Investors who beat the market look for opportunities before others have caught on.

A recent edition of The McKinsey Quarterly presented an analysis of the costs to abate greenhouse gases, especially CO2. Their framework provides an interesting point of view for investors interested in companies that reduce greenhouse gases beyond the obvious solar and wind plays. (To read the full article, see "A Cost Curve for Greenhouse Gas Reduction" - free registration required.)

Background
At the low end of the greenhouse gas reduction curve are measures that reduce the demand for energy. Many of the emitters are consumers where it is difficult to realize the result of abatement measures without directly increasing their costs.

Higher up on the curve we see what many consider to be the largest causes of greenhouse gases, power generation and manufacturing. These emitters are more easily targeted by policy makers. They also are a big target for green activists.

Implications for Policy
McKinsey classified the abatement potential into six primary categories, as detailed in the pie chart below. The buildings category offers the greatest low-cost abatement potential. It is interesting that power generation and manufacturing industries are the primary focus of environmentalists and governments seeking to reduce emissions, yet they account for less than half of the potential for reducing emissions.

Transportation, Forestry and Agriculture & Waste are broad categories, and for our purposes today, will not be addressed.

Implementation of new clean or energy-efficient plants and buildings requires known emission standards that must be met before design and construction can begin. In the United States, many new coal-fired electrical generating plants are on hold until policy makers pass new emission standards.

Control of emissions will have a substantial impact on global economic growth. For those interested in learning more about global economic growth I suggest reading the book "Economic Growth" (2004) by David Weil. It is an easy to read book that presents the key factors of global economies. It is a bit expensive, and is used as a textbook for many college courses.

Investing Implications
There are many companies that are likely to participate in the massive effort to reduce greenhouse emissions. The following list is just some of the better ones that investors should consider. Don't limit yourself to considering just these stocks, but they are sure a good place to start.

Jacob's Engineering Group (NYSE:JEC) - Jacob's Engineering designs and develops buildings and plants across the globe. With the growing interest in energy efficiency for new buildings, Jacob's is in a distinctive position to include energy efficient materials in the buildings that it designs and constructs. Its customers want to save money on the high costs of energy and they wish to demonstrate they are doing their part to lower emissions.

McDermott International (NYSE:MDR) - This is energy services company installs offshore drilling rigs, pipelines and sub-sea production systems. It also provides nuclear components to the U.S. government and constructs electric power generation systems. In Saskatchewan, Canada the company is working on a 300 megawatt facility that will virtually clean a power plant of all CO2 emissions. This project is just underway and still must be proved. If it proves successful it will be a significant boon to the fortunes of MDR and to the reduction of CO2.

Fluor Corporation (NYSE:FLR) - Fluor Corporation provides engineering, procurement, and construction and maintenance (EPCM) services. Recently Fluor was awarded a contract to design and build the Desert Rock Power Plant in New Mexico, featuring a 1,500 mega-watt super-critical, low sulfur, coal-fired plant. According to the U.S. Environmental Protection Agency this plant will have the lowest emissions of any coal-fired power plant in the U.S. Also, Fluor is building a 500 megawatt wind farm in the United Kingdom, displacing 1.5 million tons of CO2 per year and providing enough power for 415,000 homes.


The Bottom Line

While many investors who are interested in the rush to green companies are chasing solar, wind power and ethanol plays, the engineering and construction industry may be in the best position to benefit in the long run from the effort to reduce emissions. These companies may not be as exciting as the others; however, they offer sustainable returns and they are growing at very nice rates as the demand for their services continues to expand globally. Investors looking for green plays should consider these engineering and construction companies.

To learn more on this subject, check out Building Green For Your House And Wallet.

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