Enlarge By Matthew Huddleston, The Garden City (Kan.) Telegram, via AP Merle Blood drives a tractor, right, as his wife, Robin, uses a combine in September 2004 east of Garden City, Kan. Ethanol's growing popularity is boosting demand for John Deere farm equipment. Global warming a hot spot for investors Droughts. Hurricanes. Rising temperatures. Melting glaciers. In a world abuzz with talk about global warming, climate change is elbowing aside tech and biotech as the major investment theme of the future. Wall Street's savviest analysts are devising ways to cash in on crazy weather, just as they did in response to the profound changes brought on by the dawn of the digital age, globalization and the graying of America. Discussions about what interest rates mean for stocks are giving way to chatter about what a 1-degree rise each year in temperature would do to profits at businesses ranging from carmakers to solar companies. Global warming has emerged as a major market-moving force that represents a generational shift likely to influence how people invest for decades. The world's biggest financial services firms are investing massive amounts of time and brainpower trying to pinpoint what stocks and sectors will benefit — and be hurt — by changes in Earth's weather patterns. "We are approaching a tipping point when it comes to climate change," says Edward Kerschner, a strategist at Citigroup. Kerschner should know. He spent nine months researching "Climatic Consequences," a 120-page report that zeroes in on 74 companies in 18 countries well-positioned to profit from changing weather patterns. "The interest in this report is unprecedented," says Kerschner. He says presentations to clients are booked through the fall. Similarly, UBS released a 97-page tome, "Climate Change: Beyond Whether." And Lehman Bros., with input from analysts in London and Tokyo, this month published a 143-page paper, "The Business of Climate Change"The well-being of the planet, the report concludes, has gone from a "fringe concern" of scientists and activists to a "central topic" for CEOs and investors. "Global warming is likely to prove (to be) one of those tectonic forces that — like globalization or the aging of populations — gradually but powerfully changes the economic landscape," writes John Llewellyn, senior economic policy adviser at Lehman. And California's Calpers, the nation's largest public pension plan and considered a trendsetter among giant money managers, is committing $800 million to invest in clean technology in emerging markets of Eastern Europe, Latin America and Asia. Earlier this month, the United Nations' Intergovernmental Panel on Climate Change (IPCC) concluded that it was more than 90% likely that human activity is causing global warming. Former vice president Al Gore came to a similar conclusion in his film, An Inconvenient Truth,which Sunday won the Academy Award for best documentary feature. The IPCC says temperatures around the globe could rise 2 to 12 degrees Fahrenheit by 2100. Likely result: more intense heat waves, more powerful tropical storms and a rise in sea levels that could swamp low-lying cities. From an investors' standpoint, it doesn't matter if people believe global warming is real or if greenhouse gases are to blame, Kerschner says. What does matter is if consumers, regulators, governments and corporations "react to the perceived threat." That is what creates investment opportunities — and risks, he says. So here is what Wall Street's cool, calculating minds say are some potential winners and losers from increasingly volatile weather. Agriculture. Ethanol, which is made mainly from corn, has been the talk of the farm since President Bush pushed for greater ethanol use in his January State of the Union address. The biggest ethanol producers, Archer Daniels Midland, Aventine Renewable Energy, Pacific Ethanol and VeraSun, seem obvious places for investors. The problem is, investments that are obvious rarely pan out. Ethanol plays, at least in the short run, have been no exception. These stocks have all tumbled as corn prices have soared, making the main raw ingredient used to make ethanol prohibitively pricey. Corn, as a feed for ethanol, is limited, says Michael Hoover, managing director at U.S. Trust. If ethanol were to provide just 10% of the nation's automotive fuel needs, it would consume 35% of the nation's corn crop. And 25% of all food prices are affected by corn prices, he says: "You've got a food-vs.-fuel issue." But that doesn't mean there's no money to be made on the farm. There are high hopes about cellulosic ethanol, which is made from farm leftovers ranging from grasses to empty corn husks and beets. The trouble is, it takes more energy to extract starches from this "biomass" than it produces. Companies such as Diversa are working on developing enzymes that could be a cheap way to extract parts from biomass to create fuel. Cashing in on the food boom requires thinking more creatively. For one thing, as in most gold rushes, the companies selling the picks and axes often cash in. That's why Kerschner thinks tractor-maker John Deere could benefit as farmers look to handle bigger crops more efficiently. Citing strong demand for tractors because of rising corn prices, Deere issued a bullish outlook for 2007, and analysts say the ethanol boom is just getting started. Similarly, Monsanto is working on crops that are more resistant to drought. Alternative energy. Windmills. Fuel cells. Solar panels. Those global warming plays pop into most investors' minds. There's no