TOP VIEW: Former Vice President Al Gore heralds an aspect of global warming that is often overshadowed by images of drowning polar bears and displaced lowlanders: the investment prospects that he believes will arise from the need to transition to a low-emission economy. As investors, entrepreneurs and even gargantuan multinational corporations increasingly turn their attention to the issue, Gore says the looming environmental crisis will be "the biggest new wave of opportunity in the history of business."

The former vice president acknowledges that the transition to the lower-emissions world necessary to alleviate global warming will be difficult. But he believes it will be characterized by the sort of Schumpeterian creative destruction, driven by innovations by entrepreneurial individuals, that has transformed the country’s economy time and again, providing tremendous opportunities for investment. While the areas of greatest potential are not yet clear (there is no entrepreneurial advantage to investing in the obvious), he believes some general trends can be divined.

"I think we are on the cusp of the biggest new wave of opportunity in the history of business," Gore says. "There are thousands of examples of very smart and successful investors who see this wave and, like the proverbial surfing champs, they are paddling fast so they can catch it."

First Mover Advantages
The energy sector is clearly the place to start. "There are billions being made this year by first movers in fields like wind power, alcohol fuels, new conservation and efficiency technologies," Gore says. "There are people in Silicon Valley who have made fortunes in semiconductors who are now betting it all on photovoltaics," he adds.

Financial institutions and companies are moving into the arena, vindicating and supporting the entrepreneurial interests, he notes. Investment banks are backing renewable energy projects–both for their investment potential and to burnish their environmental credentials. Most recently, Goldman Sachs patted itself on the back for committing $1 billion to various green endeavors. Large corporations such as General Electric, Toyota and BP say they are placing clean energy technologies at the forefront of their long-term strategies.

"We will look back on the way we handled transportation problems and marvel at how long it took to come to our senses."

The financial sector is also looking to connect investors with opportunities by providing liquidity to the market for emissions. The Chicago Climate Exchange (CCE), now in its third year, allows polluters to purchase emissions credits from companies that beat their emissions targets, with the scheme calibrated to reduce the gross amount of greenhouse gases emitted. (See "Carbon Trading: A Difficult Birth," page 56.) Similar regimes are operating in Europe. CCE founder Richard Sandor, in a speech at the annual Milken Institute Global Conference in Beverly Hills in April, claimed that this sort of trading is now a trillion-dollar market. The transition to a low-emissions economy, Sandor said, is a "business opportunity in which great wealth will be made–or lost."

Prices for carbon emissions allowances had increased more than 300 percent in some markets in the past year, Sandor said, and investment in low-emissions technology initiatives is growing by 30 percent a year. For those who prefer short positions, Sandor predicted that companies that refuse to curb their emissions could eventually be targets of class action lawsuits, the size of which could dwarf the litigation that has dogged the tobacco industry for years.

The Externalities Dilemma
Gore expects these types of market initiatives to drive the transformation of the economy. "The markets are already determining the pace of change from fossil fuels to alternative sources of energy," he says. "It’s not happening as a result of government policy in this country, the way it is in many other countries. But it is happening as a result of market forces and consumer preferences." However, the markets still need to come to grips with what economists call "externalities"–consequences, like long-term environmental degradation, that are not priced into short-term economic decisions. "It would happen more rapidly if the so-called externalities associated with environmental damage were priced in more accurately," Gore says. "But it is beginning to happen, and it will pick up speed."

Consumer preferences will evolve as prices begin to reflect these externalities, he believes. Take cars. "There is no inherent reason that we have to take 3,000 pounds of metal with us everywhere we go," Gore says. "At some point in the future, we will look back on the way we handled transportation problems and marvel at how long it took to come to our senses."