Investment: A Hat Tip To Cap & Trade By Gareth Milliams

Ethical investment has been popular with investors for more than a decade. The notion of making a good profit whilst making the planet a cleaner place is very appealing. But the reality is that very few ethical funds have made money. Part of the problem is that the technology for most green initiatives is not that green.

Solar energy is fashionable at the moment. The worlds largest solar power 'park' in the Mojave desert will become operational in 2011. Taking up 24 square miles of land, the park will generate some of the power for 400,000 homes. It will also destroy vast swathes of pristine desert and a delicate ecological system.

Wind power turbines are a common site all over the world. The problem is that for them to be truly effective you need to cluster hundreds of them together. Unfortunately, this leads to a change in the weather on the ground.

Ethanol as a commercial proposition is unsustainable without its massive subsidies, additionally there is evidence that towns where ethanol plants are situated suffer from massive air pollution problems because of noxious fumes.

My point is that as a long term sustainable investment, ethical funds and stocks have disappointed and that in their present level of sophistication have not proved themselves viable.

However, there is an eco-investment solution on the horizon that does not involve any technology whatsoever. It could prove to be highly lucrative and go a long way to cleaning the air that we breathe. So what is it?

This week, the US House of Representatives passed legislation on a Cap and Trade emission policy that limits the amount of pollution that a company can emit. If that corporation exceeds its set emissions, it may then buy credits from companies that have reduced their carbon footprint. These credits are traded to the highest bidder via either the Chicago Climate Exchange or the European Climate Exchange in London. Both are owned by Climate Exchange PLC. The main investors in the Climate Exchange are Goldman Sachs, HSBC, JP Morgan and Barclays Capital (GS holds a 10% stake in The Climate Exchange).

The beauty of the Cap and Trade legislation is that not only will there be competition for extra credits but that the threshold for emissions levels will be cut every year. Overall emissions will reduce by 17% by 2020 and by 83% by 2050, effectively increasing prices of carbon credits every year as the threshold drops and credits become more expensive. The market will dictate the price of the credits by auction. But surely, as the threshold drops, the cost of the credits will dramatically rise.

Below is a clickable chart that highlights the growth in this stock since the legislation passed the House of Representatives.

We'll have to see how the legislation fares through the Senatorial process, but should it remain more or less intact, it could be a terrific opportunity.