'Cleantech' a dirty word for VCs? RUBBISH!

How to set the tax?

Well how about we figure an alternate case for survival of the human race, scale it down from 6 or so billion to just 1 million and see what it would cost to do that over 100 years.

So lets say we screw up this planet to the point of being completely uninhabitable for us. There are 2 realistic options then - the moon or mars (lets not even bother with deep space discussion).

Lets figure out what it would cost to get 1 million people to either the moon or mars in a suitable bio dome, self sustaining and with enough resources, industry and skills present to be able to expand itself. Let is call this number cost Z.

If that is the back up plan (and saving a touch under 0.02% of the population isn't much of a backup plan) then obviously the money that would would have to spend on that would be better spent preventing having to do that in the first place.

We have a pretty nice planet here - it might just be cheaper not to break it.

So let us take cost Z, spread it over 100 years and divide it by the number of kg of net carbon released into the atmosphere at current measures. That would give you a reasonable starting point for what a carbon tax should be charging. Obviously you need to give the markets time to adapt to start it at 5% of that and ramp up to 100% over the course of 20 years.

Levy it internationally and put all the funds into research and projects for reducing the carbon. Or into space travel because long term the only guarantee for survival of our race is to have some off world redundancy. That doesn't mean we should break this one - but we should have a contingency plan or 2.

Make it like VAT

A carbon tax could be made like VAT, with payments and deductions.

You buy oil, you pay the tax. You produce "non-CO2 carbon" as petrol, polythene, PVC, nylon, or whatever, and you get rebated for the amount of carbon in the product, easily assessed by analysis.

On second thoughts, this will produce an enormous non-productive bureaucracy that will be worse than any amount of CO2. Best forget altogether the idea of a cabon tax.

VCs have lost money in greentech

Speaking as an investor with quite a lot of my net worth in VC, including some in VC funds devoted solely to greentech ....

Some VC funds have gone big on greentech, and have lost lots of money for investors. Others have made modest investments so their losses in greentech are absorbed by gains elsewhere.

Others are making good returns on green tech itself. But these are funds specifically targeting government subsidies such as FITs and ROCs. Arguably not in the spirit of VCs, and the government have been tightening the rules to deny these subsidies to new VC investments in wind or solar power.

VC is supposed to be risk capital, but it certainly doesn't help when government is forever changing the goalposts. Investors are much more tolerant of legitimate business risk typical of VC (e.g. "the technology is unproven", "the market is untested") than of being robbed of a promise on a politician's whim.

Neither does it help when governments "pick winners" directly. Thus when solar panel manufacturers were clobbered by global oversupply, Obama bailing out his pick with taxpayer funds just damages the rest of the industry. Likewise when China and the EU squabble while industry (in both places) would much prefer just to be left to get on with the job.

Regressive taxation

Intuitively, carbon tax seems like a very regressive tax. It's going to end up on everyone's gas/leccy bill, everyone's petrol bill, and is going to disproportionately add to the cost of goods where the chief costs are manufacturing and distribution, basically anything cheap and consumable. That seems to cover be just about everything a low income household spends their money on (other than the housing itself). That's why I've generally come to favour subsidy funded through general taxation, though in a universal method based on kg CO2/MWh savings against some baseline value.

That doesn't incentivise efficiency savings though, it'll get you wind farms if they do actually represent good value, but it won't encourage people to use less energy like a tax will. I guess if you had the citzens basic allowance you can just push a bunch of the carbon tax revenues into increasing that and hopefully it evens out, but even that would require an unprecidented amount of governmental foresight.

VCs may not be plowing loads of money into "clean tech", but they're not plowing loads of money into "dirty tech" either. Energy is a very mature market, and making money there requires very large long term investments for relatively small profits. If you're that type of investor, then fine. It's not the sort of thing that interest VCs though. VCs are looking for the latest social media start-up that will IPO with a 10,000% profit in the next 18 months.

The taxes and subsidies for things like solar panels and wind turbines aren't intended to develop radically new technology. The technology already exists. It's intended to help spur demand to scale up the market in order to drive manufacturing, installation, and operating costs down through economies of scale.

We're past the R&D stage and well into the implementation stage. The subsidies are intended to make all this happen much more quickly than an incremental market driven approach would. There are a lot of network effects involved in existing energy systems. For example oil fuelled vehicles can piggyback on a huge refining, pipeline, and petrol station system that simply doesn't exist for electric battery vehicles (try finding a charging station for an electric car in most places). Even if electric vehicles were superior in every way to internal combustion driven ones (and they aren't), they would have a huge hurdle to overcome, which means that market penetration would happen very slowly at best.

Actual manufacturing and construction are a lot more difficult than spinning up a few new social media VMs on an AWS cloud. VCs are people who put money into the latter. The people who put money into the former are simply known as "investors".

Now you might argue that the way governments are going about promoting "clean tech" is poor, and there are indeed many things they are doing wrong. Expecting the answers to come from your typical VC though is wasting your time.

However I don't think that "carbon taxes" are the universal answer either, although they should be looked at as a broader and more source-neutral alternative to existing fuel taxes. A lot of the European "green" tax/tax credit system goes into cutting down tropical forests to grow palm oil for bio-diesel. That's just trading one environmental problem for another much worse one. With a more targeted approach you can at least limit the collateral damage.

You can argue whether wind turbines ought to be written off as a bad idea, but that's a completely different question from what we're talking about here.

Comparison with Solyndra loans is spurious

The government wasn't looking at these as "investments" at all. They were trying to spark an industry, and knew some of the loans would go bad.

