President’s Biofuel Push Clears Way for Billions in Revenue

The President’s health care initiative rests on a shelf with little talk in Congress about what’s next for the sweeping overhaul. At the same time, Mr. Obama has re-positioned the chessboard for his climate-control bill, suggesting at a town-hall meeting in Nashua on Tuesday that the legislation might need to be split: One bill would contain the so-called “cap-and-trade” provision designed to limit carbon-dioxide emissions, while the other would enact the far more popular green jobs initiative the president has long touted.

Mr. Obama has long been serious about green energy, an issue about which he spoke frequently on the campaign trail. In his State of the Union address, the president encouraged the Congress to invest in innovation, saying that “no area is more ripe for such innovation that energy.” His 2011 budget proposal, released earlier this week, boldly proclaims that “becoming the world leader in developing the clean energy technologies that will lead to the industries and jobs of tomorrow is critical to the future of our country.”

This is bold rhetoric. It also may be good politics: While the GOP is typically annoyed by bureaucratic hand-wringing over climate change, it doesn’t seem to have a problem supporting the companies that can (profitably) produce clean energy. That not only has the potential to create jobs back home, it also allows the nation to reduce its dependence on foreign oil.

So the issue is in good smell. Is the administration actually doing anything about it? And does it mean anything to investors?

The answer to the first question is “yes.” The answer to the second is “absolutely.”

On Wednesday, President Obama, Energy Secretary Steven Chu and Agriculture Secretary Tom Vilsack announced that the Environmental Protection Agency has finalized a rule to implement the long-term renewable fuel standard of 36 billion gallons by 2022. They released an inter-agency study called “Growing Our Fuel”.

Readers of my Government-Driven Investing newsletter will recognize the 36 billion figure immediately. I’ve been writing about the timetable, which is part of a Bush-era energy law, for almost a year. It codifies output targets for renewable energy. Here is what they look like:

As the chart shows, the future is limited for traditional “renewable” fuel, which is corn-based ethanol. But the chart also shows some phenomenal growth potential for cellulosic ethanol, a cutting edge biofuel that can be made from any plant material. I predict that the value of the leading cellulosic ethanol makers, which I hold in my Government-Driven Investing portfolio, will rise like the demand for this next-generation biofuel.

This wasn’t just the president announcing a new rule change and issuing a government report. The reason the agriculture secretary was at the lectern is because cellulosic ethanol means major changes down on the farm. The new “Biomass Crop Assistance Program” — BCAP — will help transition farmers into this new market. In other words, the White House is making a major push for feeder crops for biorefineries, and it’s standing by timetables that demand a skyrocketing long-term demand for their products.

Barack Obama came to Washington to bring change in health care and environmental policy, areas where success has proven elusive even with a clear Congressional majority. It’s my belief that these moves toward biofuels will be a far more important and long-lasting element of his legacy.

That’s good news for Mr. Obama, who could use a “win.” And it’s also good news for shareholders in the two companies I’ve identified as leaders in the biofuel space, one of which has returned more than +200% since June.

A Step Toward Clean Coal
Mr. Obama didn’t stop with biofuels on Wednesday, though. He also took on a critical fossil fuel, one the United States relies on for roughly half its electric power. He announced his desire to support the commercial development of an esoteric technology known as CCS, or “carbon capture and sequestration.”

The idea is that if the nation is going to continue to use fossil fuels then we ought to remove the carbon dioxide from the emissions they create. CO2 is thought to contribute to global warming, and the compound, which also occurs organically in nature, has been categorized as a type of pollutant subject to federal regulation.

CCS is most useful with coal, which fires about half the nations’ electric plants. If the billions upon billions of tons of CO2 could be stripped from these emissions, it could have an impact on air quality. Deployed globally, espriaally to China, which uses even more coal than the United States to produce electricity, and the leading CCS technologies may be able to fight global warming on a planetary scale.

Right now, the leader is an industrial gas company that has pioneered the “oxyfuel” process of burning coal. It turns out that what makes coal emissions so onerous is not their CO2 but the byproducts that result from the combustion of coal in the ambient air. Air is mostly nitrogen, and nitrogen byproducts are difficult to remove from a flue stream in a smokestack. If, on the other hand, the coal is burned using pure oxygen, then all that results in the flue stream is water and CO2. The water can be cooled and piped off, the CO2 can be pumped into underground storage. (Some of it can also be sold for use in industrial purposes. This was the company’s intention. Saving the world is merely a pleasant side effect.)

If a large company were to decide to buy a fleet of hybrid vehicles to save gas, that’s one thing. But when the President of the United States stands up with two of his cabinet officers and announces a major new push into biofuel and clean coal, it’s time to sit up and take notice. These actions have the potential to generate scores of billions of dollars in revenue, not for Uncle Sam and our friends at the Internal Revenue Service, but for the shareholders of the companies that own these crucial environmental technologies.