Viewing posts tagged "Government Policy"

“Analysis pyrolysis” and climate change legislation

Warning:  The following is just one man's long-winded opinion on goings-on, and while I have been spending a bit of time engaging on these topics lately, I'm far from being an insider, so read accordingly

My guess is that we won't see any major climate change legislation signed into law this year.  There's a decent chance, but less than 50%.

I come to that conclusion after observing a lot of "strategy discussions" among proponents, and listening to a lot of political rhetoric over the past few months.  And it's becoming clear to me that the way climate change legislation is being tackled is likely doomed to failure.

And that would be a big shame.  Because we need to address climate change and energy independence as quickly as possible.  And if we can't get something useful done that's market-based by design, then we will see yet another big prolonged battle between those espousing "do nothing" and those espousing "command-and-control" approaches.  Paul Krugman touched on the cost-effectiveness of market-based solutions like cap-and-trade in an op-ed over the weekend.

But let's go back to 2006, when California's Prop 87 was on the ballot.  This would have imposed a tax on California oil producers, with the explicit goal of significantly reducing the state's oil consumption, and with the revenues being directed in part into a program of subsidies for alternative energy research.  It would have represented a pretty moderate tax of 1.5-6% per barrel on oil producers.

Prop 87 had some major endorsers (Al Gore, Bill Clinton, and Vinod Khosla, to name a few) and, it being an off-year for elections, it got a lot of attention and positive donations.  A major ad push was undertaken.  If any state would pass such a measure by popular vote, you would think it would be California, a state that prides itself as being at the forefront of green living and green energy. The prop started out with a lot of positive public momentum.

And it was defeated.

At the time, I was living in California, and I vividly remember the massive ad campaign -- almost entirely and overtly funded by oil producers -- against Prop 87.  Opponents pulled out the stops.  The proposal was attacked as tax and spend.  The use of the tax to fund subsidies for green power technology was assailed as imposing a new massive bureaucracy on a public already tired of big government.  A firefighter in full fire-fighting regalia was put on camera to argue that the tax would lead to higher gas prices, hurting firefighter budgets, and therefore making it harder for firefighters to fight fires.

The lessons that should have been learned are that a) when voters perceive something as being a "tax", they don't really care about (or in many cases, understand) the relative burden of that tax, they just react negatively no matter what price it is; and b) if that tax money is taken and spent by the government on new programs, no matter how popular those programs might be, it's easy to attack the whole thing as "tax and spend bureaucracy".

So what's going on in DC right now?  The very same thing.  And this time in the middle of a recession.

At a high level, the approach being touted for passing cap-and-trade suffers from the very same flaws as Prop 87.  It may not be called a "tax", but as most will admit, cap-and-trade is simply an alternative way to price carbon emissions.  It's already being labeled as a "tax" by opponents.  After a few months of massive negative ad campaigns (we're already all starting to see them on TV), I would bet that most voters will believe that "cap-and-trade" is a synonym for "tax".

That by itself is not a bad thing, if the message was better controlled.  If was "a tax on big polluters," for example, people might be more sympathetic.  But more on that below.

The other strategic mistake being made is that the proceeds of any auction are already being tapped for budgetary purposes.  Green energy proponents and producers are already arguing over who's going to get what slice of the revenues for subsidizing their businesses.

I'm not at all against subsidizing alternative energy technology development, commercialization, and adoption.  But that's a very separate concept from pricing carbon appropriately.  If you price carbon appropriately, then in theory consumers will make their own personal decisions about the trade-offs between green energy, efficiency and traditional energy sources.  In theory.  In reality there are market adoption reasons (not to mention the important goals of technology leadership and energy independence) for separately and additionally subsidizing alternative energy technologies.  But that should be left out of the climate change legislation, it should be part of a separate Energy Bill conversation.  Let's address the price for carbon.  Then let's have a different conversation about supporting one technology over another.  Conflating the two is confusing for voters, and also makes it tougher for them to support the overall proposal.