A VC might have invested in Tesla (or wished he had) and certain others that looked like they had a good chance of success, but it is unlikely any would invest in production of solar cells in the US when they'd know that China would be able to eat their lunch due to cheap labor and less environmental regulation (making the panels is kind of a nasty process, you can save a lot of money if you don't have to worry about controlling your pollution)

a couple of misconceptions

Overall, a very sensible, rational article. I won't pass comment on the details of UK administration, but those are not important to the overall thrust of the piece.

On a carbon tax, two or three misconceptions seem to be floating around.

First, it doesn't matter where you place the tax, it can be anywhere at all in the supply chain and the effect on prices, consumer behaviour, and manufacturer behaviour is the same. Economics 101. Same with any cost or any tax. (Of course, there may be practical differences of implementation: naturally, you place the tax at the point in the chain where it is easiest and most efficient to administer.)

Second, it is vital to avoid the mistake Australia made. Australia exempted imported goods, which was madness. The carbon tax became a powerful incentive to close down your local plant and import stuff from China, which at that time was a relatively high-carbon economy. Result: pain at home and less carbon abatement than there might have been. (I should note that even so, the carbon tax significantly reduced emissions in a remarkably short time. Sectors exempt from it (imports, motor fuel, agriculture) continued to increase emissions, but many other sectors improved a great deal. Since the tax was abolished they have started to get significantly worse again.)

Third, it does not matter in the slightest what you do with the money raised by the tax except insofar as we all have an interest in taxation income being used to some worthy purpose. The main benefit of the carbon tax, just like that of tobacco taxes, isn't the income the government gets from it, it is the expenditure on the part of economic actors like consumers and manufacturers. Because high-carbon goods become more expensive, consumers find ways to avoid the tax by buying cheaper, low-carbon substitutes, and manufacturers find ways to cut their costs doing things in a more efficient way. As pointed out in the article, the government does not and should not specify how manufacturers and consumers avoid paying the tax (and thus produce less carbon), the market figures that out. Markets are really, really good at doing that. It's what markets do best.

Still on the third point, once we understand that spending the funds raised by the carbon tax is largely irrelevant to its purpose, we are at liberty to do anything we like with the money. It still works just as well to reduce carbon regardless of whether we spend it on schools and hospitals, fighter jets, income tax cuts, perks for politicians, education, research, paying down debt, building wind farms, foreign aid, buying a billion tons of boiled lollies, or even just shred it and bury it in a big hole. There are individual benefits and problems with each of these possibilities, of course, and we are free to debate the merits of each one, but the key point is that these don't matter so far as the benefit of the tax is concerned. If you want to spend the tax on solar PV collectors or whichever other renewable technology you prefer, that's fine, but it will still work almost as well even if you go the boiled lolly option.

Fourth, once we understand that the tax income is fungible, we can immediately see that there is no "right" level for it. There is a minimum appropriate level, which depends on how much high-carbon activity you are aiming to take out of the economy and replace with low-carbon substitutes, and on how fast you want that transition to happen, but provided only that the total tax take as a proportion of GDP remains where you want it (at the current level, for example) there is no particular maximum appropriate carbon tax. Set it as high as you like, provided you reduce or abolish other taxes to compensate, and also provided that you don't ramp it up so fast that it disrupts the whole system. Economies can cope very well with change, especially known, expected changes, but very large, sudden changes tend to cause trouble, so phase it in over a few years, increasing a little at a time until it's where you want it.

Personally, my preference would be to start removing other taxes one by one as the carbon tax increases, starting with daft ones like (Australian) payroll tax (a tax on jobs! How dumb is that?) and working through as many of the others as possible. What is your most-hated tax? VAT? GST? Income tax? Poll tax? No reason we can't get rid of it and have a carbon tax instead.

Hmmm....

I do not like the idea of everyone being so uppity about this ("carbon tax") approach to the problem. Worstal has exposed its supposed benefits, but what about its downsides?

I don't know what one does in economics, but in engineering when one comes up with an idea, one tries to find all the ways it can go wrong before going ahead with it.

I say this on the basis of all those other "green" ideas that have gone wrong in the past in one way or another (biofuel, wind farms, high speed rail, ...) because of what appeared like a lack of sufficient critical analysis at the right (early) stage.

So, personally, I would like to see a well-informed article on why dealing with climate change by taxing is/might be a bad idea.

So The Register is where the UK (Ex) Tech VC's hang out now!

... and here's another wading now!

Having done a bunch of "Cleantech" investments it seemed to me that nearly everything I saw that could make a really big impact was beyond the scope of any but the most long term and substantial VC fund.

The kind of stuff that makes a difference on emissions tends to be competing with an established technology that's had the benefit of many cycles of optimisation. So if my new cement production, metal winning, or energy storage technology has a chance it must reach the point where it is working at levels of optimization that also take several iterations to approach.

Stuff that's going to make a big difference often involves big equipment, that means that those iterations tend to often be much slower than for more traditional venture investments:if the technology involves plant and equipment or significant scale-up to become economic, then each cycle of improvement can be years. In a 10 year standard VC structure you can get 6 years sometimes (assuming you don't invest on day 1 and need some time to realise at the other end). That's a very tight constraint.

Back around 2002/3 lots of large US VC's moved towards cleantech generally- it was interesting to observe that they often moved their focus to software optimisations around the edges of existing processes for exactly these reasons.

In an ideal world maybe

The other part you have to remember us that carbon emission and climate change does not stop at a countries borders. Any UK tax is pointless unless there is a corresponding tax on other countries at the same level.

That is not going to happen (ie India/China). Without that international co-operation the tax in the UK is just another tax which is without merit.