Green-tech pros eye cash in carbon

Forward-looking green-tech companies are trying to build a business by monetizing greenhouse-gas reductions.

The first electric vehicles to roll off Phoenix Motorcars' manufacturing lines will have a hidden, but potentially lucrative, asset embedded in them.

The company's battery-powered trucks, set for delivery this summer, will generate "zero-emission credits" from the state of California that could add up to serious money for the start-up if it can sell those credits to bigger automakers.

If that happens, Phoenix will need only a fraction of what it would otherwise cost to get its business going, said Bryon Bliss, the Ontario, Calif., company's vice president of sales. "It's the difference in how much venture capital money we need--something like $100 million versus $10 million."

Put another way, the credits could help the company be profitable in one year rather than five or six, Bliss said.

Phoenix Motorcars has hit upon a particularly scarce--and thus valuable--environmental credit. The state of California requires all automakers to produce a set number of zero-emission vehicles--or buy credits to offset the gas guzzlers they do make. Because it specializes in clean vehicles, Phoenix Motorcars expects to have an excess of these credits, which it could sell to auto manufacturers who don't meet the state's requirements.

But zero-emission credits aren't the only ones making their way into companies' business models. A number of forward-looking green-tech entrepreneurs and investors are betting on the growing value of other credits, notably those based on carbon.

As government policies that address global warming build steam, companies could start to generate revenue from offsetting greenhouse gases.

It's a novel business model, but one that is actively being explored, said Rob Day, a principal at the clean-tech investment arm of @Ventures.

"Some (entrepreneurs) have been writing into contracts that they own the carbon credits created by the products they manufacture," said Day, who said that carbon-restraining policies are likely to come to the U.S. in the next few years. "You can see the writing on the wall now."

Carbon finance
As an investor, Day favors companies that don't need to rely solely on revenue from carbon credits, or other forms of market-based environmental controls.

But others view them as a sound business model. A company called Planktos is building its entire revenue plan around sequestering carbon.

Later in May, Planktos employees will set sail for the Galapagos Islands, where they plan to seed a large area of the ocean with iron to stimulate the growth of plankton, which it says is in decline.

A portion of that plankton will die and sink, keeping carbon dioxide out of the atmosphere, said David Kubiak, the company's director of communications.

"We're mostly concerned with plankton that get below 500 meters. It puts them in deep enough ocean currents that they are out of the atmosphere for centuries," he said.

To make money, it intends to sell the carbon reduction that the plankton bloom causes. Kubiak said the company originally conceived of the idea as a research project to mitigate climate change but found that business people were willing to back the venture based on anticipated revenue from selling carbon credits, which were made possible by the Kyoto Protocol.

Planktos also has a subsidiary called KlimaFa, which plans to do essentially the same thing but with forest management. Its first project in Hungary has gained government approval, said Kubiak.

"What we're basically doing is ecorestoration...and the funding mechanism is the carbon credits generated by it," he said.

Credits designed to restrict emissions of carbon dioxide and other greenhouse gases are being discussed in the context of climate change regulation.

But trading in emissions for different types of pollutants, such as sulfur dioxide, has been going on for years. Renewable Energy Credits are another type of green trading program, driven by government mandates for utilities to generate a certain amount of renewable energy.

Regulations will definitely accelerate (carbon management)...We're a little bit in the Wild West right now.
--Dan Pullman, vice president, McNamee Lawrence

The Regional Greenhouse Gas Initiative will use a cap-and-trade system set to go online in 2009. It will give electricity generators a cap on the amount of greenhouse gases they can emit. If they stay below that allowance, they get credits for those offset emissions, which can be exchanged with other polluters.

Carbon trading has already taken hold in Europe, where about 1 billion tons of carbon dioxide were transacted last year on the European Union's Emissions Trading Scheme, at a value of more than 18 billion euros (or $24.41 billion), according to carbon finance research firm Point Carbon.

Many of these exchanged credits are generated through project finance deals and voluntary carbon offset arrangements. In one example, carbon credits were generated in a solar power project in Malaysia, said Dan Pullman, vice president of investment bank McNamee Lawrence, which advises alternative energy companies, including voluntary carbon offset company Carbon Neutral.

Because the solar power replaced a dirtier form of power generation, the financiers of the project gained carbon credits, which could be sold on a carbon exchange.

How policies are shaped has a significant impact on the price of credits. Emissions limits that are not stringent will results in a surplus of allowances, according to experts.

Phoenix Motorcars, for example, can get carbon credits in addition to its zero-emissions vehicle credits, which are part of a $25 million California clean energy incentive program (click here for PDF).

But the company isn't doing anything with the carbon credits because they "have almost no value," said Bliss. By contrast, the California state zero-emission credits will likely be in high demand from other automakers, he said.

Planktos' Kubiak has also found that the price for carbon emissions is very low, particularly in the regulated European market because of a surplus of allowances. But he anticipates prices will go up over time and said that the company, which intends to sell credits directly, "can do quite well" at $5 per ton of carbon.

Pullman said that the arrival of federal U.S. regulations will help drive more trading. Also required are more certification authorities to evaluate carbon offset schemes, he said. There have been complaints that carbon offsets are not adequately vetted or certified.

"Regulations will definitely accelerate (carbon management). It creates a much more active environment for trading and exchanging carbon credits," Pullman said. "We're a little bit in the Wild West right now."

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