As it turned out, Obama did lose coal country. There weren’t nearly enough votes there to prevent his landslide victory, or the clean sweep by Congressional Democrats. But the message did stick enough to deliver a coup de grace to coal stocks, inciting investor fears that any company with coal exposure is headed for ruin.

To be sure, there is a war being fought over coal. But contrary to the fears of many, the goal of the president and his new administration isn’t to kill coal. Rather, it’s to harness the power of science, armed with the financial power of government, to clean up coal.

Many people seem to have forgotten that Obama’s core power base is Illinois, a major coal miner and power producer state. But even leaving aside the personal connections, America has slid into a recession that appears to be worsening. The last thing an incoming leader wants to do is worsen the crisis by jacking up utility rates, the inevitable outcome of any immediate and harsh tax on carbon dioxide (CO₂) emissions.

Carbon regulation is still a certainty for several reasons. First, it continues to enjoy broad bipartisan support, as the scientific evidence that CO₂ causes climate change has become ever-more extensive and accepted. Even the world’s biggest emitter of CO₂ from power plants–Southern Company (NYSE: SO)–has publicly acknowledged its role in global warming and is moving to reduce emissions by range of actions. So has ExxonMobil (NYSE: XOM), long a naysayer in the climate change debate.

Second, Mr. Obama himself wants to reduce CO₂ emissions. That statement was clearly made on the campaign trail and it’s been backed up by his choice of Stephen Chu to head the US Dept of Energy.

Finally, the new administration is committed to multi-lateral action on the global stage. Refusing to control CO₂ made the Bush administration a virtual pariah. Reversing that policy is a major step toward enhancing the kind of cooperation the Obama administration wants on many fronts, and it may be on a fairly short leash here. A United Nations scientific body is already turning up the heat on the president for more intensive action against CO₂, and we’re likely to see a lot more in the days ahead.

Until the Obama administration puts out a specific plan, uncertainty will continue to overhang the coal industry. Share prices will remain depressed and funding scarce, as banks seek to protect themselves from lawsuits.

We’ve already seen scores of coal plant projects cancelled over the past couple of years. Earlier this month, for example, independent power developer Dynegy (NYSE: DYN) dissolved its partnership with LS Power to build five state-of-the-art integrated gasification combined cycle (IGCC) power plants in the US.

One reason was the difficulty in securing financing, given Dynegy’s low credit rating and tight credit conditions. But an equally big one was the company’s expectation that “environmental challenges would hold up construction until 2012,” even in Nevada where regulatory approval has been granted and the local utility was committed to buying output.

The irony, of course, is IGCC plants produce less than half the CO₂ per megawatt of power output that the current generation of conventional coal plants does. They also strip out substantially all the particulate matter, mercury and acid rain gases (sulphur oxide and nitrogen oxide), and without the huge sludge and waste problem of coal plants retrofitted with scrubbers.

The IGCC process takes coal and turns it into a gas, a process which essentially removes all of these elements. The gas is then burned in an efficient turbine, with the waste heat from that process recycled to power another turbine. The result is very little wasted energy and enhanced output, in contrast to the increasingly antiquated burners that power the majority of US coal plants.

Because coal transportation and mining infrastructure is already in place, companies can simply build an IGCC plant on an existing site. They can then shut the adjacent conventional coal plants without increasing fuel costs or incurring additional expense on infrastructure.

As of now, carbon capture and sequestration technology is not commercially available. There are several projects underway that may produce a viable process, including one being developed by New World 3.0 Portfolio Beyond Our Borders play Alstom (Paris: ALO, OTC: AOMFF). But these are likely at least a few years away from marketability, despite the massive incentive of prospective industry demand and promised government money for development.

The good news is IGCC plants are well suited to be retrofitted with this technology, as they’re already chemical plants in many ways due to the gasification process. The high-profile Edwardsport plant in Indiana now being built by Duke Energy (NYSE: DUK) recently won additional funding for studying a carbon capture retrofit. And an IGCC plant planned by Southern Company in Mississippi plans to do the same thing, if it wins regulatory approval in that state.