Because, I believe, in order to get voters (and their representatives in DC) to support even a moderate "tax on big polluters", it has to be revenue-neutral.  In other words, every single dollar of proceeds has to be kept out of the budgetary process.  And it has to be returned to each household in the form of a per capita rebate check.

I'll never understand why some politician hasn't stood up and declared:

"I want to propose an income tax reduction!  We're going to put money in the hands of average American households who need it so badly right now!  And the way we're going to pay for it is by charging a fee on big polluters.  We'll set up a separate account that the politicians aren't allowed to touch, and every dollar paid for by the big oil and coal producers will be sent back to the American public.  You'll get your share of the proceeds as a rebate check every year!"

Alas, those writing the current legislative proposals are following the Prop 87 script pretty closely instead.

Polling done with Americans suggest that they are very sympathetic to the goals of fighting climate change, growing "green energy jobs", and moving toward energy independence.  They claim to be willing to make sacrifices.  But once again, when asked about even the most minor of cost increases on their electricity bill or at the pump, they balk.  They're willing to make sacrifices like changing lightbulbs and driving smaller cars, but they're not willing to pay any higher prices during a recession.  And they simply don't trust the promised "payback" in terms of the benefits of green collar jobs growth, avoided climate change damage, etc.  Unless it's a protected rebate check delivered right to their door, they will never believe the benefits are net positive.

But from what I can see, the inside-the-Beltway horsetrading seems to be focused on two things:  Arguing over what the price of carbon should be (via the proxy argument of how much of the available pool of emissions should be auctioned vs. granted to utilities, etc.); and trying to pile additional spending proposals into the major bills or auxilliary bills being proposed over the next few weeks.

When I talk with proponents of climate change legislation, many of them appear to recognize that this is likely a flawed strategy, at least in terms of getting something done this year.  Symptomatic of this kind of active denial is the emphasis being put on the Waxman-Markey bill in the House.  But everyone agrees that the Senate (with its 16 or so skeptical Democrat senators) will be the really tough place to pass anything.  So why fight so hard about the specifics of Waxman-Markey?  Because that's the way to get something meaningful passed in the House.  And then, hopefully, that will lead to some momentum going into the Senate.

The other hope I've heard expressed is a "backup plan" of pushing for a National Renewable Energy Standard.  This would require all states to make sure that a certain proportion of their energy supply comes from renewable resources by 2025 or so.  The hope is that, even if a cap-and-trade scheme is defeated, much of the same objectives could be achieved by mandating this kind of supply mix.  But now I hear of strong objections to this kind of scheme as well, from those states (such as the Southeast) who don't believe they have good access to renewable resources.  And besides, it gets us away from the most efficacious solution:  Pricing carbon.  It's closer to command-and-control than it is to market-based solutions, and thus probably costlier in the end for power suppliers.

Those groups hoping to forestall any real carbon pricing or renewable energy standard are probably pretty happy with their position right now.  The dollar advantage they enjoy is pretty significant, and that will start to play out in the ad and lobbying campaigns.  And even before that really kicks into full swing, the schisms and strategic choices of the proponents of climate change legislation are making it difficult to see a clear path to getting something meaningful passed in this economic situation.

On the other hand, let's not forget what the ultimate alternative for action is:  Forced technology adoption, the ultimate command-and-control approach.  So called "Best Available Control Technology" has long been a fact of life for power generators in terms of other pollutants besides carbon.  Now we're seeing, in the UK, proposals for what are essentiall "Future BACT":  A requirement that any new power generation facility must promised to adopt carbon capture and sequestration technology as soon as it is commercially available.

That could end up being a lot more costly for utilities than any cap-and-trade or carbon tax.  And the threat of that kind of thing may be exactly why some utilities like Duke Energy have been publicly supportive of climate change regulation... if it isn't too punitive on them in the near term.

So there's still a chance that something gets passed that would have a meaningful "Phase 2" in its implementation.  A cap-and-trade scheme where Duke Energy, et al, can see enough other benefits (from CCS research and commercialization subsidies, and the inclusion of energy efficiency as a source of near-term offsets, for example) where they can support it.

