The recent surprise announcement of a climate agreement between the U.S. and China has been in the works for some time. Savvy investors should be aware of the potential opportunities and pitfalls it presents.

The agreement not only sets ambitious goals for reductions in greenhouse gas (GHG) emissions but also for collaboration between the two countries on clean energy research and development and the promotion of trade in green goods.

China’s conspicuous foray into the arena could bring other countries on board at or before the Paris climate summit next year. In fact, it’s already affected the G20 meeting in Brisbane, Australia. Prime Minister Tony Abbott attempted to keep the topic of climate change off the agenda completely—and failed embarrassingly.

The two weeks of UN climate negotiations kicking off this week in Lima, Peru could experience the same effect. Diplomats are hopeful for the first time in a generation that something meaningful will occur after November’s bad news from a UN climate report. It warned industrialized nations they were falling far short of emissions reductions needed to keep the global temperature from rising more than 2 degrees Centigrade above preindustrial levels, the goal leaders had set some time back.

Officials have gone on the record saying that even U.S.-China agreement won’t cut global GHG emissions sufficiently by 2030 to achieve the 2-degree goal. Still, optimism surrounding the agreement is expected to spur other countries with large pollution records—such as India, Russia, Brazil and Japan—to make their own pledges more ambitious.

There’s certainly room for improvement. Encouraging new developments in solar, wind, energy storage and other technologies could spark a revolution in opportunities—not just for protection of the earth’s climate but also for investors looking for new fields of endeavor.

David Richardson, managing director of Impax Asset Management, which focuses on opportunities created by the scarcity of natural resources and increasing demand for cleaner, more efficient products and services, said the most immediate effect of the agreement would likely be to “foster a global agreement in the Paris Climate Summit” next year. In addition, “we think it gives a strong drive to the rest of the countries to set targets, given that the U.S., EU and China have set internal goals.”

 “From a policy perspective, [the agreement will] lead to a global tax on carbon at some point. It’s hard to know when that might happen, but if nations are going to set GHG emission targets, one of best ways to stimulate that eventuality is a market mechanism to reduce carbon intensities of economies and economic growth,” Richardson said.

A carbon tax leads to two separate factors that affect the markets. First, the tax on carbon has “implications for high-carbon emitters and industries, with fossil fuels being an easy example. Our view is, there is now a risk premium on fossil fuels that didn’t exist in the past,” Richardson said.

Then there’s “stimulus for low-carbon energy and energy efficiency, and businesses involved in those markets,” he said. Impax, has done a lot of work “over the last 16 years to see what those investment opportunities are in the low-carbon energy framework.” In addition, “we’ve also done some work with FTSE in classifying the investable universe for these slots.”

Energy efficiency subsectors investors should watch are “the power network—the grid—and improving both its efficiency as well as being able to accommodate a much more distributed form of energy; rather than large coal plants, a wide array of solar and wind,” Richardson said. Industrial energy efficiency is also a good opportunity, especially in Asia, where energy input costs are so much higher that money will be spent to reduce energy costs in manufacturing firms.

Another area he cited is “buildings’ energy efficiency, and that exists in both the listed equity framework, with companies involved in building investing in energy efficiency—high-quality installation forcing new construction and retrofits to meet standards—and companies that make products to fit in that framework.”

Richardson ticked off other sectors: transportation energy, with companies making equipment to meet higher standards; consumer energy efficiency, with improvements like high-capacity diodes and longer-life batteries. “Companies in that market [are] benefiting [from] that focus on battery life, which is an energy efficiency mechanism.”

And of course the alternative/renewable energy sector is “another investment opportunity that will get strong drivers out of this drive to reduce GHG emissions. Everyone thinks of solar and wind, but there are a number of ways investors can play that: companies that make equipment—original equipment manufacturers (OEMs)—and a number of companies that supply equipment to them, whether it’s cell technology or generators in wind energy equipment [or] companies supplying technology to solar manufacturing plants.”

The need to compete on costs will drive a shakeup in China, which has underinvested in its manufacturing equipment. “Meyer Berger is a German company that makes high-quality equipment that solar drivers need—it’s like selling picks to miners,” Richardson said. “There’s been a big pickup in interest in biofuels,” he added; “we see that continuing because of EPA regulations and increased efficiency in second-generation biofuels.”

Richardson also suggested yieldcos: packaging up a security that owns solar energy projects and the income produced by those projects selling power to the grid, for instance. “They look like coupons to investors, replicating a high-dividend stock or an income-producing bond.”

Not only do yieldcos offer ways for investors to participate directly and indirectly in the steady ratcheting up of GHG emission standards, but they’re relatively stable. In both the UK, where they’re regarded more as fixed income than equity, and in Germany as well, Richardson said, there’s a strong demand for them. He also sees such opportunities expanding in China and Japan, as well as in other markets.

Both China and Japan are “great examples” of areas in which there is a large need to drive down the cost of energy, both residentially and at the industrial level. In China, he said, there’s not only high energy cost but also “the need to compete on a global level driven by the need to reduce pollution,” according to Richardson.

China is “sort of at the tail end of its 12th 5-year plan,” with “a lot of pent-up spending that hasn’t happened equally over those years. Early money will be spent in later years on pollution control, renewable energy and renewable infrastructure to reduce the carbon intensity of their GDP growth.” Two subsectors to watch there are the automobile and industrial applications areas, he said.

While Richardson said he doesn’t see the fossil fuel industry affected equally by divestment and tighter regulations, he said investors thinking about what to exclude “shouldn’t throw away all the carbon-intensive sector, but look at it as a range of carbon intensities and cost curves.” Coal, he said would be hard hit, but pollution control will play a major factor in shale gas. While there are some “bad actors in fracking,” the industry overall “is recognizing they have a problem relative to their own sustainability … We think the direction of travel for industry stewardship of the environment is improving, and some companies will benefit from that improvement,” he said.

Within all the subsectors “there’s a range of companies and technologies, and we don’t think everyone will prosper,” he said. Looking at the macroeconomic overlay that includes valuation, he said, “a number are great long-term investment opportunities, but current prices reflect enthusiasm reflecting their prospects. Ppricing is pretty dear, so pick points of entry into these long-term growth” opportunities. “Not everything’s on sale,” he said.