shortage of companies working on these technologies. Energy Conversion Devices and SunPower, for example, are developing types of clean solar panels with the hope of rivaling oil and coal, deemed "dirty" by scientists. Don't count on making big-time dough, says Robert Wilder, CEO of WilderShares, a company that creates stock indexes that track eco-friendly companies. He says the technology is too immature. Wilder is skeptical about how soon these technologies will make meaningful contributions. Solar, for instance, provides only one-tenth of a percent of the world's energy. Even if production were ramped up tenfold, it would provide 1% of current demand. Alternative energy plays, he believes, are not the best route to profits. He prefers technology that makes dirty energy sources, such as coal and oil, cleaner. Fuel Tech, for example, makes devices that help factories reduce the dangerous carbon spewed out of smokestacks. "Ironically, people interested in benefiting from climate change should look at the really dirty stuff, not the clean stuff," Wilder says. Another potential play: nuclear power generators. While disposing of nuclear waste is problematic, the actual generation of nuclear energy is clean and doesn't produce carbon, he says. FPL Group is a play on both nuclear and alternative energy because it produces nuclear power in addition to being the nation's biggest producer of wind power, Wilder says. Automotive. Seems like people are pouring just about anything into their gas tanks. There's ethanol, hydrogen, clean diesel and biodiesel. Each hold promise and any could be part of the solution, says Ron Cogan, editor and publisher of Green Car Journal. Cogan lists hybrid technology as a can't-miss investment. Hybrid cars are powered by an intelligent system that knows when to run on liquid fuel and when to switch to electricity. Hybrid technology works with all the fuels to make them more efficient. Toyota, Honda, General Motors and Ford are the leaders, in that order, he says. Another way to profit is to invest in companies that make the parts used to build hybrid vehicles. International Rectifier, for instance, makes many of the components that end up in hybrids made by General Motors and Ford. Energy Conversion makes the batteries. Financial services. One potential beneficiary, analysts say, is the Chicago Mercantile Exchange (CME), a futures exchange with an already-broad weather-related product lineup and plans to create markets. Last year, the CME traded 797,508 weather contracts valued at $21 billion, up nearly tenfold from $2.2 billion in 2004. Those options and futures enable insurance, energy and utility companies to hedge potential losses related to weather. Similarly, the CME recently launched "hurricane contracts" that enable insurers to transfer risk to financial markets. "Companies are becoming increasingly aware that climate is closely tied to profits," says Felix Carabello, CME's director of alternative investment products. "Investors are always looking for new asset classes" to diversify portfolios. Stock investors seeking broad exposure to "green" investments could consider mutual funds offered by Domini Social Investments. All Domini holdings promote "the enrichment of our natural environment." Infrastructure. While the Earth may be choking on contaminants, the world's demand for energy is only accelerating as economies in places such as China and India enjoy growth spurts. And that's why heavy construction and engineering companies that build power plants will be busy, U.S. Trust's Hoover says. But the enlightened ones that build ecologically sensitive plants will steal market share. Case in point: McDermott International. It builds and designs everything from coal-fired boilers to power-generation systems in 90 countries and nuclear steam generators. The company is finding ways to make these plants more efficient and cleaner. One technology, clean coal, puts devices in smokestacks that pull the carbon out of the exhaust and plow it back into the soil. "It's about taking the harmful things out of the stack," Hoover says. Real estate. In a post-Hurricane Katrina world, many folks may rethink their dream of buying or remaining in coastal homes with coveted water views, David Lereah, chief economist at the National Association of Realtors, writes in his upcoming book, All Real Estate Is Local. Lereah cites global warming as a "megatrend" and notes that people have an "increasing aversion to locations on the water" and are avoiding "severe-weather-prone" areas. He predicts households will "move from oceanfront properties to homes several miles away from the water." Many folks, he notes, are fleeing Florida in favor of the Smokey Mountain region, which includes Georgia, Tennessee and western North Carolina. "They feel more secure in the mountains," says Lereah. Red Lyons, a Georgia Realtor, confirms a stream of buyers, many from Florida, are moving to the mountain region: "It's without a doubt weather-related." Skyrocketing insurance premiums are also affecting property values. "Higher premiums come directly out of the asking price," says Dean Baker, co-director at the Center for Economic and Policy Research. Technology. Small parts and components that go into everything from washers and dryers to fighter jets and elevators could play a gigantic factor in curbing energy use. Technology that exists right now could reduce the world's power use by 30% overnight, says Alex Lidow, CEO of advanced control maker International Rectifier. About 11% of the savings could be