Carbon entrepreneurs heat up
Tuesday, February 20, 2007/
Greenhouse concerns have propelled sales of carbon credits, but the potential is much higher. By KRISTEN LE MESURIER
Businesses trying to sell carbon credits as recently as a year ago would have been greeted with a puzzled ‘What’s that?’ before being shown the door. But the continuing drought, Al Gore’s documentary An Inconvenient Truth and the Stern Report on climate change have shifted public perceptions and created a more receptive audience for entrepreneurs in the business of carbon trading.
A boom market is in the making. An Australian carbon trading scheme could create a market worth more than $4 billion a year, according to traders at Dutch investment bank ABN-Amro.
For entrepreneurs, carbon is a profit centre with huge growth potential, which has already been demonstrated in New South Wales. Its greenhouse gas reduction scheme, introduced in 2003 and aimed at the power industry, resulted in turnover ballooning from $59.1 million in 2005 to $184 million in the first nine months of 2006, the latest figure available. The scheme has traded 37 million credits since the scheme was introduced. With each certificate valued at $12–14, this market has so far turned over about $480 million.
The numbers are much bigger in Europe. The European Union emissions trading system, which was introduced to help member countries meet targets under the Kyoto Protocol, turned over $US8.2 billion in 2005 and a massive $US18.8 billion in the first nine months of 2006.
The market in Australia is ready. Resources giant Rio Tinto shocked the market when it broke ranks with other miners and manufacturers and called for a national emissions trading scheme in January.
“The language has changed. It is now more about when, not if,” says Andrew Peterson, PricewaterhouseCoopers’ Climate Change Services leader.
What is carbon trading?
Carbon trading involves capping emissions and allowing companies that pollute below the cap to sell their excess permits to others. The theory goes that putting a price on carbon provides a financial incentive to cut emissions. Businesses that choose to pollute are forced to pay market rates for that luxury.
Who are the carbon entrepreneurs?
For a growing number of entrepreneurs, trading in emissions is a way of making money by doing good. “It can be an uneasy partnership,” says Dave Sag, the chief executive of Adelaide-based carbon credit trader Carbon Planet.
“But it comes down to this: If we’re a for-profit organisation we can ask venture capitalists for $60 million because we offer a return on investment. I could ask all of the greenies in the world for money and they’d scratch their beards while shaking their head.”
Entrepreneurs such as Sag are springing up in the brokerage business, creating markets by facilitating trade between consumers. Some, such as Easy Being Green’s Paul Gilding and Nic Frances, are in the business of selling offsets – guarantees that for every tonne of carbon emitted, a tonne somewhere else is removed by planting trees or installing energy-efficient technology.
Some entrepreneurs have started up consultancies, stepping into back rooms and boardrooms to devise emission reduction strategies. Others are rushing to get clean technology to market because a level playing field with coal-based alternatives is no longer a pipe dream.
Sydney-based Easy Being Green started out in 2004 using the mandatory NSW greenhouse gas reduction scheme (GGAS) to get paid for increasing household energy efficiency. It sold $36 million worth of carbon credits to consumers and businesses last year, according to chief executive Paul Gilding.
The business models behind Easy Being Green and other carbon offset organisations such as Elementree, Carbon Neutral, Greenfleet and Climate Friendly, are much simpler than they first appear. They collect money from individuals and businesses, help cut their emissions by installing smaller shower heads, for example, then use the money left over to reduce pollution somewhere else on the consumer’s behalf.
Carbon Planet differs by retailing carbon credit certificates, which are regulated under the NSW GGAS scheme, for $23 a tonne. The certificates are bought from Forests NSW for $14.30. “We actually transfer ownership of the credits in NSW’s greenhouse gas register under the state emission scheme,” Sag says.
Investors are starting to take notice
Entrepreneurs report that the route to venture capital is getting smoother. Because of the worldwide appetite for clean technology, investors are ready to listen to pitches, says PwC’s Peterson.
“I’m seeing enormous interest in SMEs with processes or technologies that could be monetised and brought to market. There are definite opportunities for carbon offset businesses when it comes to raising venture capital.”
The clean technology industry snared 328 cash injections worth $6.65 billion in 2006, according to the Australian Cleantech Map, produced by Clean Technology Australasia.
Gilding says: “Investor interest is rising exponentially. We have more people expressing interest than we have a need for the money at the moment.”
After investing about $1.5 million to get Carbon Planet up and running, Sag is talking to venture capitalists in the United States and Britain. “The next two years will be a sprint. Heading overseas for VC funding means we can raise 100 times more than our initial investment.”
Challenges facing carbon traders
Emerging markets come with big risks. For the new carbon traders, government schemes are the biggest challenge because the goalposts can move unexpectedly.
Easy Being Green had its revenue halved last September in just six weeks when the NSW Government scrapped an arrangement whereby Easy Being Green handing out energy efficient lightbulbs in exchange for tradeable carbon credits. The credits were worth cash.
“Being completely dependent on regulation is really scary. The voluntary end of the market [where individuals pay to offset their emissions] is still small and emerging. Until that gains momentum our revenue depends entirely on government-based schemes,” Gilding says.
Carbon Planet’s Sag says that right now, other carbon traders are the industry’s biggest challenge. One scandal could destroy the industry’s credibility. “It’s a topical industry all of a sudden, so the cowboys are out in force. There are no standards, no regulation, so who knows whether consumers are actually getting the emission reductions they pay for.”
Export markets await
The new carbon traders are using the internet to launch on the world stage. Almost 60% of Carbon Planet’s customers are overseas. “Geography is irrelevant. Consumers buy carbon credits over the net with their credit card. Emissions are global, after all,” Sag says.
Carbon Planet gets involved in the countries it sells to. It is creating a code of best practice with the UK’s Department of Environment Food and Rural Affairs. “We need standards to be as rigorous as possible. The idea is that companies who don’t comply won’t be able to trade in the UK,” Sag says.
Easy Being Green’s predecessor and partner, environmental consultancy Ecos Corporation, started by Gilding in 1994, has offices in the US and the UK and clients as big as Ford Motor Company and DuPont. “About 50% of consulting work comes from the US and the UK,” Gilding says.