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 Dave: The interest is due to the fact that consumers are feeling the pinch
the recent interest in of higher commodity prices and their preferences are shifting toward more
environmentally friendly products. Also, businesses are seeing higher
Climate Change?
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?
Q: On that point, what are
companies doing about
climate change?
Q: Before we discuss some of
the regulatory options, what
were some of the specific
solutions to climate change
that were discussed?
LPL Financial Member FINRA/SIPC
FACT ORS DRIVING CLIMAT E CHANGE IN I T I AT I V E S
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.
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.
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?
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.
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FACT ORS DRIVING CLIMAT E CHANGE IN I T I AT I V E S
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.
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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 FACT ORS DRIVING CLIMAT E CHANGE IN I T I AT I V E S

Q: Why do they think taxing Dave: For starters, they agreed taxes are never very popular but,
emissions would not work? more importantly, this approach is not directly tied to carbon dioxide
reduction goals since it just focuses on levels of energy use.

Q: Were the implications for Dave: Yes, in fact there was a heated discussion about the lack of an
effective national energy policy. Lack of national coordination on the
national energy policy discussed?
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.

Q: Will there be broad Dave: One of the clear themes that came out of this forum was that
reaching negative impacts mitigation of carbon dioxide emissions won’t occur unless there are real
business opportunities and that will require clear and flexible regulation.
from an economic or There may be some dislocations due to a shift to cleaner energy and policy
business perspective? 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.

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.

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