achieved with efficient electric motors inside washing machines, conveyor belts and other motors that use half the energy of older technology, Lidow says. Another 11% could be saved in transportation uses including hybrids. The last 8% can be saved with energy-efficient fluorescent bulbs. Making devices that go into bulbs, hybrid cars and electric motors is paying off for International Rectifier. It gets a third of its business, which is growing at an annual 25% clip, from such energy-saving devices. Those businesses focused on energy efficiency are also the company's most profitable. Despite the forward-looking mind-set of Wall Street analysts, profiting from climate change is still in its infancy. Citigroup's Kerschner learned that firsthand at a recent meeting with wealthy clients in Florida, a state known for both its beautiful beaches and run-ins with deadly hurricanes. Says Kerschner: "I asked them, 'How many of you are aware of global warming?' Virtually everyone raised their hand. Next I asked, 'How many of you are concerned about global warming?' Most kept their hands up. Finally I asked, 'How many of you have adjusted your investments due to climate change?' Sheepishly, most put their hands down." At that moment, Kerschner says, he knew most investors hadn't even started to think about how to profit from changes in the Earth's weather patterns. Investors' clip-and-save guide to profiting from global warming Select companies and investments positioned in the new global eco-industry Industry Company Ticker Description Market value Monday's close Agriculture AGCO AG Farm equipment $3,420,119,296 $37.54 Agriculture Deere DE Farm equipment $25,758,898,176 $113.21 Agriculture Monsanto MON Engineered seeds and insect control $29,767,407,616 $54.79 Alternative energy Archer-Daniels-Midland ADM Ethanol producer $22,930,370,560 $35.13 Alternative energy Aventine Renewable Energy AVR Ethanol producer $717,000,448 $17.14 Alternative energy Ballard Power Systems BLDP Fuel cells $776,648,384 $6.80 Alternative energy Diversa DVSA Enzymes to help produce ethanol from waste products $371,984,384 $7.74 Alternative energy Energy Conversion Devices ENER Advanced battery technology $1,286,538,752 $32.55 Alternative energy Evergreen Solar ESLR Solar products $729,496,000 $10.72 Alternative energy Fuel Systems Solutions FSYS Clean fuel burning tech $356,973,600 $23.60 Alternative energy FuelCell Energy FCEL Power plant fuel cell tech $414,945,312 $7.81 Alternative energy Pacific Ethanol PEIX Ethanol producer $713,589,056 $17.71 Alternative energy Plug Power PLUG Fuel cell tech $325,672,384 $3.76 Alternative energy SunPower SPWR Solar power gear $3,443,477,760 $46.64 Alternative energy Ultralife Batteries ULBI Advanced battery tech $146,562,000 $9.75 Autos Ford Motor F Hybrid auto tech $14,951,905,280 $8.26 Autos General Motors GM Hybrid/hydrogen auto tech $19,213,805,568 $33.97 Autos Honda Motor HMC Hybrid/clean diesel tech $70,824,361,984 $38.60 Autos Toyota Motor TM Hybrid tech $220,358,361,088 $137.03 Diversified plays Domini Social Equity fund DSEFX Invests in socially responsible companies N/A $34.33 Diversified plays First Trust Clean Edge QCLN Tracks clean energy companies N/A $21.15 Diversified plays PowerShares WilderHill Clean Energy Portfolio Fund PBW Exchange-traded fund (ETF) invests in clean/renewable energy stocks N/A $19.55 Diversified plays PowerShares WilderHill Progressive Energy Portfolio PUW ETF invests in clean oil and gas energy production stocks N/A $27.87 Diversified plays Sierra Club Stock SCFX Mutual fund that invests in environmentally sound companies. N/A $12.13 Financial Chicago Mercantile Exchange CME Exchange for weather-related financial contracts $18,681,917,440 $536.59 Infrastructure Capstone Turbine CPST Efficient energy production facilities $141,855,984 $0.98 Infrastructure FPL FPL Electric utility that produces a large amount of wind/nuclear power $24,758,312,960 $61.17 Infrastructure Headwaters HW Systems to reduce harmful coal emissions $1,066,015,616 $25.19 Infrastructure McDermott MDR Power generation plants $5,449,712,128 $49.32 Technology Baldor Electric JCI Enhances efficiency of motors $18,965,696,512 $96.52 Technology Fuel-Tech MXWL Cuts toxic emissions in boilers and furnaces $271,797,760 $15.75 Technology International Rectifier IRF Advanced electronic controls for transportation, lighting $3,186,375,000 $43.95 Technology Johnson Controls PWER Efficient electronic controls for cars/appliances $577,906,816 $6.68 Technology Maxwell Technologies UQM Energy-efficient electronic capacitors $118,333,800 $4.68 Technology MEMC Electronic Materials ZOLT Energy-saving semiconductors for machines $848,157,824 $31.39 Technology Power-One CHK Makes power management and efficiency products. $14,607,985,664 $31.26 Technology UQM Technologies SWN Develops energy efficient motors $6,791,336,960 $40.36 Technology Zoltek Companies XTO Carbon fibers. $19,350,167,552 $52.88 Utilities Chesapeake Energy AG Efficient producer of power, no Gulf of Mexico exposure $3,420,119,296 $37.54 Utilities Southwestern Energy DE Efficient producer of power, no Gulf of Mexico exposure $25,758,898,176 $113.21 Utilities XTO Energy MON Efficient producer of power, no Gulf of Mexico exposure $29,767,407,616 $54.79 Sources: Citigroup, WilderHill, Green Car Journal, Bridge Information, USA TODAY research Enlarge By Charlie Riedel, AP Sunflower Electric Cooperative's coal-fired power plant in Holcomb, Kan. A Citigroup strategist sees an approaching "tipping point when it comes to climate change."