Investing in Green Tech

So, after reading this article, I've been thinking a lot about if/how one should invest in green tech. I agree with several of the premises of the article but disagree with some, particularly the degree to which the government is responsible for the creation of bubbles. The .com bubble was largely a result of its own making. The Internet was a ground-breaking new technology with the potential to unleash massive productivity gains and was going to receive massive amounts of investment whether or not the government suspended sales tax on Internet purchases or not. The fact the Internet was a valid target of investment is demonstrated by all those investments in Internet technologies turned out to be wise investments. Ebay, Amazon, Google, Yahoo, etc. all proved to be very good companies that now generate billions of dollars in profit for their shareholders. But, beyond the purely Internet companies (and Internet suppliers like Cisco) nearly every business benefited from investment in Internet technologies whether it was in the form of banks automating operations or a corner store doing Internet billing. An Internet bubble was coming whether Congress passed any kind of bill facilitating it or not.

However, I do believe that the housing bubble was to a larger extent government driven. When the government eliminated capital gains on home sales in 1997, it instantly increased the value of homes across the board and that coupled with historically low interest rates during the early 2000's, set off a housing boom. That said, the housing boom wasn't completely government created either. After people captured a lot of the wealth that was generated by the Internet boom, it was only natural that they would want to begin to consume that wealth in an effort to raise their standard of living. Upgrading one's house seems like a natural place to start. So, a housing boom was probably inevitable as well when people began to realize the standard-of-living gains that were to be had given all of the wealth that was generated by the rise of the Internet. I do, however, believe that the housing bubble was a government-created phenomenon to a larger extent than the Internet boom given the larger roles that interest rates and taxation played in its creation.

The potential green tech bubble, if it materializes, will be almost exclusively government generated. The very fact that government is attempting to pass legislation mandating "greener" practices demonstrates that there are not significant productivity or standard of living gains to be had by implementing these practices. If there were, we wouldn't need the government forcing the hands of consumers or business owners. As I have said before, I think global warming is inevitable when the Second Law of Thermodynamics collides with the Tragedy of the Commons. In this case, the commons happens to be the entire world or, more specifically, the entire atmosphere. We need more energy injected into the system to overcome the naturally increasing entropy and thus increase our standard of living. Unfortunately, the easiest way to inject energy into the system is to burn carbon fuels which releases carbon dioxide into the air resulting in likely higher temperatures. Which could ultimately lead to natural catastrophe. Then comes the tragedy of the commons where the most of the world's inhabitants are more concerned (rightly) about pulling themselves out of poverty than keeping the planet's temperature the way it is. The poor countries will pollute the environment if we don't. That, sadly, is the reality. We already know that the atmosphere is a victim of the tragedy of the commons because we have to force our fellow Americans to stop abusing it through cap-and-trade, carbon taxes, or regulation. Now if we can't convince Americans to respect it, how are we going to get the rest of the world's citizens to comply given we have no jurisdiction over them?

Now comes the dilemma...How should one invest given this political environment? Since green tech returns don't depend on fundamentals (i.e. we can't invest based on how much productivity gain we expect to achieve) we have to invest based on 1) our prediction about how drastic first-world countries are willing to get in staving off global warming and 2) how long we predict the green revolution will last. Are we going to pass a few ethanol mandates and then watch our food prices rise and pull back? Or are we going to drive off the cliff and pass massive, far-reaching mandates that take a two-by-four to our economy (and a jet pack to green tech companies)? That's the question you have to accurately predict to invest in this environment.

I'm hoping that we quickly come to the consensus that there is nothing we can do about the climate change and decide not to bankrupt ourselves in a fruitless endeavour. Even liberals know that ethanol is a bust. So, hopefully we can back-track on that pretty soon. But, maybe we won't, the government drove us off of the cliff with housing. So, that's what I plan researching in the next couple of months: whether or not this green tech is going to take on a life of its own and if so, what companies are going to benefit the most from it. In the mean time, are oil sands a good investment in this environment?