Sunny Forecast for Climate Exchange Stock

By LIAM DENNING
Politics and the weather rarely offer certainties. But in this era of expanding government, investors shouldn't ignore Washington's determination to regulate carbon emissions.
With consumers in hibernation, sectors pushed by Uncle Sam present opportunities. One is London-listed Climate Exchange, chaired by Richard Sandor, an architect of the interest-rate-futures market. The company combines an existing market leader and an option on potentially huge growth. The lion's share of operating profit -- some 90% in 2009, Morgan Stanley estimates -- comes from the company's European Climate Exchange, which dominates the carbon-derivatives market.
Bloomberg News/Landov
Richard L. Sandor
Europe's carbon market is still young and growing, but the big growth opportunity is in the U.S. via the company's Chicago Climate Exchange and Chicago Climate Futures Exchange. The former is a voluntary but contractually binding cap-and-trade spot carbon market with more than 470 members. The CCFE trades federally regulated emissions such as sulfur dioxide.
Assuming federal cap-and-trade legislation passes the Senate, exchanges could reap $200 million or more in annual revenue from the market, brokerage Raymond James & Associates estimates. The winner-take-all nature of futures markets bodes well for a first mover like Climate Exchange. Last year, its total revenue was £22.8 million ($37.4 million).
Climate Exchange boasts other competitive advantages, not least its partnership with the much larger IntercontinentalExchange. ICE bought a 4.8% stake in the company last month. Besides being a vote of confidence, investors should remember this is a sector where market access often means buying your competitors.
Write to Liam Denning at liam.denning@wsj.com