I've long said that if you want to pass climate change legislation, it has to be something that Duke Energy's Jim Rogers would be able to endorse.  And it might not be perfect, but it would be better than nothing.

Stay tuned.  The next few months will be fun to watch.  Often frustrating for all sides, I'm sure.  But fun to watch.

*PS: Yes, I spelled it right. Apologies for a dorky pun.

Are cleantech VCs finally starting to get active again?

I spent a couple of busy days in Washington, DC this week, meeting with old colleagues and making some new connections.  (And I drove all 1,000 round-trip miles instead of taking the train, how do you like me now, Xconomy!)  One thing that was impressively clear in DC is how front-and-center energy technology is among staffers on the Hill.  A lot of very important things being worked on there right now, and minds seem to be pretty focused.  Great to see.  Unfortunately, it’s also clear that the entire cleantech venture and startup community is gearing up to bombard the Hill and the DOE with funding requests...

Meanwhile, outside of the Beltway, it’s starting to feel like maybe some cleantech VCs are starting to get back in the game.  It’s just anecdotal, but I see my colleagues in the industry getting more serious about doing deals, after a hiatus of a few months.

For a while there, even VCs with capital left in their funds were sitting on the sidelines.  The limited partner community just wasn’t making commitments to funds.  So VCs were forced to consider that it might be a long time before they could raise additional capital.  And thus, even if they still had capital left in their existing funds, they needed to hoard their resources and a) make sure they had enough in reserve to fully back their existing investments; and b) make sure that they stretched out their remaining new deals, so doing fewer deals over the course of 2009 than they had originally anticipated.

Of course, many funds are still in this situation, so it’s not like dealflow is coming rushing back.  It’s still a very difficult time for VCs to raise capital from limited partners, and thus it’s still a very difficult time for startups to raise capital from VCs.  But I do see some faint stirrings of life out there.

Naturally, however, that won’t be reflected in recent deal announcements, since there’s a significant lag between VC interest and then deals and then the eventual press releases…  So here are the few announced deals from the past week:

• Lightscape Materials, an LED phosphor spinout from Sarnoff Corp., has raised a $3mm Series A from Wisepower Co. LTD and Foosung HDS Co. LTD.

• Nordic Windpower has raised $3.5mm in convertible notes from new investors I2BF Venture Capital and Pulsar Energy Capital, alongside existing investors Goldman Sachs and Impax Asset Management.

• New Leaf Paper, offering “environmentally responsible papers”, has taken in a $5mm round of financing led by Pacific Community Ventures.

• Cleantech investors in the news:  Redpoint Ventures has added a cleantech CTO, Dr. Nety Krishna…  and Robeco is teaming up with China’s TEDA International to launch a new sustainable private equity fund.

Other news and notes:  REBN continues to grow, with another great REBN-MidAtlantic event in Philly, and a new chapter being launched in North Carolina...  If you’re reading the NYT Mag article on Freeman Dyson today, here’s Hansen’s reply...  A good catch-up on cleantech in the Pacific Northwest…  Here’s a cogent critique of efforts to focus on breakthrough R&D efforts in energytech instead of driving adoption of already-commercialized energy efficiency technologies…  You heard it here last—Al Gore is planning a new book timed to impact the upcoming climate legislation debate in Washington…  Finally, the Conspicuous Consumption Award has to go to this vacuum, which nature must certainly abhor—if you can afford to buy it, I’m guessing you’re not using it yourself.

A T.R.I. for carbon emissions?

Perhaps I’m just a hopeless policy wonk, but I was very excited to see the news that the EPA has proposed that major sources of carbon emissions should have to report what and how much they put out their smokestacks.

Information is an undervalued but critically important regulatory tool.  If information gathering and reporting programs are well-designed, they can drive powerful market forces at minimal costs, with maximum flexibility.

