How A Cap and Trade Program Could Affect Venture Investment

Recently, the House passed the American Clean Energy & Security Act of 2009 which would implement a cap and trade system for carbon emissions. There has been great debate already over whether or not the cap and trade system would create jobs, decrease the nation’s dependence on foreign oil and combat global warming as proponents claim. Opponents are calling the proposed cap and trade system a tax that will actually result in job losses, high energy prices and hurt U.S. businesses. There’s no question the bill has a lot of hair on it, not to mention that it still must pass in the Senate which will be no easy feat, but for the venture capital community, a cap and trade system has huge implications.

It appears as though the recent drop in cleantech investment by venture capitalists (which I covered in a previous post) seems to have turned around in the second quarter of this year, due in part to the federal stimulus package which included hefty provisions for cleantech. The same dynamic could be at play if/when a cap and trade program is implemented, but at a much higher level. Venture capitalists have been calling for a cap and trade system (and to a lesser extent a national RPS) in the U.S. for some time now - in fact, not having clarity on a potential cap and trade program is often cited by venture capitalists as one of the major reasons for not investing more heavily in clean technology. A cap on carbon emissions will mean utilities and large industrial sources of carbon emission (by far the largest polluters) will have to employ alternative energy technologies , making them prime candidates to acquire venture-backed cleantech companies potentially ushering in a new wave of cleantech venture investment. Where will the impact be?

• Expect investment into solar technology to continue to lead all other sub-sectors. The shift from capital-intensive, utility scale solar investment to ancillary products and services such as solar services and software may slow. Venture-backed solar panel and plant makers could become attractive acquisition targets for utilities looking for a quick way to reduce carbon emissions., meaning there could be a new wave of large scale solar investment but it will still be largely dependent on the availability of project finance.
• Venture investment into wind energy solutions should not be impacted much because of the limited opportunity for technological advancement, not to mention the high costs associated with wind projects.
• Smart grid investment should continue to increase since efficiency and conservation will be part of the solution for reducing emissions. Investment flow to less capital intensive companies that develop consumer energy management systems and software that interacts with and performs analytics on new smart metering systems and should ramp up.
• Battery technology (primarily related to transportation) and next generation biofuel technology should be less directly impacted by a carbon cap and trade system but will play a role in the overall reduction of carbon as part of the move away from gasoline powered vehicles.
• Finally, we should see the growing crop of software and related services that measure, monitor and manage carbon emissions to grow much faster, but companies in this space will have to act fast as those who can gain early traction will be at a huge advantage.

Regardless of the many controversial impacts a cap and trade program may have, one thing is clear - it would for sure usher in a new wave of innovation, something the venture industry would accept with open arms.