LP L FINANCIAL R E S E AR C H

Factors Driving Climate Change Initiatives
Dave Reilly, CFA
Assistant Vice President, Equity Strategy, LPL Financial

April 21, 2008

A review of the Aspen Environmental Forum
In an effort to explore climate change effects and their potential investment impacts, LPL Financial sent Dave Reilly to attend the Aspen Environmental Forum held in March 2008. In partnership with National Geographic Magazine, the Aspen Institute hosted an innovative forum on the future of our environment. The forum covered new research and theories about the environment and provided an in-depth look at the best current approaches to environmental problems. Public sentiment, public policy, and business initiatives are driving climate change initiatives. This interview reviews the research on climate change topics and other major themes that were discussed at the forum. As an industry leader, LPL Financial is committed to putting resources towards learning more about these issues.

Q: Dave, what is causing the recent interest in Climate Change?

Dave: The interest is due to the fact that consumers are feeling the pinch of higher commodity prices and their preferences are shifting toward more environmentally friendly products. Also, businesses are seeing higher costs and new opportunities arise. As a result, the three U.S. presidential candidates are pushing for some form of climate change legislation. To remain globally competitive and to profit from business opportunity some U.S. corporations are working proactively with legislators to provide input and gain greater clarity on what is believed to be inevitable U.S. climate change regulation. In that vein, the Bush Administration has recently changed their stance on this issue in order to help shape future legislation.

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Q: What about the science of these environmental issues?

Dave: Scientific evidence presented at this forum pointed to increased levels of carbon dioxide (CO2) in the earth’s atmosphere as the driver of climate change. The rise in carbon emissions can be attributed to increasing global fossil fuel consumption from the industrial revolution over the past 100 years and more recently a push for increased living standards in developing countries, particularly in China and India. While this subject tends to be controversial, we don’t debate the merits of the science. More importantly, I learned from conference participants that both business and the investment community are increasingly attending environmental conferences. And that is not because they have suddenly become more concerned about the environment, but rather that they are seeing real opportunity for profit.

Q: On that point, what are companies doing about climate change?

Dave: A lot. In fact, major corporations across most sectors are either beginning to address these issues through business opportunities or have already begun to do so. Certainly, companies in the Utility and Energy sectors are preparing to deal with the carbon emission mitigation rules that are undoubtedly coming. Industrial companies, which will likely play a large solution role, are positioning themselves and in some cases already providing environmental efficiency products and services, such as solar panels, wind turbines, building efficiency solutions, etc. Some Financials companies are already acting as market makers in the nascent carbon credits trading markets. In addition, the auto and component manufacturers, which have a lot to lose or gain, are moving toward more energy efficient products. Finally, it was argued at this conference that all companies need to address climate change as simply a matter of business. Saving energy is profitable and corporations have begun to realize this. According to the EPA, businesses and consumers combined cut energy use per dollar of GDP by 2.1% per year from 1996 to 2005. It’s not about whether they are environmentally friendly - it’s a matter of a necessary focus on rising input costs due to global competition for limited resource – essentially corporate sustainability.

Q: Before we discuss some of the regulatory options, what were some of the specific solutions to climate change that were discussed?

Dave: Generally it was agreed that there is no silver bullet solution to the problem, but rather silver buckshot. In other words, solutions to this issue will require a combination of three primary approaches that will take place over several years, involving clean coal, energy efficiencies and alternative energy solutions.

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Q: Dave, can you start with the first approach you mention, given that coal is the primary fuel source for U.S. utilities?

Dave: Sure. The U.S. is dependent upon coal efforts targeted at clean coal, carbon capturing, and storage, which are paramount to any solution. This is also due to the fact that coal is one of the least expensive sources of energy, ubiquitous and a major source of carbon emissions. In fact, coal produces among the highest amount of carbon emissions per megawatt-hour compared to oil, natural gas, nuclear, or any renewable energy source. Furthermore, global coal power capacity is expected to increase 50% by 2030 according to the Department of Energy and the International Energy Association. For example, China is currently building one new coal fired plant every week. Interestingly, the U.S. has the largest reserves of coal, which provides the opportunity for a competitive advantage if we can achieve clean coal solutions. Dave: Improving energy efficiency was also addressed. This can take many different forms and is also a necessary part of the solution. This is very important since there are so many small ways to improve efficiency, some relying on technology, some on businesses and some on consumers, which separately may seem less relevant, but together would add up to a meaningful contribution. For example, according to the Federal Reserve, the U.S. now uses half of the energy per dollar of economic output than it did 30 years ago. Data presented at the conference highlighted that 90% of coal energy is lost from mining to the consumer. Whatever the exact numbers, energy efficiency will be a necessary part of any solution and can certainly be profitable for businesses. Dave: Increased power generation from alternative energy sources not based on fossil fuels, such as solar, wind, geothermal, nuclear will also be necessary. While nuclear energy may be a part of the solution, concerns over safety, nuclear waste disposal and the potential for geopolitical risk from nuclear proliferation still exist and therefore complicate this challenge So, to tie these solutions together - efforts on all three of these fronts – clean coal, efficiency, and alternatives, will be required and all three have investment implications.

Q: What were the other solutions?

Q: How does alternative energy fit into the array of solutions?

Q: So, now let’s shift to the trends in regulation that were discussed.

Dave: There were four potential regulatory approaches presented at this forum. Some of these have been tried in various countries, including the U.S. However, there was a good deal of agreement that one approach, cap and trade, which is already in place on a limited basis in Europe and in the U.S. through regional exchanges, is the most likely to gain momentum. Another policy that has been in place includes the use of carbon offsets, which were established through the Kyoto Protocol and are monitored by UN. A third approach, taxing carbon emissions, was also discussed but many forum attendees believed this does not make sense. Finally, the fourth approach is to mandate energy efficiency – presenters noted this has been done successfully in the past. In fact, all three Presidential candidates are calling for new energy efficiency standards.

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Q: Why do they think taxing emissions would not work?

Dave: For starters, they agreed taxes are never very popular but, more importantly, this approach is not directly tied to carbon dioxide reduction goals since it just focuses on levels of energy use. Dave: Yes, in fact there was a heated discussion about the lack of an effective national energy policy. Lack of national coordination on the issues of energy consumption and conservation has created uncertainty for businesses to manage the challenges posed by climate change. This has acted to stall businesses initiatives and progress on key climate change initiatives. In the absence of that, states and businesses have filled the void and taken a leadership role pushing for their own solutions. California is a primary example of a state that has long taken the lead in environmental initiatives. One such example is that California and Oregon allow utility companies to profit from their customer’s energy savings. In all other states, utilities are rewarded for selling more energy. It appears that a more coordinated, national approach is likely to emerge. Dave: One of the clear themes that came out of this forum was that mitigation of carbon dioxide emissions won’t occur unless there are real business opportunities and that will require clear and flexible regulation. There may be some dislocations due to a shift to cleaner energy and policy may not be fair to all, but it is not likely to act as a major drag on growth. In fact, business leaders at this conference and other recent environmental conferences have expressed optimism about the possibility for positive outcomes.

Q: Were the implications for national energy policy discussed?

Q: Will there be broad reaching negative impacts from an economic or business perspective?

To learn more about this forum please visit: http://www.aspenenvironment.org

Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial, UVEST Financial Services Group, Inc., IFMG Securities, Inc., Mutual Service Corporation, Waterstone Financial Group, Inc., and Associated Securities Corp., each of which is a member of FINRA/SIPC. Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not a Bank/Credit Union Deposit

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