When policy pundits talk about regulating a pollutant like carbon emissions, what you hear most of the time are arguments for either “market-based” regulations (like cap-and-trade or carbon tax) or “command-and-control” regulations (like “best available control technology”, where everyone is required to achieve the same performance with the same technology).  But few talk about “information-based” regulations.

Yet back in the 1980s, Congress’ implementation of the Toxics Release Inventory as part of a “right to know” law turned out to be a very important illustration of the potential usefulness of information as a regulatory tool.  The thinking was simple:  Require companies that were putting toxic pollutants into the environment (even if at legally-allowed levels) to report it into a simple database that the public could get access to.  If you want to see what the data looks like, check out Planet Hazard, a great web-based interface.

The impacts were significant and immediate—companies started reducing their emissions of toxics (with total reported emissions dropping 48% from 1988 to 2000).  In some cases companies were embarrassed by local news reports identifying the biggest polluters in certain regions.  And in other cases I’ve seen, some CEOs had never been forced to acknowledge the amount of toxics being emitted out of their factories, and they recognized that pollution is very often a form of wasteful cost, so TRI spurred waste-reduction efforts that improved profitability.

I emphasize that last point because it shows that not only was making the data available a relatively low-cost way to get significantly reduced emissions, the information also became a useful business tool for businesses that were looking to lower their costs and environmental impact.

TRI has come under attack for putting reporting burdens on companies, costs which have been measured in the hundreds of millions of dollars by some accounts.  But of course, that misses the point entirely—this is information these companies should be gathering anyway, if they’re run by profit-maximizing businesspeople.  And it’s certainly a less-costly alternative to BACT standards or other more active regulations that could be placed on emitters of toxic waste, in any attempt to achieve the same reductions.  So it was a great win to see Obama already signing legislation strengthening TRI reporting requirements.

So now we have the EPA proposing greenhouse gas emitters be put into a somewhat similar system.  And I think it’s a terrific idea.

Again, this is information that major GHG emitters should already be tracking.  Because carbon out the smokestack represents some form of waste, potentially avoidable.  Companies like eQuilibrium have already been signing up corporate customers who want to use their carbon emissions tallies to help them identify places where they are wasting energy.  There are efficient ways to gather this information now, it shouldn’t be a huge administrative burden.

But as the example of TRI showed, such information gathering and reporting can have a major impact on corporate performance.  Information is a powerful regulatory tool, and it’s great to see it start to be deployed in the fight against climate change.

A TRI equivalent for carbon emissions could be a lot more important than most people realize.

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A proposal for government seed stage funding in cleantech

A couple of weeks ago I wrote up a few thoughts on the chatter about government money being directed to cleantech venture capital firms (and then discovered I’d given fodder to the Globe, who knew?).  At the end of the column, I mentioned that I wished to see more government support for cleantech startups at the early end, too early for many venture capital investors.  It prompted some thoughtful replies from several readers.

One reader pointed me to Sustainable Development Technology Canada.  This is a non-profit, quasi-governmental corporation that makes direct investments in Canadian cleantech companies to help them in later-stage growth or for initial project development purposes.  It has taken in $1B from the government and has already made investments in 144 projects to date—they’re looking to issue their 15th round of funding later this year.  So here’s a model for some to look at, but it doesn’t really address that seed-stage gap I pointed to.

Another reader reminded me about OnPoint and In-Q-Tel, two government-sponsored firms whose missions are to invest in startups that are developing technologies of interest to the Army and the CIA respectively.  These groups are investing in some early stage opportunities, but also are coming in later stage in some cases as well.  But it’s certainly a good model to draw upon for inspiration when it comes to government financing of cleantech.

Of course, a couple of people reminded me about the proposals for an “ARPA-E”, a counterpart to the Department of Defense’s DARPA research grant program.  DARPA is another good tool to consider, and has certainly been the source of grants for a number of cleantech startups.  It’s not an investment, however, and so it comes with a very specific set of requirements (and bureaucratic headaches) for the grantee.  It’s useful, but no panacea.

