Business costs
As debate over global warming rages ... the magnitude of it and its possible causes ...
Many businesses are already acting, working to trim greenhouse gas (GHG) emissions and investing heavily in new technologies.

Why? The handwriting is on the wall. Multinationals face foreign regulations as the European Union and others begin moving toward implementation of the Kyoto Protocol ... the treaty intended to combat global warming.
States and cities are cracking down. About two dozen states mandate that more power has to come from renewable sources by 2020. Seattle; Austin, Tex.; and other cities and towns are moving in a similar direction. Nine northeastern states will impose limits on GHGs from power generators in a few years.
And federal regs are certain to come, probably in the early years of the next decade.

There’s also a liability worry at work as firms and execs fear being held responsible for not acting to control emissions even before federal rules require it. Pressure from insurers, shareholders, and the general public is climbing.
And high energy prices mean most steps make economic sense: Trimming carbon dioxide, methane, and other emissions curbs energy use.

By 2010, the impact will be visible ... new industries created, old industries reshaped, and new technologies developed. Some examples:
In power generation. Nuclear power and gasified coal will soar, as will renewables. Utilities will be more aggressive in seeking deals with users to handle peak demand, spurring sales of software and sensors to closely manage electricity consumption. They’ll be more accommodating to customers who augment purchased energy with heat-power generators or fuel cells and make it easier for them to hook up to the power grid.
In automobiles. By 2010, average mileage of passenger car fleets will hit 30 mpg. Makers will reduce weights, feeding demand for aluminum. And they’ll eke more efficiency out of power trains, transmissions, etc.
In steel, metal forming, chemicals, textiles, and construction and other heavy emitters of greenhouse gases, the need for scrubbers will rise. All these industries will push for greater energy efficiency.

A robust market in emissions credits is likely as companies that can’t easily cut pollutants buy spare reductions from ones that can. Some firms are even betting that credits earned now can be sold later.

Energy
When do oil prices climb so high that they sink the economy?
There’s no specific trigger point. The impact is cumulative, as gasoline prices, utility bills, and petrochemical feedstock prices eat away at the funds available for investment and other spending.
Still, new benchmarks pack at least a psychological punch and will probably rock U.S. financial markets, at least temporarily.
Odds are good that prices will top $60 a barrel again. The supply situation is so tight, a whisper of disruption would do it. That will hurt, but $60 is likely not high enough to strangle spending by business and consumers or to kick overall inflation into high gear.

Prices are much less likely to reach $70 or $80, even briefly.
And there’s little chance of passing a really big milestone: $88 a barrel, the equivalent in today’s dollars of the record reached in 1980, largely in response to the Iran hostage crisis.

The economy
Strong profits are helping to rapidly fill company coffers.
Nonfinancial firms in the S&P 500 will amass $680 billion in total cash holdings by year end. They’re a record $634 billion now.
That’s a bit worrisome. It means companies are wary of spending, despite the rosy profits picture. And the lackluster spending growth casts doubt on how long the current economic expansion can continue with consumer spending likely to dip next year.

Since holding cash yields meager returns ...
What’s keeping managers from spending more?
Fear, mostly: Bad memories of financial whiplash experienced when the late-1990s boom evaporated. Nagging worries that the next downturn will be severe, warranting big cash reserves. And leeriness of greater public scrutiny of company investment decisions in the wake of corporate scandals and new disclosure regs.

Good news for U.S. firms slammed by cheap imports from China:
Congress will make it easier for them to get tariff protection with a bill treating undervalued currency as an unfair trade subsidy. Bipartisan support for the bill is strong, and Bush will likely go along. But a busy congressional calendar this year may delay action until 2006.

The U.S. dollar will remain strong versus the euro and other European currencies, with the dollar trading around $1.20 to the euro into fall. The current rally in Europe will level off soon.
But its value against key Asian currencies will head down after China allows its yuan to appreciate a bit late this year or next.

The Federal Reserve intends to keep raising interest rates, confident that the economy is robust enough to warrant more tightening. Look for three or four more quarter-point hikes before the Fed stops.

© 2005 The Kiplinger Washington Editors, Inc.