US venture capitalists optimistic on carbon market

By Deborah Zabarenko, Environment Correspondent

WASHINGTON, Dec 7 (Reuters) - U.S. venture capitalists say they see a bright spot amid the international economic gloom: a potential trillion-dollar market in carbon spurred by new regulations and a growing awareness of climate change.

The growth areas are less in traditional "green" businesses like solar panels and windmills and more in new infrastructure, such as a "smart" grid that would get alternative energy from where it's generated to where the customers are, said Martin Whittaker of Mission Point Capital Partners.

Despite the overall economic crisis, "Capital is still available for low carbon projects," Whittaker said by telephone. "There's still a lot of optimism and a lot of growth in and around the carbon market at all levels: the trading level, at the project level and at the company level."

He said his firm's fund was looking for returns on investment over a three-to-five year period if the United States puts a price on carbon emissions, which would be necessary if Washington launches a cap-and-trade plan, which would put a price on the right to pollute.

"I think everyone's quite bullish on it," Arrun Kapoor of SJF Funds, a venture capital fund where half of the investment is in "green" projects. He said rising concerns about climate change, energy security and the volatile price of oil are pushing demand for these products.

Kapoor also expressed interest in infrastructure rather than in specific solar or biofuel energy investments, where he said high evaluations of a new company's potential worth is dampening some venture capitalists' enthusiasm.

Because the current electric grid is 30 to 40 years old, Kapoor sees a new "smart" grid as an attractive investment.

So-called smart grids let customers instantly see the price of the power they are buying, which is expected to cut demand during daily peak load hours and reduce demand from centralized traditional fossil-fuel power plants.

To curb global warming, environmentalists and others want to limit emissions of the greenhouse gas carbon dioxide and put a so-called cap-and-trade system in place to let companies and institutions that go over their limits swap emissions credits with those that pollute less.

OBAMA WANTS CARBON CAP

President-elect Barack Obama supports a mandatory cap on all carbon emissions, with an 80 percent reduction in carbon emissions by 2050 -- the level that many scientists have said would head off the worst consequences of global warming.

Getting this idea into U.S. law is unlikely to occur until 2010 at the earliest, but venture capitalists are not waiting.

"Business is good at taking risks, and as long as the perception is that something will happen, the businesses will be developed ahead of the U.S. legislation," said Veronique Bugnion, of Point Carbon, which tracks global carbon markets.

Indeed, a November conference on carbon sponsored by Point Carbon and the Pew Center on Global Climate Change drew a standing-room-only crowd in Washington, even though there is no mandatory U.S. market for carbon in the United States.

There are now two voluntary U.S. carbon markets: the Green Exchange and the Chicago Climate Exchange.

The first mandatory cap-and-trade program in the United States, a group of 10 northeastern and mid-Atlantic states called the Regional Greenhouse Gas Initiative, starts regulating carbon dioxide emissions from power plants in January, aiming to reduce them by 10 percent by 2018.

Not everyone favors mandatory limits on carbon emissions, which come from coal-fired power plants and fossil-fueled vehicles, along with other industrial and natural sources.

The Bush administration opposes mandatory, economy-wide regulation of carbon pollution. The United States is alone among major developed countries in rejecting the carbon-capping Kyoto Protocol, which went into effect in 2005.

The U.S. Chamber of Commerce, the voice of American business, has supported alternative energy that emits less carbon, but does not favor compulsory limits on emissions.

The chamber's William Kovacs said a mandatory cap-and-trade program would be a kind of tax.

"I really question in this economy whether anybody's going to put that kind of cost on the system," Kovacs said in a telephone interview. (Editing by Eric Walsh)