LONDON--In the wake of the 1986 Chernobyl nuclear disaster in the Ukraine, public opinion in Europe turned increasingly anti-nuclear.

The Green Party in Germany saw its public support more than double in the wake of the accident thanks, in large part, to that party's anti-nuclear platform. In Italy, a 1987 referendum broadly rejected nuclear energy; the nation stopped work on a nearly complete plant and closed down its existing reactors. And public sentiment in the Netherlands, the UK and elsewhere also turned significantly against the power source.

But, sentiment is clearly shifting back in favor of nuclear and several nations are now taking steps to actually extend the operating life of existing plants or build brand new reactors. My visit to the European Union (EU) this week coincided with several key announcements concerning nuclear policy.

One of the major drivers of the shift in the EU policy: regulations governing climate change. Public opinion differs widely as to the importance of climate change and the urgency of regulation governing carbon emissions. The good news is that, as investors, we don't really need to inject ourselves into this argument.

The important point is that regulations on carbon emissions have been imposed in many regions of the world, and it's highly likely that the US will eventually put an emissions reduction scheme in place. As investors, we can't ignore these shifting political trends and public sentiment; carbon regulations will have an effect on energy-related stocks. No matter what your feelings are on global warming, the reality is that it's already having an impact on your portfolio.

There's nowhere this is more true than in Europe where regulations are already in place to reduce carbon emissions in an effort to meet reduction targets agreed under the Kyoto Protocol. One of only a handful of nations that's actually on track to meet emissions targets is the UK.

The UK's official Kyoto target was for a 12.5 percent reduction in greenhouse gas (GHG) emissions from 1990 levels by 2012. According to the most recent estimates, published in a white paper dated February 2008, the UK will likely exceed that target, reducing overall GHG emissions by 25 to 30 percent between 1990 and 2012. In fact, according to some estimates, the UK exceeded its Kyoto Protocol targets before it even signed the deal.

The key to the UK's Kyoto success hasn't been the wide-scale implementation of renewable and alternative generation technologies. Nor has the reduction come as a result of decreased emissions from the transportation industry: According to the National Statistics data, GHG emissions from that industry actually rose more than 61 percent between 1990 and 2005.

Instead, the success comes from the simple replacement of coal-fired power plant capacity with natural gas-fired capacity since the late 1980s. Check out the chart UK Electricity Consumption.

UK electricity consumption has risen from about 75 million metric tons of oil equivalent per year in 1989 to just under 87 million tons in 2006, an increase of 12 million tons. Over the same time period, coal consumption dropped by 13 million tons per year.

To meet new electricity demand and offset falling coal-fired output, the UK needed to add about 25 million tons of additional capacity from other sources. It should come as little surprise that the nation added more than 26 million tons of gas-fired capacity over the same time period. Natural gas releases about half as much carbon dioxide as coal to produce the same amount of electricity.

But there are consequences of this rush for gas, and it's not the ideal solution it might at first appear. Consider that back in the 1990's, Britain was total energy independent with respect to natural gas; the UK's prolific gas fields in the North Sea were more than sufficient to cover domestic demand. Without the need to import gas, the fuel looked like an ideal option.

But the nation's fields in the North Sea are now experiencing declining production and Britain is a net gas importer. As demand rises and domestic supplies shrink, the impact on prices should be obvious. Check out the chart below.

This chart shows UK natural gas prices traded in British pence per therm. As you can see, prices have risen from the 20 pence-per-therm region at the beginning of 2006 to more than 80 pence more recently. To put that into perspective for American readers, a therm is equal to 100,000 British thermal units (Btu), so 80 pence per therm equals roughly $16 per million Btus (MMBtu). That's considerably more expensive that the $11 to $12 per MMBtu natural gas trades at in the US. The rising cost of natural gas spells higher electricity prices in the UK.

And there are other issues for Britain. Specifically, the nation simply hasn't built enough generating capacity to meet rising demand. Consumption has caught up with the gas power plant building boom of the '90s. Britain will, sooner rather than later, be faced with the need to build new plants.

The situation is coming to a head. Last Tuesday, the UK experienced a severe power outage after seven power stations shut down unexpectedly. Several backup power stations--many of which were oil-burning--were immediately started to offset that shutdown, but the move was insufficient to offset the failures. The blackout hit Cheshire, Lincolnshire and parts of London. Wholesale electricity prices soared to a new all-time record of GBP95 (USD190) per megawatt following the cuts.

The power blackout was front page news all over the UK last week and has helped to raise awareness of the need for new power plants in the UK. The only obvious means of building desperately needed power plant infrastructure without paying up for imported gas or increasing carbon emissions is expanded use of nuclear power.

UK Prime Minister Gordon Brown, continuing in the path of his predecessor Tony Blair, has been calling for an expansion of nuclear power. And public opinion polls show that the British public is turning back in favor of the technology. In a speech last week following the power outages, Brown stated flatly that the nation needed to do more to diversify its power supply adding that We [the UK] will need to be more ambitious for our plans for nuclear energy in the future.

Britain already has plans to build new reactors on existing sites to replace older facilities scheduled for retirement. And government officials have stated that nuclear's importance is likely to grow beyond its current share of 20 percent of the UK grid.

Signs are also mounting that the British public is growing more resistant to new taxes designed curb greenhouse gas emissions, so-called green taxes. A proposal by the Labour government to vastly increase annual road taxes on larger gas guzzling cars has come under fire, even within other factions of the Labour Party. There is growing sentiment that the Labour Party leadership will be forced to postpone or completely eliminate the plan.

Also, parts of the A-40 artery in London were blockaded last week by truck drivers protesting a tax hike on gasoline and diesel. Around 70 percent of the price of gasoline in Britain is tax. There's a growing furor over this increase in light of the rising price of oil.

And Britain isn't the only country seeing a shift. Last week in Rome, the new center-right Berlusconi government announced a major policy shift on nuclear. Italy relies on imported oil and natural gas for 80 percent of its power needs and is the largest net importer of energy in Europe. As a result, power prices are among the highest of any country in Europe.

Last week, the government called for a group of new-generation nuclear reactors to reduce this reliance. Industry Minister Claudia Scajola noted that construction on this new wave of plants could begin as soon as 2013. Although overriding Italy's 1987 referendum will be a challenge, this is the first time in 20 years new plants have been on the table.

Speaking Engagements
Be sure to wear a flower in your hair when you venture west to San Francisco. I'll be heading to The City with Neil George and Roger Conrad Aug. 7-10, 2008, for the San Francisco Money Show.

Neil, Roger and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011361 to attend as our guest.