on the force of their commitment.

The League of Conservation Voters, an advocacy organization that has endorsed Obama, gives Obama an 86% lifetime score on his legislative record. The organization gives McCain a 24% lifetime score.

Obama voted to approve the "CLEAN Energy Act of 2007, which proposes to "Move the United States toward greater energy independence and security, to increase the production of clean renewable fuels, to protect consumers, to increase the efficiency of products, buildings, and vehicles, to promote research on and deploy greenhouse gas capture and storage options, and to improve the energy performance of the Federal Government, and for other purposes." McCain did not vote.

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