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Death Knell for Some Clean Tech Companies

With prospects dim for comprehensive climate legislation, companies focused on carbon emissions could fail or be forced to scale back their ambitions.
August 18, 2010

The U.S. Senate’s failure to pass a comprehensive climate and energy bill this summer could spell doom for startups founded to help reduce carbon-dioxide emissions. Others will limp on, limited to markets much smaller than they originally expected to target.

Blue sky tech: At a plant in San Antonio, Skyonic demonstrates its ability to capture carbon dioxide emissions from cement manufacturing. Such technology would be more profitable if carbon dioxide emissions were taxed.

“For companies depending on some type of CO2 subsidy, this is probably the death knell,” says James Kim, a partner at Khosla Ventures who has carefully reviewed the business plans of several such companies.

Last year, Congress seemed on track to pass legislation that would make it progressively more expensive, over the next two or three decades, to emit carbon dioxide. (Economists often call this “putting a price” on carbon.) That was good news for a stampede of companies developing technologies that would reduce carbon-dioxide emissions–technologies such as solar panels, wind turbines, and biorefineries for producing biofuels–or capture carbon dioxide from smokestacks or the atmosphere.

But a version of the bill that once seemed headed for success faltered and was abandoned for much more modest energy legislation that itself hasn’t attracted enough votes to pass. There is little prospect that a comprehensive bill will be passed this year, in spite of efforts by some senators to push through a bill after the midterm elections. If Republicans, who generally oppose carbon restrictions, gain seats in Congress this fall, it could be years before such legislation is passed.

David Victor, director of the International Law and Regulation Laboratory at the University of California, San Diego, says that at the federal level in the U.S., “political forces for a price on carbon are spent.”

The worst-off companies will be those that plan to capture carbon dioxide without making a useful by-product–at least at costs that are competitive with conventional manufacturing. Among these companies are Climos, which has plans to reduce carbon-dioxide levels in the atmosphere by fertilizing the ocean to promote algae growth, and Global Research Technologies, which is developing chemical means of capturing carbon dioxide from the atmosphere. (Neither company responded to requests for comment.)

Some companies whose business plans counted on climate legislation may still last. For example, Skyonic, based in Austin, TX, has developed a method for capturing carbon dioxide from smokestacks and using the CO2 in the production of such products as hydrogen, chlorine, and baking soda. But without a price on carbon, the company is likely to be limited by the size of the markets for these products and competition from existing producers.

With a moderate price on carbon, the company would have a vast potential market–it could profitably sell its technology to capture 18 percent to 25 percent of carbon-dioxide emissions worldwide, the company says. Joe Jones, Skyonic’s CEO, says that a price on carbon “is not critical for us now.” Eventually, the company could find it difficult to grow, which would mean it would need a price on carbon “sometime in the next five to 10 years,” Jones said.

Solar and wind companies are in the best situation. They enjoy many government subsidies, such as tax credits for new installations, and in some markets can compete with power from conventional sources. In contrast, advanced biofuels companies that could offset emissions from petroleum by making fuel from sources such as grass and agricultural waste aren’t doing well–no commercial advanced biorefineries have been built yet.

But leaders in the biofuels industry are hoping less for a price on carbon–although that would help–than for loan guarantees that could help get the first plants built. Many advanced biofuels companies say that once they can get financing to build their plants, the technology can be profitable without a price on carbon.

Indeed, many venture capitalists have refused to invest in companies that depend on a carbon price. “We’ve never seen that it’s viable to build a company whose entire financial success is based around the existence of a carbon tax or cap-and-trade system–especially before you know what it’s going to look like,” says David Berry, a partner at Flagship Ventures.

Although Congress hasn’t passed a comprehensive climate bill, other government entities are stepping in, and that could give hope to companies that reduce carbon emissions. Victor points to a new law in Colorado that directs the state’s utilities commission to regulate power companies “as if carbon were being regulated at the federal level,” he says.

Meanwhile, new U.S. Environmental Protection Agency regulations of power plant emissions may force some coal plants to shut down, opening the way to renewable energy. And even if the United States does nothing, Berry says, some companies can look to overseas markets, such as Europe, where there are controls on carbon dioxide. “A lot of interesting American technologies might start to get sent overseas,” he says.

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