Both projects are projected to cost in the neighborhood of USD2 to USD3 billion. The savings comes from being able to use locally mined coal–in Southern’s case lignite–that will be stable priced. The Duke plant is on track to on stream early next decade. Southern’s startup is projected in 2013, assuming it wins Mississippi regulators’ OK in a timely fashion, as looks likely.

Both plants are the target of political opposition. In Indiana, the Citizens Action Coalition has essentially charged Governor Mitch Daniels with corruption for supporting the plant and its funding. The latest brouhaha concerns an alleged failure to provide “timely disclosure of public records” regarding the governor’s relations with Duke Energy, and the rhetoric continues to heat up.

The record coal ash spill by the Tennessee Valley Authority, of course, hasn’t helped the coal industry’s image much. Neither is the growing realization that coal-burning utilities across America harbor coal ash waste by similar means.

The bottom line is that for many people, there’s no middle ground here. To them, coal use is harmful, both in the way that it’s mined and in the way it’s burned to generate power. Even if all coal utilities convert 100 percent to IGCC with CO₂ capture and storage, they stand opposed on the basis that even low-impact coal use is harmful to the environment and that energy efficiency and use of alternatives can pick up the slack.

Extreme positions like these get headlines. However, they clearly won’t be setting policy in the US. Rather, future action is almost certain to be molded along the lines sketched out by the US Climate Action Partnership, a coalition of industry leaders that proposes a plan to cut CO₂ and other heat-trapping gases by 42 percent below 2005 levels by 2030.

The plan is basically a cap-and-trade setup, under which polluters would have to buy increasingly expensive credits to keep emitting CO₂. That was the setup that successfully reduced acid rain causing gasses under the Clean Air Act of 1990. The Partnership includes industrial/engineering giants such as General Electric (NYSE: GE) and Siemens (NYSE: SI), as well as mining company Rio Tinto (NYSE: RTP), Super Oil ConocoPhillips (NYSE: COP) and power utilities Duke Energy and PG&E (NYSE: PCG).

The Partnership urges Congress to take action even if there’s no corresponding move in the international community. And it also proposes incentives for offsets, such as reforestation.

Critics of cap-and-trade point to Europe’s CO₂ reduction plan, which began in 2005 but has so far failed to bring down emissions due a massive drop in permit prices. And to be sure, setting limits on emissions is purely fanciful unless commercially viable technology is developed and made available.

That’s what makes the Illinois Clean Coal Portfolio Standard Act (CCPSA) so interesting now. Over the past several weeks, the demise of the state’s governor has grabbed most of the headlines there. But the CCPSA has for the first time created a framework for developing coal gasification projects with CO₂ capture and storage.

Privately owned independent power plant developer Tenaska is the first company to qualify under the new act with its Taylorville Energy Center. Plants must capture at least 50 percent of total CO₂ emissions, as well as comply with strict limits on other pollutants. Electric utilities in the state will be required to purchase up to 5 percent of their electricity from qualifying clean coal facilities under 30-year agreements.

Encouragingly, the primary politician behind the effort is Illinois Attorney General Lisa Madigan, a possible successor to Gov. Rod Blagojevich should he be impeached. It also enjoys strong support from a wide range of businesses and consumer advocates, as well as the Illinois Coal Association.

That’s a winning coalition that can weather almost any political storm. And its good reason to be bullish on the future of clean coal for the rest of America as well.

In addition to France’s Alstom, New World 3.0 Portfolio member BHP Billiton (NYSE: BHP) provides a way to play a recovery in coal prices, as well as continued robust demand for the black mineral in Asia. The company faces slower demand and lower prices in 2009 for pretty much all of the resources it produces.

But BHP is selling for less than half its 52-week high and less than 8 times this year’s projected earnings, and it pays a yield of more than 4 percent. That’s a compelling value for a company that remains globally dominant in the production of a half dozen key resources.

For more on BHP, see Commodities: Stay Diversified.