Finally, Reem Yared wrote to bring up a DOE program that was in place to support seed-stage companies up until a couple of years ago:

In fact, the DOE used to run a program called Inventions and Innovations, where they funded promising clean technologies with grants of $50,000 and $250,000. The grants went to inventors who were still at the patent-filing stage, helping them go through the patent process and on to commercialization. There was a whole selection process which worked quite well.

I was one of the consultants hired by the DOE (working for Vista Ventures) to help seven of the start-ups develop their commercialization strategy. Another company was DOE-sponsored market research services. The DOE had enough experience with the program to know that simply funding the research would not be enough: the patents would just be filed and shelved. The inventors/entrepreneurs really did need the hand-holding through the commercialization process.

The start-ups I worked with were all over the country and in all different fields: wind, glass manufacturing, paper manufacturing, LP gas distribution, biofuels, car engines, AC pumps. The irony, of course, is that the year Pres. Bush mentioned a focus on cleanTech in his state of the Union address, the administration pulled the plug on the program (April 2007).

I don’t think it would take too much effort to restart it, rather than creating something from scratch.
See http://www1.eere.energy.gov/inventions/about.html

Government-run investment programs have historically been challenged for a) having unintended consequences like the patent-shelving Reem mentions, and b) not being able to bring on board top investment talent because the government salary structure and even profit-sharing aren’t possible.  That latter objection also points to operational challenges—such simple questions as “are we looking for jobs growth” versus “are we looking for strong investment returns” become pretty fundamental to the exercise.

But merging a few of these ideas together, a quasi-governmental, independent corporation sponsored (and funded) by the DOE could be launched, to focus on seed stage companies commercializing technology out of the DOE labs and DOE-funded research.  It wouldn’t have to be a huge amount of capital to have a major impact—a few tens of millions of dollars would be very significant in this context, but relatively small in comparison to the “billions” being discussed by Krugman et al.  Then the questions to be answered around staffing and incentives and compensation would be very similar to those faced by OnPoint and In-Q-Tel, which have been able to bring in experienced, motivated investors.  So no need to reinvent anything at all, we can borrow from what’s already working elsewhere.

I bet right now we could get some of the brightest investors in the cleantech venture capital world to support this and even join such an effort.

A quick update on carbon goings-on

One of the interesting things to come out of Obama’s new budget is the assumption in there of revenue from implementation of a cap-and-trade scheme for carbon emissions reductions.

First of all, here’s a quick but compelling analysis by Chaz Teplin who points out that the revenue assumptions point to assumptions of fairly low (<$15/tCO2) market prices for carbon credits.  Chaz then points to what that price level might mean in terms of costs more familiar to most of us.

Secondly, here on this site we’ve previously discussed the challenges of getting to 60 (as in, Senate votes) on a cap-and-trade bill.  Well, now the inclusion of these revenues in the budget may be a hint along the lines of what got reported a couple of days ago:  That the “budget reconciliation” process may be used to prevent a filibuster on any climate regulation. That would be an interesting twist, although I continue to believe c&t legislation won’t come down to a party-line vote…

Finally, while all this goes on inside the beltway, outside regional leadership continues to push the ball forward regardless.  The latest move is by the city of San Francisco, which is launching a Carbon Collaborative designed to help make the city a hub for carbon trading.  [Mandatory self-promotion alert: One of my portfolio companies, Carbonflow, is involved in this effort]  It’s a sign of things to come, as we’re witnessing the birth of a new, multi-billion dollar commodities market.  Different regions will be vying to grab part of that, undoubtedly.  But of course, what happens inside the beltway will make a big difference on whether the nascent U.S. carbon trading industry will flourish, or languish while Europe takes all the action.

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Where there’s smoke, there’s fire

So what happens when a venture capital fund is given a few billion dollars by the U.S. government to invest in greentech?

I ask this question because it is clearly being discussed pretty seriously right now.  I’ve heard rumors for some time now that Kleiner in particular has pitched the administration on the idea, but pundits like Thomas Friedman have also been throwing it out there (in a couple of op-eds here and here), and it dovetails with a proposal Obama made during the presidential campaign for a government greentech venture fund.

