Thursday, July 3, 2008

State of New England

The new ‘billion’ is clean tech’s future trillions

I have always loved numbers; I minored in math in college and have a sudoku book in my briefcase. And I can remember the day when a million of anything was a lot, especially when talking about money. Then, quietly but absolutely, “billion” became the new million: Billions of people on earth, billions of venture capital dollars, and consequently, many billionaires. That is so yesterday — I am hereby announcing the next big thing will be measured in the trillions.

First, it is important to put in perspective how big a trillion of anything really is. Numerically, it’s a 1 with twelve 0’s behind it. But let’s delve deeper. It would take a cube 300 feet on each side to hold 1 trillion pennies. A $1 trillion tax rebate would yield over $3,000 per U.S. citizen person (that might do wonders for the economy).

So why do I bring up this whole topic of trillions? For several important reasons, all associated with clean technology and climate change. First, the U.S. has the installed capacity to produce 1 trillion watts (1 terawatt) of electricity. The Economist estimates that the world has 15 Terawatts of installed capacity with a global market size for energy estimated at $6 trillion per year, numbers that will more than double by 2050. Given current trends, the U.S. demands will also grow significantly over that period, but it could accelerate much more quickly, particularly if we start increasing our adoption of electric car technology.

Speaking of autos and gas, the latest mandate for the U.S. is to reach 36 billion gallons on alternative fuels capacity by 2022. To put this in perspective, over the next 14 years en route to this milestone, the U.S. will have consumed over 2 trillion gallons of gasoline. Oh, and the capital needed to build out the capacity and produce these 36 billion gallons is roughly on the order of a trillion dollars. This is just the United States, and this is the baseline threshold.

Finally, and most importantly, there is carbon. Common estimates are that there is nearly 2 trillion tons of carbon in the biosphere and many times that in the ocean. According to a report from the Intergovernmental Panel on Climate Change, we (the global “we”) produced nearly 50 gigatons of CO2 equivalent in 2004 alone and the rate of production increases significantly each year. Therefore, over the next 20 years more than a trillion tons of CO2 will be produced. At a cost, or price, depending on your point of view, of even $10 per ton, there is a huge capital flow looming, not to mention the human cost if we don’t reduce emissions.

I have seen various estimates that it’s going to take $1 trillion worth of annual investment for the foreseeable future to tackle climate change, transform our energy infrastructure and transition to more renewable forms of production. This is going to be the most massive outlay of capital in the history of mankind, and subsequently, potentially the largest economic transformation the world has ever seen.

In that context, what does $2.7 billion in U.S. venture capital investment in clean tech in 2007 really mean? What of the handful of grants that the U.S. Department of Energy is distributing primarily to promising biofuel and solar startups? And what of the notable but miniscule funding that Gov. Deval Patrick and the Legislature are setting aside for clean tech initiatives? All of these efforts are crucial beginnings and appropriate nods to the importance of the innovation community in tacking these problems, but the challenge and opportunity of climate change and clean energy is massive, and it will require equally massive commitments in financial, human and intellectual capital. The United States broadly, and New England specifically, are well poised to contribute to, and benefit from, this global effort, but it will require bigger thinking, bigger commitments, and even bigger capital.


 

Jim Matheson is a general partner at Flagship Ventures, an early stage venture capital firm based in Cambridge. He can be reached at jim@flagshipventures.com.