That warning applies both to this column, and to the entire cleantech investing industry in 2008.  What with an election year, new agreements and critical choices due on climate change, and the aftermath of a compromise on energy legislation, expect policy discussions to dominate cleantech market headlines next year.  Regular readers of this column will know that we typically shy away from policy discussions, leaving that to those out there smarter and more informed on the subject.  But 'tis the season, and it was a quiet week in deals last week... So let's kick off the commentary by noting this interesting column by Jim Rogers, CEO of Duke Energy (on the always interesting Cleantech Blog).  In it, Rogers argues that under a cap and trade system for carbon emissions (which is the scheme envisioned by most proposed climate change bills in Congress), utilities and other emitters shouldn't be asked to purchase their credits at auction.  As he points out, that would be similar to a carbon tax, but with more uncertainty. While most of the proposed bills out there focus on cap and trade, and it's perceived as being more politically feasible (in a post-2008 timeframe, naturally) than a carbon tax, there's been a lot of chatter among the punditry lately discussing the relative merits of both policy schemes.  In other words, should we impose a uniform tax on all carbon emissions across all categories and let the market sort out emissions levels, or should we set a cap on the total emissions levels that could be allowed, and let market players trade between each other to find the optimal emissions levels for each within that cap.  (For a lot of wonk-y analysis on this general subject, I'd recommend my former employers, WRI) The best way to succinctly dig into such topics is often to delve into a new take on otherwise intractable problems, to help illustrate the contrasts.  So, here's a modest proposal -- What about a hybrid system, with a market-wide carbon emissions fee, and a cap-and-trade imposed on a few key industries. Here's the elevator pitch on how it would work: 1.  A carbon emissions fee would be collected, across all sectors.   It would be low for the first few years, ratcheting up to full levels at the end of a ten-year phase-in period.  This slow phase-in would allow businesses and consumers alike to change their purchasing habits (ie: to more energy efficient vehicles and appliances) in better accordance with the natural lifespans of their existing products.  In other words, you wouldn't have to rush out and trade in the SUV you bought just three years ago, but you WOULD consider the higher carbon emissions fees when making your next vehicle purchasing decision. 2.  For political expediency, and simply for reasons of tax system efficiency, a tax shift would be a potentially powerful use for the collected fees.  Under such a shift, all receipts of carbon emissions fees would be dedicated 100% to reductions in income (or payroll, etc.) taxes, with no discretion for Congress or others to snag the money for other uses.  There's a basic rule of public finance theory which says that if you want less of something, tax it.  And yet we tax income and (net-net) subsidize carbon emissions.  Perhaps that imbalance could be addressed... 3.   Establish a cap and trade system on key industries (e.g., utilities, cement, and the other largest emitting industries with centralized players), with the emissions credits auctioned off.  However... 4.  All fees paid at auction would be credited against carbon emissions fees that the credit purchaser would otherwise be obligated to pay.  This would set a de facto floor on the costs of such credits.  Optionally, in early phases of the scheme there could be price ceilings imposed during the auction, as well.  The auction values could also help revise the end-point carbon emissions fees levels, as an indication of efficient market prices. The concerns about cap and trade are a) market uncertainty due to volatile prices; and b) complicated management of scheme.  The concerns about a carbon tax are a) difficult to set the correct fee level correctly from the beginning; and b) political infeasibility of anything smacking of a new "Tax". The proposal above would be intended to address these concerns in tandem.  It would be a "belt and suspenders" approach that would mitigate the uncertainty impacts on the market from cap-and-trade, while also alleviating fears that emissions wouldn't fall to necessary levels under a tax.  It would also, particularly if done as part of a strict tax shift, potentially be more politically palatable ("polluters pay a fee, and your income taxes are lowered"). There's probably a fatal flaw or two in the above suggestion, it's primarily included to help briefly illustrate the key issues being debated around climate change regulation.  The bigger point is, get ready for a lot more policy chatter.  This is just one idea among many that are being thrown around right now.  Expect that in 2008, there will be a pretty robust (and probably, at times shrill) debate about all of these ideas in the midst of what is shaping up to be a big year for cleantech markets and a big year for politics.  However, this'll probably be the last policy discussion here in this column for a while... Not much happened this week in cleantech dealflow:

•  PE Week Wire reported on Friday that micro fuel cell developer Lilliputian Systems has raised a $20mm extension on their Series C from two years ago.  PEWW reported that DAG Ventures joined existing investors in this latest capital infusion.

• Energy and Power Solutions, a provider of energy efficiency and carbon-related services and solutions, raised a $20mm round of financing, provided by NGEN and Robeco.  It's interesting to note in the linked story that the bankers talked the management team up from their originally envisioned round size of $6mm...

More policy discussion:  Cluster-building efforts in Massachusetts, Pennsylvania, and the Bay Area...  Also, reactions from entrepreneurs on recent developments with the energy bill here and here (self-promotion alert:  these stories mention a couple of @Ventures portfolio companies)...  Speaking of the bill, here's a useful summary. Other news and notes:  An interesting discussion with Richard Swanson of SunPower...   A $200mm Earth Fund is launched, focusing on clean energy in developing economies...  An update on the water sector...  NGP Energy Tech Partners' Jason Hicks has been promoted to Principal...  An update from Tesla...  Interesting to see someone else also point out (along with a few cautionary words) that a few quasi- project finance deals tend to drive quarterly totals for cleantech venture capital...  Energy consumption and production forecasts aren't getting any more balanced...  Finally, here's a useful market map for clean technologies.