Where there’s smoke, there’s fire, so I’m therefore assuming it’s being discussed at a high level.

So what would it likely look like, and what would be the effect?

I can’t see this being a “Government as LP” process, where existing VC funds (note: funds, not firms) add on a couple of billion dollars of LP commitments from the DOE.  That would mess up existing fund structures and upset existing LPs.

There may be some small component that could be done as government-managed seed grants/ loans, similar to the SEED Program here in Massachusetts ($500k convertible loans into early stage companies with good prospects for growth and subsequent venture rounds).  But hard to see that adding up to anywhere close to the billions of dollars being talked about.

So the specific approach would likely be either a pool of capital allocated out for co-investments, and/or a pool of capital allocated to special purpose funds directly managed by VCs. In the former case, funds like Kleiner’s Green Growth Fund (for example) would make an investment, the Government Co-Investment Fund would make an investment into the same round under the same terms, and then Kleiner’s team would manage both, in exchange for some fees and some carry.  In the latter case, Kleiner (for example) would establish the “US Greentech Future” fund and simply run it as a traditional standalone fund, but with a single LP (the government).

I could see either path being chosen.  Regardless of which one, here are some inevitable outcomes:

1. It would have to be done by RFP, and the RFP process would be brutal.  Every firm out there would put in a proposal for some portion of whatever pool was available.  Massive amounts of lobbying (some of which is already going on, clearly).  Cutthroat competition to see what firms could claim jobs creation and wealth creation track records, which firms would be willing to charge less fees and carry, etc.  Every firm touting their own strategy over all others’.  My sympathies to the poor government staffers in charge of that process…
2. Unclear what government body would manage it.  If it’s energy tech only, probably the DOE, but it would likely be a broader program than just energy tech.  So there’s the possibility of a big mess of government bodies getting involved in a huge cross-departmental exercise.  Thus slowing down the actual decisions pretty significantly.
3. Much of it would go into later-stage investments.  Simply put, at the level of billions of dollars you either need huge staffs to manage scores of investments, or you need to put really big checks to work, which means larger rounds and thus later stage investments.  Those who read this column regularly will know that later-stage investing is already dominant in cleantech.  To put massive additional capital into that end of the market… Wow.  And it does call into question the match of the goal (fostering innovation and jobs growth) with the process.

I’m already seeing some VCs come out strongly against these ideas (a couple of examples here and here).  They argue that there’s already plenty of money in the venture capital sector, and that any effort to pour massive additional amounts of capital into startups through that kind of financial asset class would end up with skewed results.  Indeed, only about 2% of all startups get their initial capital from venture capital firms, so it’s unclear that this would be the most efficacious pathway to get startups launched and hiring.

There’s always a perception gap about what the role of venture capital is—politicians seem to believe that the role of venture capital is to promote jobs growth and innovation, but most VCs promise their LPs that it’s all about the financial returns and nothing else.  The great thing about venture capital is how often all those goals overlap.  But they don’t always…

I personally would like to see government figure out a good way to step into the seed stage gap in cleantech:  With technologies that would take a longer time to develop than most VCs would be able to stomach, government seed grants/ loans to help get the companies to a fundable point.  You wouldn’t want to, or even have to, put massive amounts of money into each company.  At $500k per startup, you could get 2,000 startups off the ground with a $1B commitment.  I see great companies all the time that are too early even for my early-stage venture firm, and that really only need a small investment to get themselves to the next level.  Later-stage investing now has everyone across the venture and private equity landscape looking to put money at play.  It’s unclear that pouring billions of additional dollars into that stage would achieve the hoped-for goals.  But seed stage funding remains a relatively unaddressed gap.

If you want to promote green innovation and jobs growth, there are a number of different ways to go about doing it.  The government venture fund is the current one being discussed, and clearly is getting pushed pretty hard right now.  I just hope that whatever happens, we take care to specifically address the seed stage pre-VC funding gap.  Otherwise all those later-stage dollars eventually won’t have anywhere to go.

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