Growing market for carbon software

by David Ehrlich, Cleantech Group

Investors are putting cash into systems that can streamline emissions management and the creation of carbon credits.

Solutions for carbon management and the creation of carbon credits is getting the attention of venture capitalists, with San Francisco's CarbonFlow and Victoria, British Columbia's Carbonetworks both pulling in funding for their software suites.

CarbonFlow, which is developing software to lower the cost and time it takes to create a credit, raised $2.9 million in its first round of funding from Clean Pacific Ventures,OVP Venture Partners, and Meridian Energy.

Carbonetworks, based in one of the few areas in North America with a carbon tax system, announced the first close of a $5 million Series A round fromNGEN Partners. The company provides software to manage emissions inventories.

British Columbia recently became the second province in Canada to introduce a carbon tax system, setting a price of Cdn$10 per tonne, going up to Cdn$30 per tonne in five years. Quebec started collecting a tax on hydrocarbons last year.

But while North America has yet to become a major market for carbon credits, carbon management and trading is growing in other regions.

"The carbon credit industry was $64 billion last year. It is bigger than solar and wind combined. It is the biggest cleantech industry by a long shot, and it's only four years old," Neal Dikeman, co-founder and CEO of CarbonFlow, told the Cleantech Group.

He said all of the major customers that his company is talking to are in Europe, Asia and South America.

Dikeman is a founding partner at Jane Capital Partners, where CarbonFlow was incubated, but he's leaving the boutique merchant bank to head up operations at CarbonFlow. He's also a founding contributor of the Cleantech Blog, and earlier this year he interviewed Marc Stuart of Dublin-based EcoSecurities (AIM: ECO), the market leader in generating and monetizing carbon credits, where Stuart talked about the strengths and weaknesses of the current carbon market (seeTaking carbon markets to the mainstream).

CarbonFlow is working to cut down on those weaknesses with a system designed to meet Kyoto standards for registration, verification, certification and monitoring of carbon emissions.

"There's a tremendous amount of time lost trying to meet all those standards," said Dikeman. "Because nobody wants to relax the environmental standards, and the environmental standards were not designed to take transaction costs out, they were designed to protect the integrity of the environmental project."

He said those very tough standards have created high transaction costs that can range, including the cost of the capital, from 10 to 20 percent of the cost of the project.

As a result, Dikeman said companies only submit big projects into the carbon credit bureaucracy. "And they only do big, easy projects, or ones that they know how to get through."

CarbonFlow has partnered with Norway's Det Norske Veritas, or DNV, for the development and marketing of the Carbonflow system. DNV was the first company to be accredited by the U.N. to verify greenhouse gas emission reductions from projects in the developing world under the United Nations Clean Development Mechanism 2004.

"Industry is now at a couple of hundred projects per year, and it needs to go to 10,000 per year, within five years, to meet the abatement targets set out."

But Dikeman said the infrastructure, including the IT infrastructure, isn't in place to support an influx of registrations for carbon credits, something his company, as well as companies like Canada's Carbonetworks, hope to fix.

Once the existing markets get up to speed, there's still the two largest markets to contend with, China and U.S. The industry is just scratching the surface in China and is nonexistent in the U.S.

"We're really looking at orders of magnitude increase in demand for carbon credits coming down the pike," said Dikeman. "This industry is expected to be measured in trillions."

Carbonetworks said its software is currently being used by over 180 organizations in 23 countries. Dikeman said CarbonFlow's system will be ready to be rolled out soon.

Original article.